My view on why our economy is pure shit.

[samjones]

Well it's not true. They didn't keep housing loans on their books.

Not 100% true, but the statement supports the premise that fair valuation caused the bubble. Banks ought to have been more circumspect and less willing to assume the market correctly values the fixed asset that is a home. They aren't stocks.

 

[DSGE]

Well it's not true. They didn't keep housing loans on their books.

Not 100% true, but the statement supports the premise that fair valuation caused the bubble. Banks ought to have been more circumspect and less willing to assume the market correctly values the fixed asset that is a home. They aren't stocks.

Banks didn't need to give a shit. They'd make the worst loans possible and sell them all to an investment bank for a fee which would then package those loans in indecipherable credit instruments and sell the shit out of them. If you look at the existence of NINJA loan, obviously banks weren't keeping those on their balance sheets. Being able to extend more credit due to an inflated balance sheet doesn't explain banks making loans they knew they wouldn't possibly be able to recover.

 

[samjones]

If you look at the existence of NINJA loan, obviously banks weren't keeping those on their balance sheets. Being able to extend more credit due to an inflated balance sheet doesn't explain banks making loans they knew they wouldn't possibly be able to recover.

I agree - but there's this big ugly tree called subprime loans and it's preventing you from seeing the housing bubble forest that it's in.

Housing prices dropped across the board.... some places worse than others and there's an obvious fallout of suprimers making the banks take the hit, but there are alot more of us who simply gnash our teeth and keep making that mortgage payment because even with the huge drop we still have more equity than the note is worth. That doesn't mean we didn't lose money and that doesn't mean that we aren't affected. Ultimately this is what is responsible for the collapse of the housing market and the ripple effect into the rest of the economy.

Bottom-line, banks shouldn't be legally allowed to finance a bubble. Whether they're loaning money on speculative real estate prices, tech stocks or tulips. The investor should be free to gamble his money in whatever way pleases him. The financier should be more cautious.... especially when it's being financed with my deposits.

 

[kwc57]

If you look at the existence of NINJA loan, obviously banks weren't keeping those on their balance sheets. Being able to extend more credit due to an inflated balance sheet doesn't explain banks making loans they knew they wouldn't possibly be able to recover.

I agree - but there's this big ugly tree called subprime loans and it's preventing you from seeing the housing bubble forest that it's in.

Housing prices dropped across the board.... some places worse than others and there's an obvious fallout of suprimers making the banks take the hit, but there are alot more of us who simply gnash our teeth and keep making that mortgage payment because even with the huge drop we still have more equity than the note is worth. That doesn't mean we didn't lose money and that doesn't mean that we aren't affected. Ultimately this is what is responsible for the collapse of the housing market and the ripple effect into the rest of the economy.

Bottom-line, banks shouldn't be legally allowed to finance a bubble. Whether they're loaning money on speculative real estate prices, tech stocks or tulips. The investor should be free to gamble his money in whatever way pleases him. The financier should be more cautious.... especially when it's being financed with my deposits.

Which leads us right back to the root cause of the government meddling thru their progressive programs, policies and regulations.

 

[DSGE]

If you look at the existence of NINJA loan, obviously banks weren't keeping those on their balance sheets. Being able to extend more credit due to an inflated balance sheet doesn't explain banks making loans they knew they wouldn't possibly be able to recover.

I agree - but there's this big ugly tree called subprime loans and it's preventing you from seeing the housing bubble forest that it's in.

Housing prices dropped across the board.... some places worse than others and there's an obvious fallout of suprimers making the banks take the hit, but there are alot more of us who simply gnash our teeth and keep making that mortgage payment because even with the huge drop we still have more equity than the note is worth. That doesn't mean we didn't lose money and that doesn't mean that we aren't affected. Ultimately this is what is responsible for the collapse of the housing market and the ripple effect into the rest of the economy.

And exactly the same situation applies. Banks securitized prime loans. The difference being that securities derived from bundles of prime loans actually had business being rated reasonably safe.

Bottom-line, banks shouldn't be legally allowed to finance a bubble. Whether they're loaning money on speculative real estate prices, tech stocks or tulips.

The problem being that at any point in time it's extremely difficult to tell if there is a bubble and we still don't actually understand what causes them. And what laws would have to prevent banks contributing to bubbles?

The investor should be free to gamble his money in whatever way pleases him. The financier should be more cautious.... especially when it's being financed with my deposits.

It's up to you as a depositor to monitor your bank's risk taking and remove your deposits accordingly.

If banks shouldn't gamble money, how do you expect to earn interest on your deposits? How do you think banking facilities get paid for, if not the interest spread. People don't want to pay large sums of money for a bank to hold onto your cash for you and provide payment systems. They want to have access to liquidity and be paid for it. Fractional reserve banking provides that service to consumers. If there were enough demand for a bank that didn't do that, surely such a bank would exist already for you to deposit in?

 

[samjones]

Bottom-line, banks shouldn't be legally allowed to finance a bubble.

Which leads us right back to the root cause of the government meddling thru their progressive programs, policies and regulations.

The root-cause of government meddling is that banks can't be trusted to do the honest thing. That's true. And if the a bank profits by being dishonest then other banks will feel obligated to do so to remain competitive.

This is true.

You said it best, KWC.

Banks saddled Americans with housese they couldn't afford and then turned around and securitized those loans and sold them to other Americans who were mislead as to the risk and this is what collapsed the automotive sector. American taxpayers were obligated to jump in and finance a bailout of the entire mess and like you said - there's no way we can hold any bank or banker accountable because they're trying to run a business and make a profit and screw America is we don't understand that.


Me.... I'm still trying to understand that. So screw me, I guess, right?

 

[samjones]

The problem being that at any point in time it's extremely difficult to tell if there is a bubble and we still don't actually understand what causes them. And what laws would have to prevent banks contributing to bubbles?

Read my lips. Abolish mark to market accounting for primary residences and return to historical valuations.

It's up to you as a depositor to monitor your bank's risk taking and remove your deposits accordingly.

No - it's up to FDIC, but that's beside the point. If a banks is making bad loans it's reasonably easy to flesh it out. If the banking system is misvaluing the properties that it's loaning on then we have a serous problem.... unless the prices are depressed, which they are, then there's no problem at all..... unless the prices go back up, which they will.

Somehow I like to think that we learned our lesson on the subprimes and we'll be able to do a better job next time around.... I dunno, maybe I'm wrong but I like to think that. We haven't done anything at all about mark to market accounting.

 

[Paulie]

give me a time in history that unfettered markets created what you claim they will create?

Give me a time in history when there was actually unfettered markets.

 

[DSGE]

The problem being that at any point in time it's extremely difficult to tell if there is a bubble and we still don't actually understand what causes them. And what laws would have to prevent banks contributing to bubbles?

Read my lips. Abolish mark to market accounting for primary residences and return to historical valuations.

Bubble still would have happened, as discussed. The increased mortgage lending had nothing to do with the fact that bank balance sheets were "inflated"; mortgages were originated to be securitized.

It's up to you as a depositor to monitor your bank's risk taking and remove your deposits accordingly.

No - it's up to FDIC, but that's beside the point.

Sure I suppose you don't have to even worry about it since the taxpayer is on the hook if your bank becomes insolvent from bad lending practices. Surely the FDIC would have noticed all the risk these banks were piling onto their balance sheets? As discussed, nobody noticed. Mortgages were not held on balance sheets, they were securitized and turned into instruments people didn't really know how to assess (which was where all the risk was present). All the FDIC would look at is the nice AAA rating the NRSROs gave the securities.

If a banks is making bad loans it's reasonably easy to flesh it out. If the banking system is misvaluing the properties that it's loaning on then we have a serous problem.... unless the prices are depressed, which they are, then there's no problem at all..... unless the prices go back up, which they will.

Except nobody was misvaluing loans. Loans weren't held on balance sheets! They were securitized! It's the crazy asset backed securities that were misvalued, and there were no such historical trends to use!

Somehow I like to think that we learned our lesson on the subprimes and we'll be able to do a better job next time around.... I dunno, maybe I'm wrong but I like to think that. We haven't done anything at all about mark to market accounting.

I'm pretty sure that everybody has learnt not to buy CDOs en masse without knowing what the **** is in them. Mark to market is irrelevant.

 

[kwc57]

Bottom-line, banks shouldn't be legally allowed to finance a bubble.

Which leads us right back to the root cause of the government meddling thru their progressive programs, policies and regulations.

The root-cause of government meddling is that banks can't be trusted to do the honest thing. That's true. And if the a bank profits by being dishonest then other banks will feel obligated to do so to remain competitive.

This is true.

You said it best, KWC.

Banks saddled Americans with housese they couldn't afford and then turned around and securitized those loans and sold them to other Americans who were mislead as to the risk and this is what collapsed the automotive sector. American taxpayers were obligated to jump in and finance a bailout of the entire mess and like you said - there's no way we can hold any bank or banker accountable because they're trying to run a business and make a profit and screw America is we don't understand that.


Me.... I'm still trying to understand that. So screw me, I guess, right?

Sam, you're so full of shit, your eyes are brown. You of course know that the government meddling was progressive social engineering and forcing banks to make questionable loans with the promise of guaranteeing them against loss. That was the snowflake that lead to an avalanche. I suppose we could nationalize banking and make it a non-profit government agency to satisfy you. Tell me, how do you think that would work out in t he long run? Kind of like the post office as opposed to UPS of FedEx?

 

[Paulie]

I still believe our monetary policy is our number 1 detriment.

 

[TakeAStepBack]

I'll say it again, centrally planned economics coupled with expansionary policies and fiat currencies, make predictions of bubbles easy. People did predict the housing bubble years before it popped.

Hint- They were not Keynesian economists.

 

[DSGE]

I still believe our monetary policy is our number 1 detriment.

In that it's too tight...?

 

[DSGE]

I'll say it again, centrally planned economics coupled with expansionary policies and fiat currencies, make predictions of bubbles easy. People did predict the housing bubble years before it popped.

Hint- They were not Keynesian economists.

Don't count Krugman as a Keynesian?

Also monetary policy wasn't especially expansionary, unless you make the rookie mistake of looking at interest rates rather than NGDP.

 

[samjones]

I suppose we could nationalize banking and make it a non-profit government agency to satisfy you.

Yes, to satisfy me.... that's why we should do it.

I don't really see why you think that Fannie/Freddie, the Fed and Joe Taxpayer taking the hit for all the losses that the banks incurred really amounts to excessive government meddling.

I've already presented proof that CRA didn't really contribute much to the subprime crisis. Megabank owns Freddie/Fannie, so the notion that they are avoiding problem by selling them their bad debt is kind of ridiculous.

Bottom-line, there's no real good excuse for being unscrupulous. If the banks knew the loans were bad, they shouldn't have been making them.

 

[kwc57]

I suppose we could nationalize banking and make it a non-profit government agency to satisfy you.

Yes, to satisfy me.... that's why we should do it.

I don't really see why you think that Fannie/Freddie, the Fed and Joe Taxpayer taking the hit for all the losses that the banks incurred really amounts to excessive government meddling.
I've already presented proof that CRA didn't really contribute much to the subprime crisis. Megabank owns Freddie/Fannie, so the notion that they are avoiding problem by selling them their bad debt is kind of ridiculous.

Bottom-line, there's no real good excuse for being unscrupulous. If the banks knew the loans were bad, they shouldn't have been making them.

Say what? Read what I said, don't make shit up.

Except when the government tells you to make the loans to be "fair" and promises to guarantee them.

 

[TakeAStepBack]

I'll say it again, centrally planned economics coupled with expansionary policies and fiat currencies, make predictions of bubbles easy. People did predict the housing bubble years before it popped.

Hint- They were not Keynesian economists.

Don't count Krugman as a Keynesian?

Also monetary policy wasn't especially expansionary, unless you make the rookie mistake of looking at interest rates rather than NGDP.

Expansion of credit and artificially lowered interest rates is...wait for it.....expansionary.

Krugman has nothing to do with this. He didn't predict shit until the flood gates were open.

Wrong guys.

 

[DSGE]

I'll say it again, centrally planned economics coupled with expansionary policies and fiat currencies, make predictions of bubbles easy. People did predict the housing bubble years before it popped.

Hint- They were not Keynesian economists.

Don't count Krugman as a Keynesian?

Also monetary policy wasn't especially expansionary, unless you make the rookie mistake of looking at interest rates rather than NGDP.

Expansion of credit and artificially lowered interest rates is...wait for it.....expansionary.

Except... wait for it... not necessarily. The hidden proviso there is "lowered interest rates below the natural rate". But the natural rate is unobservable. So how do we tell if interest rates are being lowered below the natural rate or if they're being lowered to the new natural rate? We look at what happens when an interest rate is below its natural rate: there will either be an increase in the price level, or if money is non-neutral in the short run an increase in output, or both. Now what's P*Y? NGDP! So one way to tell how easy/tight monetary policy is is to look at the growth of NGDP:

And look at that. NGDP growth actually falls slightly below trend during Greenspan's low interest rates. So that tells you that it wasn't artificially low interest rates at all; it was interest rates being lowered to near their new natural rate. Ie, money wasn't particularly expansionary at all.

Krugman has nothing to do with this. He didn't predict shit until the flood gates were open.

He made his prediction in... what?... 2005. Does that not count?

 

[Paulie]

I still believe our monetary policy is our number 1 detriment.

In that it's too tight...?

Too tight? We're at 0% right now. You call that tight?

But no. In that it distorts markets way too much and creates enormous amounts of money that inevitably gets malinvested and misallocated, which leads to bubbles and the booms and busts that seem to be commonplace in our economy now.

 

[DSGE]

I still believe our monetary policy is our number 1 detriment.

In that it's too tight...?

Too tight? We're at 0% right now. You call that tight?

Yes. Why do you think the nominal interest rate is a measure of the looseness/tightness of monetary policy?

But no. In that it distorts markets way too much and creates enormous amounts of money that inevitably gets malinvested and misallocated, which leads to bubbles and the booms and busts that seem to be commonplace in our economy now.

Except estimates of the natural rate of interest (the rate that equilibrates planned saving and investment) are around negative 5%. You realise that the natural rate of interest isn't constant and there is a zero lower bound on nominal interest rates?