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Matt Taibbi's avatar

The point here is similar to my feelings about 2008, when a decision was made not to bail out subprime homeowners (every subprime loan could have been paid off for less than $2 trillion) because of concern for moral hazard, while many times that was spent to prop up failing banks/instruments pegged to subprime loans. Not being an economist may make me unqualified to say which course is best, but I think it’s fair to point out when decisions lack consistency.

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Rob Shouting Into The Void's avatar

Not being an economist is, when it comes to the economy, a grewt advantage! As the old saying goes, economists have predicted 12 out of the last 6 recessions.

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RuntheBackBay's avatar

You don't have to be an economist to question where the bailout money went, in 2008 and 2020. You don't have to be an economist to point out that institutional elites tend to dress up their defense of institutional bailouts with different words than Bernie Sanders used when he advocated for bailing out college debt.

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Catherine's avatar

I’m an ecomonist

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ih8edjfkjr's avatar

Reasonable people can disagree with certain policies pursued by the Fed and Treasury during the credit crisis. My biggest criticism was holdco liquidity facilities and prefs versus opco. But I try not to get too exercised about mistakes in plans drafted on the back of a napkin at midnight.

But don't present a federal payoff of non-performing sub-prime mortgages as either a viable policy alternative or somehow less generous to the banks. It wasn't. It isn't. First, the suggestion that government actually pay off defaulting sub-prime mortgages would actually be a lot closer to a bank bailout than what the primary emergency facilities actually did. If the Fed repays the mortgage, it is economically identical to buying back the mortgage at par - above then-current market prices. That is more generous to mortgage holders - not less - than making pref investments in the lender or expanding eligible collateral at the PDCF. It is also more generous than the TALF and TLG programs. All of those facilities involve risk to the Federal government, but ultimately represent sums required to be repaid to the Federal government. They also had the benefit of not being absolute or permanent and also not pretending that the sole issue was sub-prime mortgages. The expanded PDCF didn't save Lehman because they didn't have sufficient collateral. The TLG didn't save WaMu because it isn't an actual capital injection. These programs largely protected the integrity of the payments system without protecting the owners from losses on their non-performing assets. It isn't just a pure coincidence that these programs all generated profits for the federal government. It was a feature of the facilities.

Nothing resembling that was going to happen - or even could happen - if the Feds simply repaid non-performing subprime mortgages. A policy like that would arbitrarily bestow profits - not just access to liquidity - on private label MBS holders, SPV warehouse lenders, and certain homeowners, all at the expense of a different group of arbitrary taxpayers. It also wouldn't have timely achieved the primary purpose of protecting the payments systems. When TARP was first passed it was intended to be used to purchase private-label RMBS and just about everyone in the space ran to the Fed and Treasury and explained how it would take 2 years to deploy that kind of money across tens of thousands of cusips. Those at least often had $100MM tranches. Doing the same thing on the loan level $200,000 at a time sounds like a 2010 item, not a 2008 item. The men you are criticizing are men, not gods. But they aren't complete idiots either.

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Berta G Gutierrez's avatar

I have no idea what a pref or opco is but I do know from having driven through small towns in the midwest multiple times since the '80s what the consequences of economic decisions from our experts look like and it isn't good. The people making these decisions may not be complete idiots but they do seem blind to what it's like to live as an ordinary person and most of us are that - just ordinary people. The question to me that needs to be addressed is does our government exist for the benefit of its citizens or for the benefit of its corporations and financial institutions?

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Jim Griffiths's avatar

You know the answer - - your 'government' IS the corporations and financial institutions, the owners, always has been. Whom else would they benefit, surely not the servant citizens, your ordinary people?

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Nate F's avatar

It wasn't the government's decision that caused global competition to move low-skill, high-paying jobs from the United States to other countries where they could be low-skilled low-paying jobs. That was simple market forces an improvements in the transportation industry. The government could have attempted to be protectionist, but that definitely wouldn't have worked in the long run.

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Jeff's avatar

Actually it was. The Gov chose to enter into trade deals that made manufacturing in the US impossible. Then sanctimonious idiots like Obama went around saying those jobs are gone forever...

Then the Bull entered the china shop and said, these deals suck. We are getting screwed by the world but China first and foremost. and BOOM, American manufacturing has been on a tear ever since Trump came into office. Make decisions based on good outcomes for the American people rather than any sort of dogma and you get good results.

What exactly is gender studies in Pakistan? How to throw acid in the face of girls more efficiently? Really? Pakistan?

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Berta G Gutierrez's avatar

To start, I'd say what we're doing isn't working so well either. The economic system we're living in is not endemic to the Earth like trees or water - it was created. It's a system that prioritizes competition and financial wealth. It increasingly leaves out more and more of our citizens. What is stopping us from creating a system that prioritizes the well being of our citizens instead? Our government through the influence of the wealthy, giant corporations that have loyalty to no one country and an out of control military supports this system - It's a choice.

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Passion guided by reason's avatar

That sounds very nice in the abstract. The devil is in the details of implementation. A movement to create that end goal through short sighted means could easily create an even worse situation. People who are driven by resentment, oppression narratives, disdain for objective truths, and ideology can be blind to semi-predictable real world effects. It is very much NOT true that things couldn't be any worse so any change made with good intentions must result in a better world; there are many more ways to mess things up than to improve them, and it's an easier task. Thing can get FAR worse than they are.

Rational solutions, with open debate and flexibility to reconsider and change course based on real world effects, are needed.

For example, policies which build net worth through increasing equity in housing, also have the effect of pricing many people out of housing. A policy of raising wages can have the effect of stimulating more automation and supporting fewer, but better paid, jobs. There are tradeoffs to choose from, rarely simple wins without costs (obvious or hidden).

So propose policies which you think would lead to a more humane world, and let's talk. I agree we need that, but I am wary of jumping into some scheme which is based more on superficial promises than serious analysis. The net impact is more critical than originally good intentions (much less catering to & amplifying resentments for short term votes).

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CDUB's avatar

I agree with a lot of what you write and was active at the time in the mix. But increasingly, I have viewed the outcomes of the “fixes” to be skewed towards institutions rather than individuals. And inevitably some institutions are able to “grift the fix.” And then my issue comes of policy design. Larry and the gang are such f*ckwits that they seem to typically write policy that benefits the best of the grifters. Ultimately that inability to effectively degrift the policy has made me shift towards saving individuals above institutions. I well know the issues but JFC he sounds like the fed talking about computing power and the lack of inflation. Argh

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ih8edjfkjr's avatar

The Fed and the Treasury don't have spending authority. You can help banks without spending money. You have existing credit facilities with them and can change the collateralization requirements. The FDIC is already guaranteeing their deposits and they can use the TGL Program and the systemic risk authorization clause in the FDIA to expand those guarantees. The Fed's TALF program fit within pretty clearly existing authority. A couple of things they did were pretty legally dubious (e.g., the Bear Stearns acquisition assistance package), but there's no way they can just start issuing grants to bank debtors.

Without a Congressional appropriation of money, what are these institutions going to do for a guy that can't pay his mortgage? There is no way any authority they had could be stretched that far. Where they could stretch those authorities to help people, they absolutely did. Look at any history of the crisis-era FHA changes and you'll see a pretty obvious picture of government agencies putting taxpayer guarantees on the line to help people that were in every way, shape and form a riskier credit than the banks the Fed assisted.

Could Congress have intelligently done something different? Maybe, I don't know. But why don't you tell me what, with some specificity. I'll keep an open mind.

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CDUB's avatar

I myself don’t have a specific counter at all. Probably a lack of imagination.

But I do wish that policy design could “means test” institutions. Your points are all well composed and concise yet sufficiently comprehensive. Thanks for the good-natured discussion. I’d like your thoughts on pros/cons of breaking up Google/Amazon since I feel that debate is only going to intensify.

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Dec 29, 2020
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ih8edjfkjr's avatar

I am not that familiar with what the HOLC did or didn't do, but I'd like to point out that the Great Depression lasted over a decade and your paragraph above indicates HOLC issued its final report over 20 years after it started, while you indicate it bought 200,000 properties. See what's wrong there? I'm telling you Paulson, Geithner and others specifically considered this option. Sheila Bair was the only one who thought it was viable. Everyone else concluded that there was no way the government could timely acquire a meaningful number of bad mortgages. Securitization also makes buying whole loans at non-generous prices a much more litigious and time-consuming process.

Take one look at HAMP and HARP and you know Geithner was right and Bair was wrong. Congress appropriated over $50B for HAMP and HARP. HAMP used Congressionally appropriated money to modify mortgages for anyone whose mortgage payment was more than 30% of their income. HARP used Congressionally appropriated money to let underwater, performing mortgages refi to lower rates without bringing money to the closing (this was by far the bigger problem than foreclosures by number of affected persons) but required the new refi'ed loan to be re-underwritten. These programs managed to push out less than $12B. They couldn't find enough takers to spend even the initial appropriation. It was extremely time consuming and non-productive and most of those people were better off walking away.

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ih8edjfkjr's avatar

One of the most legally embarrassing efforts to help homeowners was led by Holder's DoJ taking a ridiculously small number of mortgage servicer screw ups, pretending there was widespread servicer fraud that harmed borrowers that were not really in default and extorted $10B of legal settlements from them that required them to "spend" the settlement money by just reducing principal on mortgages. The banks spent about 10% of the money trying to find examples of servicer abuse/fraud and finally everyone sheepishly acknowledged it basically didn't exist and regulators told the banks to just apply the money to loans to borrower that didn't otherwise qualify for HARP or HAMP (i.e., the people no Congressman wanted to vote to help - house flippers with a half dozen properties and NINJA borrowers). So great to have the Justice Department and State AGs used to create false political narratives.

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CDUB's avatar

I remember Holder’s mortgage servicer BS. Nobody serious believed it. False narrative and “but you gotta do something about this fill in the blank anecdotal story.”

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Dec 29, 2020
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ih8edjfkjr's avatar

Here's an article about it:

https://www.marketwatch.com/story/geithner-says-bailout-plan-soon-reportedly-to-include-bad-banks

There are plenty of others. You can follow news reports about the proposal to create a band bank and buy individual mortgages and whole securitization structures and modify the mortgages from the time TARP was passed (which was the first time they actually had a Congressional appropriation to spend money) until around March 2009. You'll see the gradual change in the news reports from a bad bank buying up mortgages to modify, to the idea of selling a ring fenced insurance scheme that would let banks write down the loans. Just about everyone involved decided that it wouldn't be possible, in a timely way, to buy up meaningful numbers of whole mortgages and whole securitizations that would enable mortgage modifications. The creation of of HARP and HAMP was the acknowledgment that actually buying the mortgages was not going to work.

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Dec 29, 2020
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ih8edjfkjr's avatar

This is all a little too glib, in my opinion and covers too many topics for me to address. Let's try to focus it. Make your argument for how Glass Steagall repeal played a meaningful role in this crisis. The worst loan underwriters, like GMAC, Countrywide, WaMu weren't universal banks or derivatives dealers. They also weren't CRA lenders.

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Dec 29, 2020
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ih8edjfkjr's avatar

Oh, I'm familiar with the naked claim that repeal of Glass Steagall was somehow a contributor to the credit crisis. I'm just still waiting for an explanation of how, exactly. Mortgages are traditional bank products. The securitization of mortgages was always permissible bank/section 20 affiliate activity under Glass Steagall. Do you imagine banks didn't originate and securitize mortgages prior to repeal of Glass Steagall?

What role did the repeal of Glass Steagall have in the failures of Bear and Lehman, which did not have insured, deposit taking banks?

What role did the repeal of Glass Steagall have in the failures of WaMu, Countrywide, IndyMac, which didn't even have investment banks?

What role did the repeal of Glass Steagall have in the failure of AIG?

I really don't get the argument. And I suspect the people making it are just repeating magic words without understanding what any of them mean.

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Dec 30, 2020
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ih8edjfkjr's avatar

So, I just read the article you linked and I have to say, this article does not say what you are claiming it says. It mentions Glass Steagall exactly one time. This is the entirety of the article's reference to Glass Steagall:

"And, after the 1999 repeal of the Glass-Steagall Act, Lehman Brothers expanded their offerings (with the newfound freedom to combine commercial and investment banking activities)."

This sentence implies, without actually stating, that Lehman Brothers acquired a commercial bank. It did not. That never happened. At no point did Lehman Brothers ever own a national bank, a federal or state chartered savings bank, an industrial bank, or even a thrift or state-chartered trust bank. There was no bank. That never happened. Did you ever ask why there was no FDIC receivership as part of the Lehman bankruptcy? Just a SIPA proceeding for LBI and a chapter 11 bankruptcy for the non-broker-dealer LBHI domestic entities. That isn't how banks are wound down.

The author of this article seems to have mistakenly assumed that because Lehman acquired entities that originated and sold loans, they must be a bank. But they weren't. You need to be a bank to take deposits, not to make loans. BNC Mortgage and Aurora were non-bank lenders. At no point were either ever subject to Glass Steagall. Nor would Lehman have been. Nor has that even changed since the crisis. There are still large non-bank lenders. Quicken's Rocket Mortgage is a very large non-bank lender.

You say that everyone you've ever discussed this with or read has acknowledged that the repeal of Glass Steagall (technically not repealed, but neutered) played some role in the crisis, but that just tells me you aren't reading the people that know the most about the topic. Knowledgable people on both the right and left that have written intelligently about the topic dispute that it had any meaningful impact.

From the right, Peter Wallison:

http://faculty.msmc.edu/hossain/grad_bank_and_money_policy/did%20the%20repeal%20of%20glass%20steagall_wallison.pdf

From the left, former Fed Vice Chair Alan Blinder's book, After the Music Stopped, makes the same points.

The truth is really quite simple. Even if you believe big universal banks were critical to the crisis, despite all the evidence that non-bank lenders and simple bank lenders like Countrywide and WaMu were perfectly capable of badly underwriting a fuck ton of mortgage loans, Glass Steagall's section 20 permitted banks/section 20 affiliates to securitize mortgage loans.

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whatnext's avatar

Fannie and Freddie get something of a bad rap in these discussion. Taking Southern California as an example, the median price of a home exceeded conforming loan limits pretty early in the first bubble -- by the end of 2002 if I'm recalling correctly. Most of the crazy losses weren't agency paper. They weren't subprime, either. What I find insidious about the Dem/Rep accepted narratives is they both arrive at the conclusion that loans were made to "the wrong people" -- either with a liberal spin (predatory lenders!) or the right wing spin (those broke ass people had no right to be buying houses!).

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ih8edjfkjr's avatar

O.K., but the places with the greatest percentages of mortgage defaults weren't high-priced markets like NY or LA. They were places like Las Vegas and Phoenix. I don't think Fannie and Freddie were uniquely at fault - private label RMBS experienced the same failures - but at the end of the day, Fannie and Freddie purchased over half of all the defaulted mortgages, which was pretty much in line with their market share.

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whatnext's avatar

Their market share was 50% at the start of the bubble, but just 30% by 2006. This did lead F&F to make stupid decisions -- such as getting into Alt-A "liar" loans. Just 11% of their business but these loans accounted for half their losses. Perspective is needed: it was pressure from the reckless Wall Street casino boys that caused the mess -- as I said corrupting the whole process. Fannie and Freddie didn't do stupid things until the very height of the bubble, under pressure from market conditions they had no role in creating.

As a general note, people forget that until the advent of "government backed" mortgage finance there was no such thing as a "standard" 30-year fixed rate mortgage. The last thing banks want to do is lend large sums to average Joes at a fixed, reasonable interest rate with a 30-year payback. Liberals should be defending these companies, not lumping them in with the mega-dicks.

Back to the topic, Fannie and Freddie lost a combined $265 billion during the post-crash fallout period. A big number, sure, but hardly the cause of the End Times.

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Koshmarov's avatar

It's wild that having a roof over your head now involves both the federal government and private equity. 100 years ago you could just, you know, get off your ass and build yourself a house, out of adobe bricks or scrap lumber or whatever.

think i'm gonna start living in a tent by the river with the other cool people

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Dec 29, 2020
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whatnext's avatar

There were/are predatory practices in lending, absolutely, and still are. Every day borrowers pay more than they would have qualified for. But the emphasis on this by the Democrats, and the Republican emphasis on "people buying homes they had no business buying" put the focus on borrowers -- either as victims or "takers" depending on political spin -- and not enough on the crooked system itself. When the dust cleared we still had trillion dollar banks, no top people held accountable, no real regulatory reform that would break up the banks or separate Wall Street from "Main Street" banking.

We did have fixes that had the effect of making it harder for people of limited means, the young and the self employed to buy a home.

The last part of your post I 100% agree with, and it gets at the big problem: the sewer pipe of easy money corrupting the process from one end to the other.

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Dec 29, 2020
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Koshmarov's avatar

The only respect in which they are not complete idiots is in protecting their own immediate interests.

Short term: thumbs up

Long term: ?

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Nate F's avatar

Many of the people who were being evicted in 2008 deserved to be evicted. That's not something most people want to hear nor even consider, but it's the truth. If you buy a house for more than it's worth and more than you can pay, you can't keep living there indefinitely.

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Jan 4, 2021
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Passion guided by reason's avatar

I'm trying to consider your view and Nate V's.

It seems as if you both agree that many people being evicted had chosen to attempt to buy more expensive homes than they could truly afford. The difference seems to be in who you want to blame.

Nate seems to want to put the onus on the homebuyer in many cases, and feels that it's not sustainable for the public to bail out such poor decisions.

You prefer to emphasize "misleading sales practices". Those could come in two major flavors: somebody, say a mortgage broker seeking higher fees, pushing somebody who could have qualified for a lower interest loan into a sub-prime higher-interest loan for which they were more than qualified. That's clearly unethical and a failure to be addressed.

The other major flavor of marketing problems is just encouraging people to take out maximal loans for overpriced property period - no matter what class of loans they use. That could be the real estate agent, the buyer's friends, the mortgage company for not turning them down, the media for emphasizing buying a home to gain access to the inflation in values, etc. Responsibility gets a lot more diffuse.

When the mortgage industry tightens up credit, they are oppressive because they are not helping poor folks enough; if they make credit more available, then they are exploiting the poor and leading them into a debt trap. The missing ingredient here is accounting for the agency of the buyer. I think we have to acknowledge Nate's concern that it's unsustainable for the government to bail out poor decisions.

(We can definitely criticize other bad government actions too; but having made a bad choice in the past doesn't make a future unsustainable policy into a good one. If you want to encourage the government to bail out homeowners on a broad scale, you'd do better to find similar bailouts which you DO support, which DID work and were positive and worth emulation, rather than pointing to past actions which only call into deeper question any currently proposed bail-outs).

Your challenge to Nate to provide numbers of "evictees deserving eviction" is not unreasonable, but you fail to similarly provide numbers for "evictees not deserving eviction". And that's understandable, everybody prefers to choose the scenario to be treated as "typical" and few want to justify why it's typical. Providing numbers is going to be hard when the difference depends on how much agency you assign to homeowners. If somebody buys a bad car because they let themselves be talked into it by the salesman, is that something the government should fix? Well, if there is outright fraud, maybe so (at least in terms of punishing and regulating, if not "making whole" the buyer). There's going to need to be a lot more careful nuancing and defining before any numbers (of deserving and undeserving) would have meaning.

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Nate F's avatar

I totally agree that there were a lot of deceptive sales practices going on, and even outright fraud on the part of the banks and the mortgage companies. but that doesn't affect whether or not people should have been evicted. It affects whether or not other people should have also gone to jail.

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Passion guided by reason's avatar

Or been sued to recover damages (putting somebody in jail is sometimes appropriate as punishment and warning to others, but doesn't redress the economic damages they've caused others).

I think we are basically agreeing. Separate problems which need separate solutions.

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CDUB's avatar

Amen Cypher.

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G.W. Borg (Shadow Democracy)'s avatar

Yes, indeed, it's fair. What's unfair is to invoke the supposed expertise of economists as a bar to ordinary people talking about public affairs that affect and afflict them most directly.

As I note in another comment, "economics" as currently taught is really just one school of the stuff (neoclassical) and has been thoroughly discredited. If you have a degree in this macro garbage from most major universities, congratulations! You have been indoctrinated.

What should be mystifying to ordinary, sober taxpayers with any interest in the matter is why such reverence is accorded to the discipline and why, for heaven's sake, it is reputed to be the most rigorous of the social sciences when actual economic history again and again proves its macro models to be worse than worthless.

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Rob Roy's avatar

You may want to look at Yanis Varoufakis, an economist aside from all others. He's the one who criticizes how economics has been taught (wrongly) for all time, and still is. He is the one for whom you are looking. Cheers, Rob

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G.W. Borg (Shadow Democracy)'s avatar

Yes, I'm familiar with Varoufakis and take some of my cues from him. Thanks.

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Commentorinchief's avatar

I don’t know anyone that reveres economists. When they aren’t making ridiculous predictions like the internet being a glorified fax machine they are surfing child porn. We all know who I am taking about.

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Rob Roy's avatar

Try Yanis Varoufakis.

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Dale Fitzgerald's avatar

Government shouldn’t be in the business of picking winners or losers. It should be in the business of making sure that the playing field is level for everyone.

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Koshmarov's avatar

I mainly agree with this idea in principle. The trouble comes when the government officials responsible for ensuring this "level playing field" rotate from the government to private industry, continuously, repetitively.

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Ralph Dratman's avatar

So government wasn't protecting banks from their own mistakes in 2008? A level playing field would have let more institutions drown. I do not personally think that would have been a good idea (letting them fail), but what was done is in no way about a level playing field. When banks need help, bail them out. When people need help, bail the people out!

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Commentorinchief's avatar

Screw that! The banks should never have been bailed out. They should have failed and the executives all jailed and sued for every penny they have.

Arrest the tyrannical governors that are destroying jobs and livelihoods and open the economies so I don’t have to work yet another week of each year to pay for someone else’s bailout.

You realize there is no such thing as government funded, right? It is all tax payer funded and the producers in the middle like me are the ones that get fleeced. The Uber rich and poor don’t pay shit!

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Eric Johnson's avatar

So you think every dime the government spends comes from taxes?

If so, why do we have Treasury Bonds and Municipal Bonds? Why do we have a federal reserve system?

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Rather Curmudgeonly's avatar

Yes, every dime the govt spends comes from taxes. Bonds are simply loans based on ***future taxes***. That's why in this country govt bonds are considered the safest possible investment. The only other way the govt can raise money is by selling (or leasing) publicly-owned assets (e.g. spectrum or off-shore oil).

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Eric Johnson's avatar

This "The only other way the govt can raise money is by selling (or leasing) publicly-owned assets (e.g. spectrum or off-shore oil)."

contradicts this: "Yes, every dime the govt spends comes from taxes."

"Bonds are simply loans based on ***future taxes***"

False, bonds are simply a promise to pay back the principal, plus periodic interest, over a fixed period of time. There's nothing stating that a Treasury has to be paid off with tax dollars. In fact, that rarely ever happens: Most Treasuries are paid off through the issuance of other Treasuries.

You could pay off Treasuries by simply printing more money in your own currency (I do not advise doing this, but the Treasury certainly could do it if Congress told it to do so and the Fed went along and this option is only available to the federal government, who controls the currency).

The failure to understand this concept is a fundamental reason why people loathe macroeconomists like Summers: You think the federal government works like a P&L. But it doesn't, because the federal government can impact the money supply.

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Trollificus's avatar

I realize you're just trying to win an Internet argument, but...just saying "You're wrong! The answer is waaay more insane and unsustainable than THAT!" doesn't necessarily win you this particular argument.

You are contending "It's not tax dollars, it's a Ponzi Scheme!" and "It's not tax dollars, it's Magical Unicorn Money conjured up by we got the plates, ink and paper!"

Are you a crazy person? Or an economist?

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Rather Curmudgeonly's avatar

The sale or lease is a drop in the bucket, so we can settle on nearly every dime.

Your comment on Treasuries reminds me of the woman defending Hindu cosmology - it's turtles all the way down.

Debasing the currency is indeed a bad plan for repayment of debt. And it is not available to non-federal bond issuers, of which there are many - and all of them are paid off in time out of taxes collected.

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Eric Johnson's avatar

Question: Is the following statement true or false?

"Given the size of deficits today and the current levels of government debt, taxes must increase in the future."

This is fundamental, so really, really think about your answer.

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Rather Curmudgeonly's avatar

If something cannot go on forever, it will stop. --H. Stein

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G.W. Borg (Shadow Democracy)'s avatar

I see your point, but isn't there a moral component worth considering? By and large, the banks themselves caused the meltdown. And by and large the homeowners did not. Yes, I think the banks should not have been allowed to fail. Instead, they should have been nationalized, and individual bankers at the highest levels should have been prosecuted.

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Rather Curmudgeonly's avatar

If failing to loan prudently was at the core of the banking problems, then nationalizing (and politicizing) banks is an even worse solution than what the dumb bastards did.

The banks should have been allowed to fail. Sure, that would have been painful - such lessons are. It is the vain attempt to prevent people from learning painful lessons that is the rot in our system.

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Ralph Dratman's avatar

Letting banks fail sounds fair, but produces a lot of problems that spread through the economy far and wide. If we had a laissez faire economy, of course the banks would fail, but our real economy is nothing like that theoretical construct, free-market capitalism. It has not been like that for a long time. In our present American system all the big stakeholders can make enough noise to get saved by the government -- banks, large corporations, unions and so on. That leaves the non-stakeholders, the people with little or no (or negative) net worth. They have no lobbyists and therefore they end up absorbing a generous share of the big players' losses.

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Rather Curmudgeonly's avatar

Without failure as a possible outcome, then success has no meaning. Failure is an essential part of what makes markets work; that certainly doesn't make it fun for anyone involved. It is a serious mistake for our govt to be used as it is - to bail out anyone (which of course is quickly narrowed down to those that play the game the best).

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Ralph Dratman's avatar

I agree. But "meaning" is not part of the goal of enterprises which must serve the needs of the public. Failure of such critical systems may be detrimental to the health of the country or even the world. Our financial system serves both the goals of people who aim to make money thereby and also the most basic needs of all the people of our country.

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Rather Curmudgeonly's avatar

You take out failure from the market (because you don't like the pain it inflicts), you cripple the market.

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Koshmarov's avatar

Only certain categories of people are allowed to learn painful lessons. Certain others -- from already rich and well-connected families -- are protected from learning these painful lessons.

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Rather Curmudgeonly's avatar

Well, having wealth should have some advantages - it just should not confer the ability to use the govt (the "well-connected" part) to screw over everyone else.

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Eric Johnson's avatar

I'd like to believe that one or two dozen really greedy and ignorant financiers can't bring down the world economy.....but I'd be wrong in that belief. Put those people at the right positions at the right time and they certainly can.

What I DO NOT believe is that there are any number of smart and noble men who can prevent this sort of disaster. It takes the structure of institutions, markets, and mutually defined trust instruments to avoid chaos all the time....but it will always happen some of the time. We just need to learn from those mistakes and try to do better next time, although entropy basically ensures that whatever we fix over here will likely create the environment for potential harm over there.

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Rather Curmudgeonly's avatar

You need to let greed have it's natural consequence - loss.

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CDUB's avatar

Agreed, Lenders would have behaved differently if they thought they would have to take the loss, institutional and personal. Speculators would have never received their speculative capital.

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Eric Johnson's avatar

You'd think that would be true, but it's not.

If it was, how come we have defaults and recessions? How is it that Enron and Tyco and Madoff happen?

People are not always rational. Markets tend to be more rational, just due to being less contingent on one specific persons rationality, but when an entire market or mix of markets is entirely irrationally propped up, no amount of potential penalty is going to prevent people from acting that way, their actions are implicitly irrational.

Example: I loan you money with your home as collateral. I do this a fair number of times, to many different people and then I sell these loans to JP Morgan. JP boxes up the loans into large securities, sells them to investors, and those investors hedge the risk of default on their securities by buying a derivative insurance with AIG.

This has been going on for over 30 years in 2005. These sorts of trades, years upon years, and none of them had ever really defaulted, even during the Savings and Loan crisis. So it's perfectly rational to think that will continue. You're making a small profit on the upside and hedging the tail risk with a derivative, so you're insuring the downside. You and I do this every month when we pay car and home inurancee premiums.

One small problem, though: The entire market is priced on a lie. And that lie is that home mortgages have stable collateral because residential real estate prices are stable and, more importantly, don't decrease and aren't, on mass, subject to speculation. Whoops.

The secondary lie is that mortgage underwriters and bond ratings agencies can be trusted because they are not subject to incentives that would lead them to act unethically. Oops.

Were there bad actors? Hell yes. But they didn't actually cause the meltdown. They just contributed to what the perfectly rational actors were doing for a profit. And punitive punishment isn't going to prevent either of those things from occurring.

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CDUB's avatar

Thanks for the thoughtful reply. I do keep falling down the “people behave rationally” hole. Id like your thoughts then on how we dictate government policy re:market intervention?

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Eric Johnson's avatar

To me, market "intervention" and market "regulation" are two different things.

The latter is just about setting the rules for how you have to interact within the marketplace. This is the Rule of Law and has dictated most of Western liberal government constructs since the Magna Carta.

The former is government policy directly intervening within the marketplace, as a form of direct investment (not spending) or as a form of heavy handed alteration of how the market mechanisms.

I don't think this is always bad, sometimes it has net positive effects, but what nearly always does is create regulatory capture and "rentier" inefficiencies.

I think that what government policy should be focused on in the 21st century is the following:

1. Ensuring that all market pricing information is freely available to the public. This is a goal, not a requirement, but I think if we strive to ensure that markets are not moving based on non-public information during trading hours, we reduce the chances for arbitrage, which, in my view, provides no net-positive economic benefit (although it makes some people insanely rich).

2. Slowing down the speed of trading. I sort of prefer a financial transactions tax for doing this, but there are other methods. The only reason HFT's want to trade faster is because they desire more opportunities for arbitrage by front-running the trades of others. If I place a $5 buy order with my broker for a stock priced at $4.85 and the HFT's are doing the order flow for my broker, they know what my buy price is, which means they can go buy that same stock for $4.98 when the price is going up and then sell it to be for $5.00, pocketing the $0.02 difference. Which doesn't seem like a lot until you realize that they can do this millions of times per second across the entire market. Their claim is that this offers the market "liquidity" and that's in some sense correct, but if you taxed that transaction at $0.001 it would make the arbitrage less profitable, while raising money to regulate markets and prosecute fraud. Seems like win-win.

3. Tax short term capital gains the same as income because that is what short term capital gains are: Income.

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Commentorinchief's avatar

Where is the incentive to learn from one’s mistakes when you know you will be bailed out and not go to jail for doing the same thing?

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Eric Johnson's avatar

I'm sorry: Do we bail out everyone all of the time?

No, we don't. So that's the incentive.

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Eric Johnson's avatar

False. When one bank fails the entire banking system tends to fail. We very, very narrowly avoided that disaster with the Lehman debacle.

The banks should not have been allowed to fail, but their shareholders should have been wiped out (many were anyway) and the banks sold for their assets. The mortgage lenders who were responsible for the poor underwriting were mostly dealt with this way, it was the investment banks hoovering up those poorly underwritten loans and turning them into investment rated securities (and the insurance companies providing counterparty derivatives to insure against their failure) that became the systemic problem. We had never seen or contrived of this sort of securitized speculation before, which is why it caught everyone's risk models by surprise when it went belly-up.

Dodd-Frank gave Treasury, the Fed, and regulators more power to resolve these sorts of issues without systemic risk: Giving the federal government the authority to take over a poorly capitalized investment bank and wind it down without causing systemic harm and ensuring that banks of a size that could cause systemic issues remained appropriately levered (i.e. the "stress testing" regimen).

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Commentorinchief's avatar

Uh, aren’t the same banks already over leveraged again because they literally have nothing to lose because they were never held accountable? This is the result of no accountability.

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Rather Curmudgeonly's avatar

You're buying the bullshit they're peddling and have been since Long Term Capital Management (which was a small player compared to the 2008 games, but it was the same argument).

Systemic risk is an economist's conceit - all to bully you into believing two untrue things: first - that they (the regulators) actually know what they are talking about, and second - shut up and pay for it (making the capital owners whole at the taxpayers expense).

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Eric Johnson's avatar

And you're buying the bullshit that Hayek-ians have been perpetuating for essentially the same amount of time.

I actually don't believe either of those two things (and have basically been arguing against those two things in most of the thread).

1. Systemic risk is real and does do significant harm. We know this because we have thousands of examples of it throughout human history.

2. "Making the capital owners whole at the taxpayer's expanse": That's not at all what happened, it's just an unfortunate side effect.

If you allow banks to fail and that causes a pension fund not to be able to pay it's obligations, who is harmed? Those with pensions.

What does the FDIC insure? Deposits. Not loans. Not securities. Deposits. Why? Because we know what happens when there's a run on a non-insured bank. It causes a run on other banks and, pretty soon, depositors are wiped out, debt markets seize up, and deflation happens. Who is harmed? Not Rockefeller, Mellon, or Carnegie......the common taxpayer takes the brunt of it.

So I'd just say "Wake the fuck up already, the world isn't fucking fair and it never has been."

You participate in capitalism and get the benefits of capitalism then bitch about capitalists not being the sole ones punished. The biggest populist problem we have is this issue of "fair". Fair is a stupid and idiotic construct. The sooner you figure that out, the better off you'll be.

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Eric Johnson's avatar

"By and large, the banks themselves caused the meltdown. And by and large the homeowners did not."

There were a lot of homeowners taking out ARM loans they didn't fully understand, thinking they could always refinance into a fixed rate in the future. That happened to be what their mortgage servicer was telling them too, but if their mortgage servicer said he'd give them $5000 to jump off a bridge would they just blindly do it? Probably not.

You also have people effectively lying about their incomes and their wealth to secure loans when their credit was absolute shit due to previous defaults, massive credit card debt, etc. Yes, underwriting standards are supposed to catch that, but that doesn't mean that "homeowners did not" help to cause the meltdown by borrowing money they literally could never afford to pay back within their lifetimes. You had janitors with two mortgages on two different homes who never lived in either -- they were "investment" properties that they were "flipping".

Was that everyone? No. But, similarly, plenty of credit unions and small commercial banks did everything right and got hammered by the undertow of all the bad actors in the system. To state that "banks = evil" and "homeowners = helpless" is just to simple a story....but it's certainly the story that Matt seems to write.

Just look at the headline of this op-ed, for instance.

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Ralph Dratman's avatar

Don't forget that these home buyers also believed they could sell their houses within a few years for more than they had paid, thus wiping out the loan. Recent history of prices that always rose and never fell led them to believe such would be the case forever. In every bull market the younger players think exactly the same. You cannot expect home buyers to be more prudent than those who speculate in an up market, especially considering that they were planning to live in their investment. Only lenders have the knowledge of history and the rules of their firm to guide them in such unpredictable waters.

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Eric Johnson's avatar

I agree with this, for the most part, but if all the speculators had been hedge funds run by billionaires, we'd be blaming them for speculating (which is sort of what the OP is doing here by saying that banks caused this "by and large").

Speculation is speculation. There's plenty of blame for speculation to go around and we should apportion it appropriately.

That said: Were the majority of people in the mortgage and CDO markets speculators? No, they weren't. But they were fundamentally harmed by those who WERE speculating. So we can talk about moral hazard, but what if avoiding moral hazard makes EVERYONE worse off? That's really the question isn't it?

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Nobody's avatar

You can certainly make a case that something had to be done, but that doesn't excuse the actions of Wall Street. It feels more like a lame excuse used to deflect blame from what really happened. We had to save grandma's pension!

Banks that originate shady NINJA loans deserve to lose money when their borrowers default. That's what used to happen when bad loans were made. Instead they didn't care since the loans were bundled into CDO's and sold off to unwitting investors. Ratings agencies essentially took bribes to slap AAA ratings on shit. Why are they still in business? The traders CDO's and synthetic CDO's were ripping off their clients. There was email proof that Goldman Sachs shorted the very same stuff they were peddling to their clients. That's a textbook definition of fraud. They knew what they were doing. Nobody went to jail.

All of these bad actors made obscene profits. How come their assets weren't seized and sold off to make the investors they screwed over whole? That would have been justice. But no, instead we got TARP.

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Eric Johnson's avatar

"They knew what they were doing..."

Yeah, but you have to be able to PROVE that they knew what they were doing. Which journalists don't have to do, but judges actually require.

I suggest reading everything Preet Bharara has to say on this subject. He thought he had all these motherfuckers. Every last one of them. Then he started looking at the cases and, as a prosecutor, found it nearly impossible to throw the book at many of them, because they could very easily claim ignorance.

Many of the traders you mention did end up going to jail, paying giant fines, losing their securities licenses. Go actually look at the record. It's easy to claim "nobody was punished", but that doesn't make it true. It's not. It's just become the narrative for angry people, angry that the world isn't fair, angry because they think they're getting the shaft, angry.......but refusing to actually do anything about it that makes any logical sense because they fear loss more than the other guy, which is why they're angry in the first place.

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Rather Curmudgeonly's avatar

Preet would be America's Lavrentiy Beria if he was given half a chance; thankfully our legal system doesn't support that.

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Nobody's avatar

You call paying a fine with no admission of guilt justice? The banks collectively paid pennies on the dollar in fines on the profits they made. There was ample evidence to go after some of the more egregious players such as Angelo Mozlio. You're either a Goldman employee or a paid shill.

Also, please cite your sources for the traders that went to jail over the 2008 crisis. I think there was maybe one patsy?

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Eric Johnson's avatar

Did I say that?

Do you call ranting about justice while having not a clue what you're objectively talking about, idk, wise?

I really don't care about what you're so angry about. But it's the age of angry populism, so prattle on then...

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Eric Johnson's avatar

You take my argument to be "either this OR that" when it's actually "both".

"How come their assets weren't seized and sold off to make the investors they screwed over whole?"

Because doing so would have made everyone worse off. You appear to be obsessed with fairness, like so many people in this thread.

And yeah, they did have to save grandma's pension, because without it, grandma is destitute. Imagine if we punished all the bankers and put millions of retirees in the poor house? I'm not saying that's the choice that was made, but it was potentially one of the outcomes of making a different decision.

Hundreds of thousands of bankers were engaged in a market for mortgages and collateralized debt securities that they didn't understand....but Larry Summers and Tim Geithner were supposed to figure ALL that stuff out while trying to stave off an economic depression. That's like saying "The New Deal was great and all, but how come Andrew Mellon escaped with all his money?"

Perfect is the mortal enemy of the necessary good.

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Nobody's avatar

I never stated there was a binary choice, that's just you stuffing a strawman.

And painting things like prosecuting securities fraud and forcing banks to eat losses on bad loans as 'obsessed with fairless' speaks volumes about you. Tell me, who is your employer?

"Hundreds of thousands of bankers were engaged in a market for mortgages and collateralized debt securities that they didn't understand....but Larry Summers and Tim Geithner were supposed to figure ALL that stuff out while trying to stave off an economic depression."

First off I call bullshit on the industry not understanding it. They knew. And Larry Summers and Tim Geithner were supposed to prevent it in the first place. You know, by using regulations and enforcing existing laws. That's was their job.

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Eric Johnson's avatar

...and I'll just state that I've done far more research on this topic than you have and that your positions here are heinously ignorant. You just want someone to blame.

Fine. Blame me. Blame Summers. I really don't care to further explain what a few simple Google searches could tell you.

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Commentorinchief's avatar

Why would avoiding moral hazard make everyone worse off?

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Eric Johnson's avatar

Suggest you go read The Age of Excess by Ray Ginger.

Should help to give you some perspective on this.

https://www.amazon.com/age-excess-United-States-1877/dp/0023437006

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Commentorinchief's avatar

So I have to go buy a book to get an answer? Is there not a one or two sentence summary of the concept you can give me?

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Eric Johnson's avatar

I gave you plenty of answers in the thread above. For more context, you're going to have to do some reading.

Oh, and you can find that book at most public libraries so you don't have to buy it. Or you can wait 5 more years when it will likely drop into the public domain.

You either want to understand this stuff or you don't, but as my history instructor once told me: "Reading a summary is not a replacement for doing the work."

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Ralph Dratman's avatar

I'm not following your argument that avoiding moral hazard may make everyone worse off. Could you sketch a hypothetical to make this clearer?

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Eric Johnson's avatar

Example: The claim is that bailing out banks who were partially to blame for the mess is just socializing losses and creating moral hazard because why not make huge gambles if the Fed and Congress will just bail you out if you fail?

1. You might fail without causing systemic risk. At which point, you don't get bailed out.

2. Economies and markes, large and small and micro alike, are just confidence games. So when Lehman failed, all lending shut down completely except from the Fed and the Fed can't loan money to you and me (although Nathan Tankus has some interesting ideas on how they might create credit facilities that ostensibly COULD do that) but they can prop up banks via heavily discounted lending.

Absent that lending, you have an extremely tight money supply, no interbank lending (because nobody knows who is trustworthy), and most market investors clamoring for safe places to park their investments aren't going to lose value (which is why inverted yield curves in Treasuries generally indicate a future recession on the horizon).

What's that sound like? Sounds like 1929-1931.

Understand that these arguments have been made before. Andrew Mellon essentially created those conditions on purpose so as to allow those who created the crash of '29 due to speculation to fail. Except when they did, they brought everyone else dowm with them in a massive deflationary spiral.

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Ralph Dratman's avatar

Very sorry but I still cannot follow the basic flow of your arguments. Can you explain it at the 5th grade level? For me to be able to understand you may have to spell certain things out in greater detail than you think should be necessary. Pretend you are writing an article for a very uninformed audience who just has no idea what you are talking about, and has to be oriented first, from a distance, so to speak, to know very generally what you are trying to convey. Again I apologize for having to ask this.

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Eric Johnson's avatar

Simplest terms:

If the people providing liquidity and lending to the economy suddenly decide to stop doing that, everyone loses. This is what happened during the Great Depression (it's more complicated, obviously, but that's the 30,000 foot view of things).

Hence: You can punish the bankers and let them all go out of business. That's what you would call "fair". But when you do that everyone who does business with those bankers (i.e. you, me, the small business down the street) are harmed in the process.

Conclusively: Yes, bailing out bankers who made bad bets and are overleveraged to seek profits is a moral hazard, but the alternative is likely an extreme fiscal depression like we saw from 1930-1940. That's not some theory, that's what actually HAPPENED.

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NEIL DEBOER's avatar

Do you really believe that Nationalized banks would to a better job than independent banks? Government interference caused the 2008 crisis. The government running the banks would be the opposite of a solution.

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Ralph Dratman's avatar

The truth is that I'm not qualified to have a useful opinion on this. That said, I've lately been thinking that the survival of capitalist infrastructure is helpful to people because if food and other goods became unavailable, tremendous numbers of people would suffer. I am not as concerned about moral anything -- only the most good for the most number of people. I do find it remarkable that our economic system keeps going to the extent that the holiday season supposedly gained in sales over last year! Greed has many bad effects, but it is impressively persistent in making money. By contrast, according to what I've read, when the Soviet Union began to fall apart, the food stores there were empty and people were hungry all the time.

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G.W. Borg (Shadow Democracy)'s avatar

Generally, the government has a much better record of picking winners and losers, batting about .500. In the private sector, OTOH, about 80% of new enterprises fail within in 18 months.

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Rather Curmudgeonly's avatar

Tell me how well the govt does in picking winners in the DoD?

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G.W. Borg (Shadow Democracy)'s avatar

Overall, the federal government bats about .500 picking investment winners and losers, which is better than the private sector, where 80% of new enterprises fail within 18 months of launch.

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Rather Curmudgeonly's avatar

That's not an answer - cat got your tongue?

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Ralph Dratman's avatar

It sounds like an answer to me.

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Rather Curmudgeonly's avatar

Repetition via cut and paste, oh granted he did shift from "generally" to "overall". I'd like to know which of the DoD programs he considers part of the winners?

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Ralph Dratman's avatar

I see what you mean.

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Rather Curmudgeonly's avatar

Winner of what I might ask. I'm thinking stupid games, stupid prizes - surely that works politically as well as anything. If all it survives on is political pork - I just don't see how that could be called a winner.

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Commentorinchief's avatar

This is an immoral argument. The “government” has no Constitutional role in interfering in markets and when allowed to do so picks winners based on corrupt criminal incentives(bribes and pay offs).

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Eric Johnson's avatar

The Commerce Clause would like a word.

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Scott Jason's avatar

Economist=Haruspex

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Ralph Dratman's avatar

I had to look that up.

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Scott Jason's avatar

Unemployment numbers=goat entrails?

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Ralph Dratman's avatar

Could be, but I don't know.

I've recently been feeling liberated by the idea that I don't need to (and actually cannot) have an opinion on some extremely important issues because I have zero knowledge of those fields. Macroeconomics is a good example.

(I used to try to learn everything about everything, but for some reason have not achieved that goal. Now I am increasingly grateful to be able to say to myself and others, "I have no idea.")

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Commentorinchief's avatar

99% of the time good old common sense is correct.

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Ralph Dratman's avatar

That has not been my experience.

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Nate F's avatar

You don't need to be an economist to know that means testing a response to a pandemic that has harmed well off and poor alike is a bad idea. The person who used to make $400,000 a year but was forced by the government to shut down and is now facing eviction has just as much claim to a government handout as a poor person in a similar situation, and significantly greater claim to it than somebody working minimum wage who hasn't lost their job or seen any changes in their hours during the pandemic. We've had 60 years to help poor people do better, and now is not the time to suddenly change our policy and become super worried about how they are doing. The response should be targeted towards people who have lost their jobs as a result of the pandemic or have been forced by the government to shut their businesses down, regardless of their previous income. That means that some people who were very well off will get significant stimulus checks while poor people who have been relatively unaffected would get nothing. At least half of the country will HATE that idea.

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CDUB's avatar

I wonder why not pay every household and then means test through a invertly graduated repayment reduction as part of filing your 2020 Income Tax. Sure some PE guys may get to keep but wouldn’t the result be highly effective?

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