KPO'M

Capitalism, R.I.P.

54 posts in this topic

One other point. I don't think a political system either can create or destroy virtues or vices in individuals. This is the idea behind regulation in general, that it can control "greed" or foster "benevolence". Short-range thinking isn't created by the government. But the government can create policies where it is easier for fly-by-night crooks to obtain business and compete with honest businessmen. Basically, I don't think you can "regulate" vices out of existence.

You may not have meant it this way, but a political system certainly can destroy virtues by punishing individuals' freedom to act rationally. Witness the criminalization of the free market.

The National Post's Terence Corcoran had a very good article published last weekend on the nationalization:

"More is needed," said Mr. Paulson. He spoke of "further decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses." The Bush administration now wants to try buying up the bad mortgage assets that are allegedly at the heart of the global financial meltdown -- or freeze-up, to use a Paulson metaphor.

The president's description of how this new plan would work came with a stunning irony. He said it would mean putting substantial U. S. taxpayer money at risk, but not to worry because "we expect that this money will eventually be paid back. The vast majority of assets the government is planning to purchase have good value over time."

But if the "vast majority" of these assets have value over time, then why does U. S. accounting policy force banks and other institutions to write these same mortgage assets and their associated securitization products down to near zero? If the government can sit on mortgages and wait for payment over the long term, why can't banks?

It's a question Mr. Paulson failed to answer yesterday. His comments are worth a close look, since he came oh-so-close to the "root cause" of the problem, but failed to acknowledge it. He said these mortgage assets are "parked, or frozen" on financial institution balance sheets, "preventing them from financing productive loans." He said the "inability to determine their worth has fostered uncertainty... about the financial condition of the institutions who own them."

In a Wall Street Journal commentary yesterday (reprinted elsewhere on this page),William Isaac, former head of the U. S. deposit insurance agency, joined the chorus of critics who have zeroed in on one of the real root causes of the global financial turmoil -- accounting rules that force institutions to write assets down to "market value." Due to temporary uncertainty in the market, there is no current market value. But that should not mean the assets are worthless. "If we do not halt the insanity of forcing financial firms to mark assets to a nonexistent market rather than their realistic economic value, the cancer will keep spreading and will plunge the world into very difficult economic times for years go come."

Share this post


Link to post
Share on other sites
How could anyone in a free society other than a crook lend money that he does not have to recipients who are poor risks in a game of cascading short term "profits" until the bottom of the scheme falls out? And how could a crook do it on such a wide scale for so long if such fraud were not condoned and encouraged by the government? The kind of rules, incentives and mandates put in place by the government over years only brought out the worst kind of short term, manipulative "greed' in the worst kind of people who saw a way to exploit the system.

I think we all agree on the government's culpability in this. Can you point out who the crook is on the private side?

(I have worked in banking for three years, two months of which were spent buying mortgage pools, the rest of the time in Commercial Banking. I have pretty strong opinions and a decent handle on this, but I am not an expert so Caveat Lector!)

Originators (Mortgage and Commercial Banks)- Originators do need to have the capital in order to lend. They lend their money and make a profit by collecting the interest or selling the loan to investors. If the originator sells the loan to an investor with false information (potentially through negligence) then certainly I could see calling them a crook but to my knowledge that was not the case. (There were allegations that brokers were pushing people to lie on applications but nothing systemic that I have seen). As the Fed Funds Target rate went to negative in real terms (less than inflation) the money was so easy banks felt pressured to lend more to higher risk clients (also higher reward). I don't see this as "short term manipulative greed", rather as a bad bet capitalists are free to take.

Investors (Banks and Funds)- Purchased loans from originators on the open market. Full disclosure of 50-100 pieces of information about each loan is passed from originator to investor before the deal is closed. It is my understanding that varying degrees of due diligence were performed depending upon the purchaser. Yes, this piece can get quite complicated as the loans are put in tranches and sold in many different ways, but the point is the information about the underlying assets was available to the investor and no guarantees about performance were ever made, so no fraud here. With the Fed holding down interest rates, yields on corporate bonds and bank products were low. The equity market returns at this time were also sub-average. The yield was in real estate and mortgage backed securities seemed safe as they are backed by houses that can be sold if the payments aren't made. To get preferred yields investors took more risk and, like the originators, they lost.

Borrowers- On a national level housing prices have not gone down since the Great Depression. You can pay $1000/mo. on an Interest Only loan for a $500,000 home that will "likely" increase in value by $20-100M over the next few years at which point you can "likely" refinance or sell and make a nice profit. You sign on not understanding that "likely" doesn't mean "definitely" (blank-out) and not considering that without this scenario you have no way to pay the $3000/mo. payment if you can't re-fi or sell (blank-out #2).

My opinion on this is that the government's goal of increased home ownership along with the deep influence the Fed's monetary policy has on banking were the overwhelming contributors to this debacle. I see that banks made bad bets, investors made worse bets and taxpayers will pay the bill. It sucks but I think if presented clearly (by someone more authoritative than I) it makes a great case study for Laissez-Faire.

Share this post


Link to post
Share on other sites
One other point. I don't think a political system either can create or destroy virtues or vices in individuals. This is the idea behind regulation in general, that it can control "greed" or foster "benevolence". Short-range thinking isn't created by the government. But the government can create policies where it is easier for fly-by-night crooks to obtain business and compete with honest businessmen. Basically, I don't think you can "regulate" vices out of existence.

You may not have meant it this way, but a political system certainly can destroy virtues by punishing individuals' freedom to act rationally. Witness the criminalization of the free market.

I don't agree, I think that the virtues and vices are more fundamental than the political system. As a central planner, you cannot enact policies that create or destroy morals. You can reward or punish but that is not the same.

Share this post


Link to post
Share on other sites
One other point. I don't think a political system either can create or destroy virtues or vices in individuals. This is the idea behind regulation in general, that it can control "greed" or foster "benevolence". Short-range thinking isn't created by the government. But the government can create policies where it is easier for fly-by-night crooks to obtain business and compete with honest businessmen. Basically, I don't think you can "regulate" vices out of existence.

You may not have meant it this way, but a political system certainly can destroy virtues by punishing individuals' freedom to act rationally. Witness the criminalization of the free market.

I don't agree, I think that the virtues and vices are more fundamental than the political system. As a central planner, you cannot enact policies that create or destroy morals. You can reward or punish but that is not the same.

When a political system rewards the needy and or punishes the productive it will destroy the virtue of productiveness and create a culture on the vice of sloth. I agree that ethics is more fundamental than politics. But, that does not mean that politicians cannot enact policies that destroy morals. To concretize my first sentence let us use an example from today. The welfare receipent makes $390 dollars a week and does nothing but sit around and watch Jerry Springer. The welfare receipent's neighbor, an average American worker, is working 40 hours a week and makes $400 a week. After talking with his neighbor the American worker decides that if he can make $390 a week by sitting around his house doing nothing he is willing to give up the $10 extra dollars that he will save in gas anyways.

Share this post


Link to post
Share on other sites
When a political system rewards the needy and or punishes the productive it will destroy the virtue of productiveness and create a culture on the vice of sloth. I agree that ethics is more fundamental than politics. But, that does not mean that politicians cannot enact policies that destroy morals. To concretize my first sentence let us use an example from today. The welfare receipent makes $390 dollars a week and does nothing but sit around and watch Jerry Springer. The welfare receipent's neighbor, an average American worker, is working 40 hours a week and makes $400 a week. After talking with his neighbor the American worker decides that if he can make $390 a week by sitting around his house doing nothing he is willing to give up the $10 extra dollars that he will save in gas anyways.

Ok, you've given an example of a gov't destroying a virtue. Can a gov't drive out of existence a vice, via regulation? Can they create virtue through regulation?

Share this post


Link to post
Share on other sites
But if the "vast majority" of these assets have value over time, then why does U. S. accounting policy force banks and other institutions to write these same mortgage assets and their associated securitization products down to near zero? If the government can sit on mortgages and wait for payment over the long term, why can't banks?

It's a question Mr. Paulson failed to answer yesterday. His comments are worth a close look, since he came oh-so-close to the "root cause" of the problem, but failed to acknowledge it. He said these mortgage assets are "parked, or frozen" on financial institution balance sheets, "preventing them from financing productive loans." He said the "inability to determine their worth has fostered uncertainty... about the financial condition of the institutions who own them."

In a Wall Street Journal commentary yesterday (reprinted elsewhere on this page),William Isaac, former head of the U. S. deposit insurance agency, joined the chorus of critics who have zeroed in on one of the real root causes of the global financial turmoil -- accounting rules that force institutions to write assets down to "market value." Due to temporary uncertainty in the market, there is no current market value. But that should not mean the assets are worthless. "If we do not halt the insanity of forcing financial firms to mark assets to a nonexistent market rather than their realistic economic value, the cancer will keep spreading and will plunge the world into very difficult economic times for years go come."

First some facts here. US accounting policy isn't set by the government, but rather a private not-for-profit entity that has only been funded by a levy on public companies since 2002 (prior to that, since its founding in the 1970s it was funded through private donations). Also, international accounting standards used in the rest of the world also require marking assets to fair value.

We can debate the merits of fair value accounting, but the bottom line is that accounting isn't to blame for the financial crisis, and certainly isn't the "root cause." The reason there is no market for these assets is that no one wants to buy them. It's not that the values now are too low. If anything, the values back in 2005 and 2006 were too high. The banks are in crisis right now because for most of the past decade they were making loans to too many people who had no realistic possibility of paying them off. Lenders thought they could predict the percentage of people who would pay and who wouldn't, and that home values would continue to rise, but they were wrong. They aren't wrong because of fair value accounting.

As for "true economic value," who is supposed to determine that? The same banks who couldn't predict their loan losses? Fair value, while certainly not flawless, is at least a reasonably objective measure (being referenced by market transactions, or, in their absence, by discounted cash flow analyses based on market discount rates). It's important to note that accounting, in itself, is just there to provide information. What companies, investors, and governments do with that information is up to them. If creditors thought that Lehman's assets were worth more than 39% of par (which may have been true), they could have waived the debt covenants or lent them more money. Investors and creditors quite often make adjustments to GAAP accounting.

Share this post


Link to post
Share on other sites
When a political system rewards the needy and or punishes the productive it will destroy the virtue of productiveness and create a culture on the vice of sloth. I agree that ethics is more fundamental than politics. But, that does not mean that politicians cannot enact policies that destroy morals. To concretize my first sentence let us use an example from today. The welfare receipent makes $390 dollars a week and does nothing but sit around and watch Jerry Springer. The welfare receipent's neighbor, an average American worker, is working 40 hours a week and makes $400 a week. After talking with his neighbor the American worker decides that if he can make $390 a week by sitting around his house doing nothing he is willing to give up the $10 extra dollars that he will save in gas anyways.

Ok, you've given an example of a gov't destroying a virtue. Can a gov't drive out of existence a vice, via regulation? Can they create virtue through regulation?

No a government cannot drive out of existence a vice with regulation, it would only become worse. Again, the answer is no. A government cannot create a virtue through regulation. A government can indirectly promote the growth of virtues by defending individual rights and staying out of the way of the moral person.

Share this post


Link to post
Share on other sites
But if the "vast majority" of these assets have value over time, then why does U. S. accounting policy force banks and other institutions to write these same mortgage assets and their associated securitization products down to near zero? If the government can sit on mortgages and wait for payment over the long term, why can't banks?

It's a question Mr. Paulson failed to answer yesterday. His comments are worth a close look, since he came oh-so-close to the "root cause" of the problem, but failed to acknowledge it. He said these mortgage assets are "parked, or frozen" on financial institution balance sheets, "preventing them from financing productive loans." He said the "inability to determine their worth has fostered uncertainty... about the financial condition of the institutions who own them."

In a Wall Street Journal commentary yesterday (reprinted elsewhere on this page),William Isaac, former head of the U. S. deposit insurance agency, joined the chorus of critics who have zeroed in on one of the real root causes of the global financial turmoil -- accounting rules that force institutions to write assets down to "market value." Due to temporary uncertainty in the market, there is no current market value. But that should not mean the assets are worthless. "If we do not halt the insanity of forcing financial firms to mark assets to a nonexistent market rather than their realistic economic value, the cancer will keep spreading and will plunge the world into very difficult economic times for years go come."

First some facts here. US accounting policy isn't set by the government, but rather a private not-for-profit entity that has only been funded by a levy on public companies since 2002 (prior to that, since its founding in the 1970s it was funded through private donations). Also, international accounting standards used in the rest of the world also require marking assets to fair value.

[...]

You have attributed to me words I did not utter. I posted a link to an article by Terence Corcoran; I did not write the article. You should be more careful.

Share this post


Link to post
Share on other sites
Apparently "fair value accounting" is a technical term. What does it mean? How does it differ from "cost" (cost when?)?

"Cost" means what you paid for it. "Fair value" means what it's worth now. Financial instruments, typically being readily convertible to cash, are usually accounted for at fair value. So if I paid $100 for something, and today it's worth $70, I'd put it on my balance sheet at $70 with the $30 difference being a loss or reduction of my net worth. If it were worth $120, I'd have a gain or increase to my net worth.

I know what current "fair market" value is in contrast to original "cost". I wondered about the term "fair value accounting" as official terminology because you never know what is being peddled and and built into their system in the name of "fair".

To what exent was sloppy or fraudulent accounting involved in this? I have heard that the mortgage lenders' (Fred and Fan) accounting has been criticized but don't know exactly what they did or what happened in the rest of the financial industry involved in this and which is now claimed to be much larger.

It appeared to me several months ago that something was dangerously wrong in the financial world and that the government was trying to paper it over, but I couldn't tell what it was. One of the disturbing things about this whole mess is how secretive they have been. Normally when they want to impose new controls it is preceded by a lot of spin trying to create a perception of a "problem" that needs to be solved with some new government scheme whose nature is not being honestly revealed. This time it looks like they have gone out of their way to keep it from the public followed by wide eyed panic as they suddenly demand an enormous overt nationalization, which leads me to think they really did create a horrendous disaster that got out of hand and they are now desperate to patch it up with obviously huge new powers. Only towards the end have the Democrats been demagoguing it with pleas for more government hand outs, exploiting and converting what appears to be a structural attempt to save the whole financial system from imminent and catastrophic collapse into a massive giveway of taxpayer funds to individuals deemed to be "victims" when they couldn't afford the loans they knowingly took.

Share this post


Link to post
Share on other sites
How could anyone in a free society other than a crook lend money that he does not have to recipients who are poor risks in a game of cascading short term "profits" until the bottom of the scheme falls out? And how could a crook do it on such a wide scale for so long if such fraud were not condoned and encouraged by the government? The kind of rules, incentives and mandates put in place by the government over years only brought out the worst kind of short term, manipulative "greed' in the worst kind of people who saw a way to exploit the system.

I think we all agree on the government's culpability in this.

It is not clear what the government's culpability in this is because it is buried and hidden under so many layers of complexity that have grown like a cancer ever since the New Deal. That is why I wrote that there is a need for an expert to unravel in detail what has been going on in order to explain the causes.

Can you point out who the crook is on the private side?

That was in response to a claim that this mess could occur in a free society. The parallel of the "crooks on the private side" in this case are those exploiting the government system under current law who would be regarded as crooks if they did this in a proper society. The FBI is now reportedly investigating, but whatever they find that was not what I was referring to as crooks. In this case the major problem is what the government set up to be done legally.

Share this post


Link to post
Share on other sites

The usually centre-left Financial Times defence of free markets.

In praise of free markets

Published: September 25 2008 19:02 | Last updated: September 25 2008 19:02

The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street’s follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.

It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the “Great Contraction” of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe’s fledgling democracies: fascism.

Despite the severity of the current crisis, such extreme reactions remain very unlikely. Yet there is plenty of room for policymakers to compound the damage already inflicted by the irresponsible conduct of the financial sector. It is time, then, to remember what open markets have achieved, and what lies in wait for societies that suppress them.

It is no help that some of the loudest critics have little interest in what went wrong, less in how to fix it, and none at all in safeguarding against problems in future. Rowan Williams, the archbishop of Canterbury, this week applauded the UK government’s ban on short selling. His colleague, John Sentamu, declared that the short sellers of bank shares were “clearly bank robbers and asset strippers”. These are the words of a well-meaning man who can see no moral or practical difference between a car thief, a scrap-yard mechanic, and a person who insures a car and thus profits if it is stolen.

Andrew Cuomo, New York’s Attorney General, went one step further – “looters after a hurricane” was his ill-judged analogy. Are short sellers also to be shot by the National Guard?

The trouble with such sentiments is that they solve nothing. Criticise in metaphors – “unbridled capitalism”; “unfettered greed” – and you duck the tiresome task of specifying what bridles and fetters you have in mind.

Consider the Washington rescue package first. Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is “yes”. The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer. A successful rescue would prevent that and there is even a small chance that it would be profitable in its own right. That is the justification for the rescue. Congress was right to scrutinise it – especially its lack of oversight – but has become distracted by a desire to clip Wall Street’s wings.

The case for more effective regulation is nevertheless undeniable. It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises – the dotcom crash and the current banking disaster – in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.

The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett’s prophetic words, really were “financial weapons of mass destruction”.

Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.

This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.

Market freedom is not a “fundamentalist religion”. It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years. The Financial Times is proud to defend it – even today.

Share this post


Link to post
Share on other sites
Apparently "fair value accounting" is a technical term. What does it mean? How does it differ from "cost" (cost when?)?

"Cost" means what you paid for it. "Fair value" means what it's worth now. Financial instruments, typically being readily convertible to cash, are usually accounted for at fair value. So if I paid $100 for something, and today it's worth $70, I'd put it on my balance sheet at $70 with the $30 difference being a loss or reduction of my net worth. If it were worth $120, I'd have a gain or increase to my net worth.

I know what current "fair market" value is in contrast to original "cost". I wondered about the term "fair value accounting" as official terminology because you never know what is being peddled and and built into their system in the name of "fair".

To what exent was sloppy or fraudulent accounting involved in this? I have heard that the mortgage lenders' (Fred and Fan) accounting has been criticized but don't know exactly what they did or what happened in the rest of the financial industry involved in this and which is now claimed to be much larger.

Bad accounting has a big role in all of this. What I mean here is that the rules themselves were bad. So far, I haven't seen evidence of fraudulent application of accounting rules.

Basically, accounting rules were written in such a way to allow lenders to package their loans, "sell" them into trusts called special-purpose entities (or SPEs), and get them off their balance sheet, even though they were still exposed to most of the risks. Here's how it worked. A lender, which could be a bank or, more likely, a non-bank who financed their operations through short-term debt, would originate a bunch of sub-prime loans (let's say $1.2 billion). They would work with an investment bank, who'd package all the loans into the SPE, which financed the "purchase" of these loans from the lender by issuing various tranches of debt securities collateralized by these loans (let's call them A, B, and C for this example). The "A" tranche of debt (say $500 million) would be collateralized by all the loans in the portfolio. The "B" tranche (say the next $250 million), would be behind the A tranche (meaning they'd have what was left over after the A tranche was paid off), while the C tranche (the next $250 million) would be behind the A and B. The original lender or the investment bank would retain the interest in the remaining $200 million (usually called the "Z" tranche, or the "overcollateralization"). The thinking here was that, worst case scenario, up to 20% of the principal could go bad and even the C tranche would still be paid in full. Naturally, all the modeling would assume that far less than 20% would go bad (say 5-10%).

The way the rules worked, the lender could de-recognize $1 billion of loans as "sold," even though they obtained virtually all the risks of the entire $1.2 billion. They were supposed to value the $200 million Z tranche at fair value. What happened was that these lenders had exposure to billions of dollars of assets, most of which weren't on anyone's balance sheets. The buyers of the A, B, and C tranches would show investment-grade "bonds" on their books (all appearing to be A, AA, or even AAA-rated), while the original lenders would have a small portion of high-yielding Z tranche assets on their books.

While FNMA and FHLMC weren't directly involved in the "sub-prime" business (they typically purchased only "conventional" mortgage loans), they pioneered the concept of securitization, and took trillions of dollars of conventional loans off banks' balance sheets, usually selling it back to them in the form of AAA-rated securities.

In the end, "securitization" doesn't really remove exposure to the assets from the market. It just changes the name (from "loans" to "securities") and spreads it around. A lender would originate a bunch of loans, sell them off, and then buy back interests in securitized assets. It made everyone appear to have higher quality assets on their books than what they really did.

Share this post


Link to post
Share on other sites
To what exent was sloppy or fraudulent accounting involved in this? I have heard that the mortgage lenders' (Fred and Fan) accounting has been criticized but don't know exactly what they did or what happened in the rest of the financial industry involved in this and which is now claimed to be much larger.

Bad accounting has a big role in all of this. What I mean here is that the rules themselves were bad. So far, I haven't seen evidence of fraudulent application of accounting rules.

Basically, accounting rules were written in such a way to allow lenders to package their loans, "sell" them into trusts called special-purpose entities (or SPEs), and get them off their balance sheet, even though they were still exposed to most of the risks. Here's how it worked...

It all sounds like a legalized shell game perpetrated in the name of "regulations" supposedly protecting us from real capitalism. Wasn't it also leveraged off fractional reserves to inflate the whole scam into something even bigger?

Share this post


Link to post
Share on other sites
Bad accounting has a big role in all of this. What I mean here is that the rules themselves were bad. So far, I haven't seen evidence of fraudulent application of accounting rules.

....

Thanks for the explanation.

....

The way the rules worked, the lender could de-recognize $1 billion of loans as "sold," even though they obtained virtually all the risks of the entire $1.2 billion. They were supposed to value the $200 million Z tranche at fair value. What happened was that these lenders had exposure to billions of dollars of assets, most of which weren't on anyone's balance sheets. The buyers of the A, B, and C tranches would show investment-grade "bonds" on their books (all appearing to be A, AA, or even AAA-rated), while the original lenders would have a small portion of high-yielding Z tranche assets on their books.

....

OK - I think I understand - so is the problem then that the holders of the Z tranche are really responsible to the holders of the more senior A, B and C tranches in case the borrowers don't make their payments? In other words: the Z tranche holders still have a potential liability for $1.2 billion, even though they just have a $200 million asset on their books?

...

The word that comes to my mind when I hear about schemes like this is "evasion." It's like a form of conceptual laundering - we have here a risky loan - subprime mortgage - that is being transformed by financial sleight-of-hand into something that people are then putting in a portfolio of investments that's supposed to hold only investment-grade things. I think an honest term for these securities would be "junk mortgages." But as long as we pretend that they're really investment grade securities, everything's supposed to be OK...

There seems to be a lot of this going on these days in our culture. People like to pretend that reality is different than it is - pretend that everything's OK when it isn't. Pretend that there's more substance to a company or an investment than there really is. Or pretend that an enemy of the US is a person who can be reasoned with. Or pretend that the dollar is still a strong currency with the kind of value it had 40 years ago. Or pretend that somebody is getting a good education when in reality he's learning next to nothing.

In some future history book, perhaps our present era will be called "The Age of Evasion."

Share this post


Link to post
Share on other sites
When a political system rewards the needy and or punishes the productive it will destroy the virtue of productiveness and create a culture on the vice of sloth. I agree that ethics is more fundamental than politics. But, that does not mean that politicians cannot enact policies that destroy morals. To concretize my first sentence let us use an example from today. The welfare receipent makes $390 dollars a week and does nothing but sit around and watch Jerry Springer. The welfare receipent's neighbor, an average American worker, is working 40 hours a week and makes $400 a week. After talking with his neighbor the American worker decides that if he can make $390 a week by sitting around his house doing nothing he is willing to give up the $10 extra dollars that he will save in gas anyways.

Ok, you've given an example of a gov't destroying a virtue. Can a gov't drive out of existence a vice, via regulation? Can they create virtue through regulation?

I would say, no, government can't drive a vice out of existence (and of course, that's not its purpose; at most, government should compartmentalize a vice, i.e., ensure that by prohibiting force and fraud a vice can only directly affect its owner). However, reality will do that nicely, or will at least ensure that a vice remains on the fringe. In the current context, this means that while some lenders in a free market might make irrationally risky loans, they'll not survive for long. And, the potential for loss will ensure that the vast majority of lenders will not make irrationally risky loans, and so we couldn't possible approach anything near the current crisis.

Share this post


Link to post
Share on other sites
OK - I think I understand - so is the problem then that the holders of the Z tranche are really responsible to the holders of the more senior A, B and C tranches in case the borrowers don't make their payments? In other words: the Z tranche holders still have a potential liability for $1.2 billion, even though they just have a $200 million asset on their books?

...

The word that comes to my mind when I hear about schemes like this is "evasion." It's like a form of conceptual laundering - we have here a risky loan - subprime mortgage - that is being transformed by financial sleight-of-hand into something that people are then putting in a portfolio of investments that's supposed to hold only investment-grade things. I think an honest term for these securities would be "junk mortgages." But as long as we pretend that they're really investment grade securities, everything's supposed to be OK...

That's exactly what was going on. Going back to my original example, by design, about 10-15% of the loans were expected to default. Let's assume a 70% recovery rate on the defaulted loans (again, assuming that home prices would at least remain the same), and you can see that the lender assumed a default rate of about 5%. Having a Z tranche of almost 20% was expected to be significantly more than enough to protect even the C tranche holders, let alone the "AAA-rated" A tranche holders. Add to this the fact that the A, B, and C tranche holders generally got a lower rate of interest than the average rate of the underlying loans (because of the supposedly lower risk), and the Z tranche looks even more profitable for the original lender or investment bank who retained the Z tranche. The A, B, and C holders definitely had risks (even if defaults didn't result in complete losses, they could delay the receipt of principal or interest payments, resulting in a decline in fair value), though they were obscured in such a way where a lot of entities (particularly European banks) wound up with a lot more exposure than they realized.

That's not to say that securitization has no place in a rational market, or that these transactions were completely fraudulent. However, the way the rules worked, there was added incentive to structure deals like this because it got risky assets off lenders' balance sheets. Add the fact that these deals got what turned out to be inflated ratings from the credit rating agencies, and things got out of hand. Again, it's important to point out that Fannie Mae and Freddie Mac were pioneers in the securitization market. They managed basically to remove the majority of conventional mortgage loans off the balance sheets of most banks, and replace them with "AAA securities" backed by an implicit government guarantee. Freed from the capital constraints of holding conventional mortgage loans, banks and other lenders found it much easier to do the bottom fishing.

The sad thing is that lots of people knew this was going to happen, but couldn't do much about it because the market became so distorted. Goldman Sachs, for instance, saw this coming a few years ago and actually started betting against the mortgage market. That's partly why they are one of the survivors, but the current crisis has forced them to change, at least ostensibly, to a commercial bank so they can access the Federal Reserve's discount window and accept customer deposits. The credit crunch had gotten so bad that there were no available funds even for a smart investment bank like Goldman that did the right things.

Share this post


Link to post
Share on other sites

Game over. We are now following the lead of the UK and turning to outright nationalization.

http://www.ft.com/cms/s/0/5037a3cc-9566-11...0077b07658.html

To me, the events of the last few years are precisely what Objectivists have long feared would happen the longer that capitalism was defended by the pseudo-capitalists. Basically, the socialist intrusions have finally caused a near collapse of our economy, just as the Austrian economists have been warning, and, without the backing of people who understood the moral arguments, "capitalism" is taking all the blame.

A few questions for the forum. Isn't what is happening right now the culmination a refutation of the argument that we should pinch our noses and vote for conservatives, evangelicals, and others who appear to be "less bad"? How would things have been any worse had Gore or Kerry won? Might we have been better off, since the left wouldn't have been able to pin the blame on the right and "deregulation" the way they have? Bush II has been a lot like Hoover II. Like Hoover, he was a "compassionate conservative" who was going to buck his party by putting a nice face on it and bring people together while staying true to the fundamental principles. Instead, he presided over a huge expansion of government (just as Hoover) and an increase in deficit spending. His "protectionism" is a bit different (sealing off our borders to an extreme level in a misguided attack on terrorism), but it is real.

Share this post


Link to post
Share on other sites
To me, the events of the last few years are precisely what Objectivists have long feared would happen the longer that capitalism was defended by the pseudo-capitalists. Basically, the socialist intrusions have finally caused a near collapse of our economy, just as the Austrian economists have been warning, and, without the backing of people who understood the moral arguments, "capitalism" is taking all the blame.

A few questions for the forum. Isn't what is happening right now the culmination a refutation of the argument that we should pinch our noses and vote for conservatives, evangelicals, and others who appear to be "less bad"? How would things have been any worse had Gore or Kerry won? Might we have been better off, since the left wouldn't have been able to pin the blame on the right and "deregulation" the way they have?

If the American people haven't figured out explicitly whether socialism/government intervention or capitalism lead to economic collapse from literally hundreds of real world examples over the last century--some of those including our own--then how is voting solely for socialists, then observing the subsequent devastation, going to bring any new enlightenment to them? I'd rather not be the guinea-pig of that doomed experiment.

You could point at people like McCain or Bush who don't take a principled stand against global warming, and throw your hands up and say "how could they be better than Gore or Kerry?" Well, for starters Gore is the one who starred in and created "An Inconvenient Truth", so there is a difference.

One side (Republicans) may not properly fight the bad things in the world, but the other (Democrats) crusade for them!

Share this post


Link to post
Share on other sites
One side (Republicans) may not properly fight the bad things in the world, but the other (Democrats) crusade for them!

Both sides crusade for bad things. This bailout package was originally all Bush's doing. The Republicans in Congress bravely voted it down so that they could load it up with pork.

The right and the left are both our enemy. Things will never get better until they destroy each other. The right's on the ropes right now. Let's kill them off, and then we can start working doing the same with the left.

Share this post


Link to post
Share on other sites
The right and the left are both our enemy.

The Left are always our enemy while some on the Right are often friends and allies.

Things will never get better until they destroy each other. The right's on the ropes right now. Let's kill them off, and then we can start working doing the same with the left.

This like saying, our army doesn't always do a good job of defending us from foreign enemies, so let's get rid of our army and then deal with our enemies.

Share this post


Link to post
Share on other sites
The right and the left are both our enemy.

The Left are always our enemy while some on the Right are often friends and allies.

That's what I used to think. After witnessing the last 14 years, I no longer think that. We have friends and allies, but they are on neither the right nor the left. The only moral way to deal with those in power on the right or the left is to treat them the way they treat us, as tools to be used and then discarded.

Things will never get better until they destroy each other. The right's on the ropes right now. Let's kill them off, and then we can start working doing the same with the left.

This like saying, our army doesn't always do a good job of defending us from foreign enemies, so let's get rid of our army and then deal with our enemies.

That assumes the Right is our army. They are on a crusade, all right, but not a just one, and they aren't defending us.

Share this post


Link to post
Share on other sites
The right and the left are both our enemy. Things will never get better until they destroy each other. The right's on the ropes right now. Let's kill them off, and then we can start working doing the same with the left.

And how long do you expect civilization to survive if nothing is left but the Left? Even if America didn't fall, a Left America would probably be quicker to censure free thought and the spread of Objectivism than a Right America (imagine if the intolerance of academia became the norm for a nation! :) )

Share this post


Link to post
Share on other sites
The right and the left are both our enemy. Things will never get better until they destroy each other. The right's on the ropes right now. Let's kill them off, and then we can start working doing the same with the left.

And how long do you expect civilization to survive if nothing is left but the Left? Even if America didn't fall, a Left America would probably be quicker to censure free thought and the spread of Objectivism than a Right America (imagine if the intolerance of academia became the norm for a nation! :) )

I doubt very seriously that Bob Jones University (yes, that Bob Jones U where Republican politicians frequently go for political legitimacy) would look very kindly upon free thought and Objectivism. Heck, I can't even go there because I was baptized the wrong kind of Christian. Telling them I've "converted" to atheism probably won't help, either.

Share this post


Link to post
Share on other sites