I had been watching the preparations for the Obama inauguration and it looked so positive than I though Wall St. might give him a warmer reception. Financials and NASDAQ look particularly grim. Has anyone kept track of how the market typically behaves on presidential inauguration days?

Denny Schlesinger

I saw one of those pointless statistics that showed the Dow has fallen on something like 72% of Inauguration Days. Who knows what that means.

Paul

I saw one of those pointless statistics that showed the Dow has fallen on something like 72% of Inauguration Days. Who knows what that means. -- Paul

Look at the bright side.....

....at least the market doesn't drop 72% on Inauguration Days.

But...there's always tomorrow... ;)

Rob
twisted optimist

How'd you watch it, Denny? Independent TV? Web?

http://news.bbc.co.uk/2/hi/americas/obama_inauguration/78379...

"1348 The BBC's Will Grant in Caracas, Venezuela: State TV didn't cover the event. Nevertheless there is keen interest here and many people here are looking to see what will develop with an Obama presidency… There's a sense of wait and see here, driven both by President Chavez and the people of Venezuela."

I saw one of those pointless statistics that showed the Dow has fallen on something like 72% of Inauguration Days. Who knows what that means.

It just means the Dow didn't fall on 28% of Inauguration Days.

I don't have a TV set. I just watched bits and pieces on the Internet. This man has created a lot of expectations and I wonder if he can deliver.

I'm not doubting his good will, just the inability of even smart economists to understand the problem and its cure. The general consensus seems to be that if you throw enough money at it it will cure itself but the money thrown at it by the outgoing Bush administration seems to have been swallowed by a back hole which likely will swallow all you can throw at it. John Mauldin calls it "pushing on a string." So how do you pull up an economy by the bootstraps? What are and where are these economic bootstraps?

Denny Schlesinger

<<<<What are and where are these economic bootstraps?>>>> Housing and jobs.

<<<<What are and where are these economic bootstraps?>>>> Housing and jobs.

missash

You are probably eight. In Venezuela around 90% of the foreign exchange and 50% of the fiscal revenue comes from oil but it is construction that creates the jobs and distributes the wealth economically (as opposed to government giveaways, AKA transfer payments).

This is what makes me think that government spending on infrastructure is a good idea.

Denny Schlesinger

<<<<This is what makes me think that government spending on infrastructure is a good idea.>>> KOP and SJ.to; utility poles and railroad ties

The inaugural address stressed bio-fuels, solar and wind power to achieve energy independence. I doubt they can dethrone King Oil and King Cole [sic] in the short run but that's where the money is going.

Denny Schlesinger

You are probably eight. In Venezuela around 90% of the foreign exchange and 50% of the fiscal revenue comes from oil but it is construction that creates the jobs and distributes the wealth economically (as opposed to government giveaways, AKA transfer payments).

missash is probably 8 or right? Or both?

I'm all for spending on infrastructure, the roads here in Colorado are full of potholes.

missash is probably 8 or right? Or both?

GrahamInv


Reight on the money!

Denny (dyslexic typing fingers) Schlesinger

There is a old saying out here on the farms.

"The cure for high prices...is high prices. The cure for low prices...is low prices."

The market will correct itself over time, if left alone. Credit was required by law, to be extended, to far too many people unable to pay the funds back.



Government intervention will only make things worse. All the money they are throwing at this crisis will cause bigger problems down the road. They need to allow the ballon to deflate and stop most of the social programs. For example, 75% of the Agricultural budget is food stamp, ADC, school lunch programs combined. Not saying not needed but, to hide it in there and then blame the farmers for rising food prices is just insane.


There are only a few lines of work that truely creates a dollar that was not there before:

Farmer
Rancher
Miner
Logger
Fisherman

Everybody else just shuffles the paper around.


B-man Rick

Credit was required by law, to be extended, to far too many people unable to pay the funds back.

That statement has a very low correlation with reality. OTOH, if what you really mean is "Credit was extended to far too many people unable to pay the funds back", I would agree 100% with you. No law compelled the banks to make 'liar loans' in the quantity made.

What you're missing is the (in retrospect misdirected) profit motive of the investment bankers and how they (mis)exploited the excess liquidity in the market. Banks made 'liar loans' to anyone who wanted money because they could immediately sell the loan (for a tidy profit), which would then be sliced, diced and securitized and resold ... again for a profit.

It was a magic money making machine. The cash was pouring in... the top executives of the investment banks were raking in the big dough and 'banking' their outsized bonuses (which they should be forced to pay back, imho). They willfully ignored arguments by people like Buffet and lessons taught by the LTCM blowup, that they were seriously underestimating the risk in their overly clever loan securitization shenanigans.

If I could lay blame on a single person for this mess, it would probably be Alan Greenspan for manipulating interest rates in such a way as to encourage the investments banks to indulge in their particular brand of selfish stupidity.

Bill

If I could lay blame on a single person for this mess, it would probably be Alan Greenspan for manipulating interest rates in such a way as to encourage the investments banks to indulge in their particular brand of selfish stupidity.

Bill

While I mostly agree your post I think there is an important ingredient missing. At some point the Congress decided that everyone should participate in the American dream of owning a home whether they could afford it or not. I recall how banks were coerced into make loans to minorities regardless of risk under threat of legal prosecution for discrimination.

Surely a banker knows when a loan is a bad risk, that's what his business is all about. If a banker is forced to make a risky loan, surely he will look for ways of either avoid making the loan or passing it off to some other party. The solution they found was, as you state, to have the loans "sliced, diced and securitized and resold." Would this have happened if they hadn't had to make crappy loans in the first place? It reminds me of employee stock options. If it hadn't been for the cap on executive pay income-tax deductions imposed by the Congress, options might never have become as popular as they did.

What I'm getting at is that every time the Congress undertakes social engineering, the losing party is going to look for ways to lose less or even to gain from the deal. That's how "unintended consequences" arise. While I may not be able to connect the dots perfectly, I would still put some of the blame on the Congress.

Denny Schlesinger

Surely a banker knows when a loan is a bad risk, that's what his business is all about.

ROTFLMAO

B

While I mostly agree your post I think there is an important ingredient missing. At some point the Congress decided that everyone should participate in the American dream of owning a home whether they could afford it or not. I recall how banks were coerced into make loans to minorities regardless of risk under threat of legal prosecution for discrimination.

The bankers goals were to maximize their own earnings. By taking on these future risks, and counting the money as deposited in the bank today, they granted themselves millions of dollars in bonuses personally. They transferred the "potential" future rewards to their current selves.

They did this rationally and with understanding, because they were making a ton of money in their pocket. It didn't take government interference to do this.

The idea that Congress enacted laws which forced banks to take on excessive risk has been debunked over and over.

http://mediamatters.org/items/200810100022

The idea that Congress enacted laws which forced banks to take on excessive risk has been debunked over and over.

http://mediamatters.org/items/200810100022
yttire



Newsweek senior editor Daniel Gross wrote in an October 7 Slate commentary:

You believe NewsWeak?

Denny Schlesinger

You believe NewsWeak?

They are at least as reliable as Faux News ;-)

Bill

I recall how banks were coerced into make loans to minorities regardless of risk under threat of legal prosecution for discrimination.

Surely a banker knows when a loan is a bad risk, that's what his business is all about.

It's so sad that people who should know better keep repeating this tripe as though it's important.

Again: 86% of subprime loans were made not by banks. They were made by mortgage brokers and others, all unregulated, none were under any sort of thread of "legal prosecution" or coercion of any kind for who they did or did not loan to.

The funds were provided by Wall Street, in similarly unregulated pools garnered from hedge funds, soverign wealth funds, and other pools of capital which had nothing to do with the banking system.

Of the 14% which did flow through the banking system, only a small portion had anything to do with the regulations which encouraged lending to "less than stellar credit" individuals. It should go without saying that the problems are not "evenly divided", as some banks went wild offering mortgages to anyone who could fog a mirror (CountryWide), and many did not at all. Countrywide, for instance, saw this as a strategy to get big fast - and it was highly successful right up until the moment it imploded all over themselves - and the rest of the system.

Most banks are solvent. A few are weak. A few less are walking disasters, thanks to the greed of their business models and their inability to evaluate risk, specific or systemic.

You might note that much of the TARP money has gone into "saving" Wall Street investment houses like Merrill Lynch (via a complex arrangement with BoA), Bear Sterns (ditto JPM), and other places like AIG, GM and Chrysler. The monies that went into the banking system (proper) were to shore up their capital base and encourage them to start lending again, not because they were about to collapse. Not because they were giving money to unqualified buyers. Not because some arcane regulation, or speech by some government official encouraged them to do dumb things.

By endlessly repeating the canard that this is all somehow the fault of some laws of Congress, some passed over 30 years ago and having lived through two other recessions, you demonstrate an inability to process information which conflicts with your preconceived political agenda, and makes you look foolish.

14%. Get it? That's total. The number of loans which were processed by the regulated banking system and which are non-performing subprime loans is vastly less. The problem is the other guys, who were shooting money out the door with pitchforks and selling the loans to suckers around the world as "Grade A American Investment" when it was no such thing.

For the last time: it was not the banks. It was not the CRA. It was largely the greed of the free enterprise market, where some people discovered a way to get money from Sam and give it to John, whether John was qualified or not, by camouflaging the route and destination through the slicing-and-dicing technique which became so popular.

Aloha ytty et al,

Dang it ytty, ya got me seeming to agree with even Goofy <g> .... Hmmm, then again maybe I’m just partially and equally disagreeing with everyone ... Ahhhh .. there, now I feel better <big ole wolfish grin with a wink towards Goofy> ......

I think one of the few clear things on this whole issue is that there are a host of probable contributing criteria (ie plenty of guilt to go around <g>) and we’ll never be able to prove the complete set and their proportional share of blame. And much like Goof has intimated ... regardless of how one views these myriad “causes”, moral hazard is probably the foundation underneath them all. But to suggest that our congress critters and other fed policies were not part of the mix seems ... well ... too “blueskyish” for this curmudgeonly ole lupine ....

And so Ytty, I see your NewsWeek with IBD (“How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable”)

http://www.ibdeditorial.com/IBDArticles.aspx?id=307149667289...

And I raise ya A Wikipedia (“...Government policies and competitive pressures for several years prior to the crisis encouraged higher risk lending practices... Causes proposed include .... monetary policy, and government regulation ...”) ...

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

and I throw in some hot air to boot (“Was sub-prime lending ever a good idea?” - which includes some very interesting comments from our current pres <smile>) ....

http://hotair.com/archives/2008/10/06/was-sub-prime-lending-...

Take care,
IcyWolf

For the last time: it was not the banks. It was not the CRA. It was largely the greed of the free enterprise market, where some people discovered a way to get money from Sam and give it to John, whether John was qualified or not, by camouflaging the route and destination through the slicing-and-dicing technique which became so popular.

Goofyhoofy

You have described transfer payments perfectly:
"a way to get money from Sam and give it to John,"

or as some would say:
"a way to Rob Peter to pay Paul."

Icy just posted a link to Obama saying that it is a good idea to sell homes to people who can't afford them. That was the principle under which the Democratic administration had been working and they recruited private enterprise into the scheme. Now you want to white-wash the Liberals and demonize free enterprise. The fact of the matter is that it all hangs together, the American economy is a mixed system, part public and part private which is why I said:

"What I'm getting at is that every time the Congress undertakes social engineering, the losing party is going to look for ways to lose less or even to gain from the deal. That's how "unintended consequences" arise. While I may not be able to connect the dots perfectly, I would still put some of the blame on the Congress." [emphasis added]

Of course private greed played a part but Liberal policy also played a very important part. The prime mover that created the conditions under which greed could act was the Liberal policy of selling houses to people who could not afford to pay for them. Now those Liberal chickens have come home to roost.

For the last time.....

Is that a promise you are willing to keep? I sure hope so. :)

Denny Schlesinger

I think there is no doubt that we all agree that the following factors contributed to the current financial issues:

1) Liberal pressure in congress to lend to unqualified buyers. This was pressured for (and paid for in PAC money) by Freddie and Frannie.

2) Private individuals in banking who could pocket millions of dollars personally by taking on future risk for their bank. By showing that future earnings would be huge with these "risk free" investments of 100's of millions they could pocket a couple of these million today, and had no incentive to investigate closer. There was a large disincentive to look at it closer actually.

3) Both parties in congress pressuring to remove regulation on banking because bankers were paying into PACS heavily- this led to the removal of oversight of many insurance businesses which had traditionally had strict margin requirements (around 2000 authored by Republicans voted in by Democrats and signed by Clinton into law).

4) Both parties in congress removing the separation of commercial and investment banking, causing investment banking losses to bring down commercial lending, and hence the entire economy with it (around 2000 under the same forces as 3).

5) Greenspan's lowering of interest rates in 2001 when the economy should have had a mild recession to remove poor lending decisions (and flushed out a lot of these bad mortgages) instead leading to an even more insane housing build up and worsening of the eventual correction.

6) The overoptimistic financial models employed by the banking industry which led them to believe that by breaking the mortgages into tons of tiny slices and distributing them into different instruments they were removing appropriate risk to rate them as AAA (they were removing risk of any particular defaulter, but not removing the risk of many defaulting at once).

7) The rating agencies had no incentive to tell the truth since they would lose business as a result of it, which took place because government interfered and made the rating agencies take their bills from those supplying the debt rather than those buying the debt.

But our differences lie in how we interpret the information. Denny, I believe you would lay all the blame on 1.

I blame all of the above, and consider 1 to be a contributing factor to some percentage, perhaps 5%-10% of the bad debts.

Since the same financial problems have struck in England, France, Portugal etc, with bad lending practices that is bringing down the banks I personally doubt that the laws and regulations of the US had a major influence over those other countries. This also points out that the corruption of the US system with the buying of legislation is not completely culpable either (my personal favorite belief in the ultimate cause of the financial problems).

The reality is there were a lot of factors. Blindly adhering to one conservative talking point without considering the other positions is not going to allow us to move forwards with a political and economic system which will actually solve the problem. But to be honest, neither of us has any impact on the eventual decisions made to solve the problem, so perhaps each of us cocooning around our own perceived reality does not really hurt us in any real way. And presented with huge amounts of alternative views, if you wish to reject them all out of hand and suckle on the teat of a cherished belief, it is your right to do so and I won't attempt to push you off of that belief any further. I'll admit I have my own cherished notion of what caused this problem (a corrupt democracy mixed with blind laissez faire ideology) and no matter how much you show me other evidence I probably won't be swayed either.

But anyway it is interesting.

But our differences lie in how we interpret the information. Denny, I believe you would lay all the blame on 1.

yttire

Not so and I said it specifically:

While I may not be able to connect the dots perfectly, I would still put some of the blame on the Congress. [emphasis added]

http://boards.fool.com/Message.asp?mid=27377319

My point is more to look for the original cause, what started the problem. I'm no friend of bankers and they certainly are not blameless but the point is what stared the mess? Would bankers have made bad loans if they didn't have incentives to do so? Supposedly a prudent banker only lends money to people who don't need it. Sub-prime is anti-banking by that definition. Why do we have sub-prime lending? Who started sub-prime lending? Who encouraged sub-prime lending? Who is encouraging sub-prime lending now by rescuing sub-prime lenders in the name of preventing systemic failure?

But sub-prime is only part of the problem. It was compounded by excessive leverage and that, as far as I can tell, is entirely the doing of the financial establishment both borrowers and lenders alike, you can't have one without the other.

Securitization, per se, is not the problem. Like any tool, it is as good or as bad as the use made of it. In the first round of securitizing you would "sanitize" the upper tranches by moving the risk to the lower tranches. It can be shown that the top RMBS tranches were virtually risk free, truly AAA, because the risk of default had been moved to the lower tranches, the lower most being junk (John Mauldin has a letter dedicated to this analysis). Securitizing had two beneficial effects, it evened out the expiration date of the debit and the credit. Before securitizing you were basically making long term loans from short term deposits which made the loans extra risky because you didn't know your future cost of capital. Second, it gave fixed income investors a choice of riskiness and yield (at least in theory).

But then a second (and third) round of securitizing created the junk that blew up the system. They repackaged the bottom most junk tranches and you can't make a silk purse out of a sow's ear. Here the rating agencies are very much to blame, the whole set of new securities should have been marked below investment grade. I find it sad that the rating agencies are being let off scott free. They should have gotten a treatment similar as to what Arthur Andersen got for its part in the Enron fiasco.

But, of course, this is Monday morning quarterbacking with 20-20 hindsight.

Denny Schlesinger

The market almost always falls on Inaugration Day because the New President often makes potentially expensive promises or sets goals that are very expensive, such as extending the Interstate Highway System to London in the next four years.

Could that be done, yes. Would it cost Trillions, absolutely.

General Invitation to visit "My MF Message Board" KahunaCFA'S Investment Musings:

Sample Post: This one on Starbucks(SBUX)

Picture: http://finance.yahoo.com/q/bc?s=SBUX&t=1y&l=on&z......

This suggests, from a recovery point of view, in a BEAR Market, that the nine dollar per share may soon be tested <in TA terms>. I am willing to add to my tiny [< 10K shares] SBUX position around $8.97 per share or so. I will not buy over the next few weeks until my IRA portfolio receives all of the January dividend distributions.

Kahuna, CFA


Kahuna, CFA

My point is more to look for the original cause, what started the problem.

Well, that's one approach. However, if one sees that there is a small, well contained campfire for years in the same location, never growing in size until one day it suddenly changes and turns into a raging conflagration is looking at the fact that it is a fire going to provide an answer for the sudden change?

Sure there has been pressure to lend to minorities. The pressure was there because all the stats collected showed that minorities were disproportionately represented in the declination statistics.

Yet, the increase in lending to the minorities still moved at a glacial pace. I submit that this was akin to that well-contained campfire.

Yet the fire turned into a conflagration which appears to have consumed everything financial in its path. So what had changed? And is what changed more important than the original fire or not? I mean one can always argue that if the fire wasn't there in the first place the conflagration might not have happened. I say might not because maybe something else would have ignited it anyway (like lightening is the cause of many wildfires).

From my redneck perspective there were two main things that changed, And they are in no particular order of primacy because they fed on each other. One was that the limits on leverage of the lending institutions was removed (I forget the name of the act but I think it was sponsored by Phil Gramm). The second was the development of derivative products which allowed lenders to believe they could lay off risk from both defaults and changing interest rates.

The second batch allowed lenders to feel that they could make loans at any interest rate (therefore the lower the better) without concerns for whether they would lose money on the rates. It also allowed them to believe they could lend to anyone as long as they bought the insurance that would allow them to pass on the risk of defaults to the seller of the insurance.

These two brought them into a frenzy of lending that took them right up to the old limits of leverage. Then they understood that those limits no longer applied and they continued the lending up until (and in some cases way beyond) the limits of sanity.

Now would some of those greedy bankers justify their actions by saying: "Look at all the downtrodden we're helping?" What do you think? Would these same bankers who sat beside the well-contained campfire for years before the conflagration then come back and blame the CRA? Again what do you think?

Have these bankers ever before exhibited the kind of selfless behavior that would lead one to believe they immolated the banking system in a frenzy of selflessness? Or is this the logical progression of things once the stops are removed from the actions and consequences of those actions of the greedy?

So....was it the greedy or the needy that brought down the system?

My vote goes for the greedy.

Poz

The prospects of socialism doesn't exactly put a warm and tingly feeling up investors' legs. This isn't rocket science.

While I mostly agree your post I think there is an important ingredient missing. At some point the Congress decided that everyone should participate in the American dream of owning a home whether they could afford it or not. I recall how banks were coerced into make loans to minorities regardless of risk under threat of legal prosecution for discrimination.

Is this what your talking about?

in June 2002 an initiative called "America's Home Ownership Challenge". In The Presidents press "EXPANDING OPPORTUNITIES FOR ALL AMERICANS" he urged the private lending sector (as well as Fannie Mae and Freddie Mac) to make more than 5.5 million new minority and low income mortgage loans. To meet his challenge to the private lending industry, twenty four of our largest banking and lending companies pledged to make 1.1 trillion dollars in low income and minority loans. It also pushed Freddie Mac and Fannie Mae to increase the capital available for such loans-- --

-- Here are some quotes from The Presidents speeches on the topic around this time.

"One of the barriers to homeownership is the inability to make a downpayment. And if one of the goals is to increase homeownership, it makes sense to help people pay that downpayment.

... And let me talk about some of the progress which we have made to date, as an example for others to follow. First of all, government sponsored corporations that help create our mortgage system -- I introduced two of the leaders here today -- they call those people Fannie May and Freddie Mac, as well as the federal home loan banks, will increase their commitment to minority markets by more than $440 billion. (Applause.) I want to thank Leland and Franklin for that commitment. It's a commitment that conforms to their charters, as well, and also conforms to their hearts.

This means they will purchase more loans made by banks after Americans, Hispanics and other minorities, which will encourage homeownership. Freddie Mac will launch 25 initiatives to eliminate homeownership barriers. Under one of these, consumers with poor credit will be able to get a mortgage with an interest rate that automatically goes down after a period of consistent payments."

It was the administration which directed Fannie Mae and Freddie Mac to more aggressively serve risky markets, and threatened their charter if they did not do so.

-- On December 16, 2003, President Bush signed into law the American Dream Downpayment Act of 2003, which will help approximately 40,000 families a year with their down payment and closing costs, and further strengthen America's housing market. This legislation complements the President's aggressive housing agenda announced in 2002 to dismantle the barriers to homeownership.

(From White House Press Release "American Dream Downpayment Act of 2003 - Expanding Homeownership Opportunities for All).

The American Dream Downpayment Act of 2003 followed Bush's admonishment that capital must be made available to "low- and moderate-income families, individuals with blemished credit, and families who have little savings for a down payment."

#3 The Republican administration had HUD offer "zero down payment" mortgages, and risky 3, 5, and 7-year ARMs.
" As part of President Bush's ongoing effort to help American families achieve the dream of homeownership, Federal Housing Commissioner John C. Weicher today announced that HUD is proposing to offer a "zero down payment" mortgage, the most significant initiative by the Federal Housing Administration in over a decade. This action would help remove the greatest barrier facing first-time homebuyers - the lack of funds for a down payment on a mortgage. Speaking at the National Association of Home Builders' annual convention, Commissioner Weicher indicated that the proposal, part of HUD's Fiscal Year 2005 budget request, would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.

Nice to see ya around again Pos .... its been a while ... Hope life is treating you only better than well <smile> ...

Mahalo for your pov and I liked your post but would like to suggest a minor addition to your "greedy and needy" .... I think it need to be greedy and needy and seedy.

The greedy are all those folks (not just bankers) who looked to profit without taking any responsibility, the needy don't have to be explained. But how can we forget the seedy Washingtonians who would explot the needy (ie votes) for political purposes above the fiscal realities and necessities? ALL seem to have played their part.

Maybe 20 years from now we'll know enough (providing the whole ballgame doesn't implode and you all have to live in dens like wolves <g>) to be able to fairly appropriate blame? Mayhaps some of you already can? But I am a pretty dumb ole forest wanderer and I can't see how it can done with the presently available info ... So I can't say with any certainty who is more or less at fault, but they all (the greedy, needy and seedy)seem to have had vital roles in the present fiasco.

My hopes are that the fiasco doesn't lead to a withering maelstorm with truly catastrophic consequences AND that at least a few Fools can profit from this situation even while creating something of value/worth in the process ... I know, I know ... my tired old song of profit without greater value creation probably deserves a rest, but hey ... we furry 4 leggers can have our own cherished notions <lupine wink> ...

I applaud that furryfeathered Lincolian's consideration of rental property ... he's providing a necessity of life and hopefully profiting from it. Isn't that the real stuff of capitalism? <glancing at Captain Denny> I am NOT arguing against equity investing, but rather that its only a part (a relatively small part?) of a much broader consideration ... Isn't part of the current problem where folks considered only their very constrained involvement in larger process as the only thing of import ie my fees/profits are what's important not whether the greater processes are reasonable or succeed?

Take care,
IcyWolf

Aloha biggap ...

Ya know, as we age sometimes we aren't physically as strong etc as we once were ... and so I don't know how helpful this may or maynot be for ya, but ... well ... whenever I get a warm tingly feeling up my leg, it usually means I wasn't lifting it quite high enough when I ... ya know ... <lupine wink> ....

almost thoughtfully offered <g>,
IcyWolf

Isn't that the real stuff of capitalism? <glancing at Captain Denny> I am NOT arguing against equity investing, but rather that its only a part (a relatively small part?) of a much broader consideration ... Isn't part of the current problem where folks considered only their very constrained involvement in larger process as the only thing of import ie my fees/profits are what's important not whether the greater processes are reasonable or succeed?

IcyWolf

To a lengthy question, a short answer. No.

Markets have to be understood as places where people exchange value or valuable considerations. If you are not contributing value then the market should not reward you and if it does, the market is not functioning properly.

Suppose you catch a cold, you are not going to blame your body for the cold. Some bug or other attacked you and your body's defense were not strong enough to overcome these nasty little critters. There are many bugs attacking markets from Madoff's Ponzi scheme to stock option abuse, poison pills, crony boards, tax and spend politics, industry/regulator revolving door, PACs, industry lobbies and on and on and on. Just as the Founding Fathers build checks and balances into politics we need better checks and balances in markets. A major problem that needs to be resolved is banks that are to big to fail, they need to be taken apart and made small enough that failure will not sink the economy.

It is not for us to judge the goals individuals set for themselves. We just have to make sure they don't overpower the system.

Denny Schlesinger

Is this what your talking about?

DanPoz

No, I was thinking about earlier episodes but your quotes are very much to the point. Bush was elected a Republican but he was an economic Liberal. I was astounded by his economic policies. This is the problem with labels. We need to judge people by what they do, not by what party they belong to.

Denny Schlesinger

My vote goes for the greedy.

Poz

Good post and nice bonfire metaphor! But instead of blaming the greedy I would rather we were not led into temptation in the first place. :)

A friend of mine used to say that the only thing he could not resist was temptation.

Denny Schlesinger

I also vote for greed, it's a common factor overwhelming judgement of a rational self interest.

A "confidence game" requires that the same motivation exists on both sides of an "exchange" The Grifter is greedy for an (relatively) easy profit and the Mark is greedy for an (apparently) easy profit. The art of the grift is in the design of the lure and smoothness of execution (here's Ponzi, Madoff, Socialism again).

There would be no need for laws if all men behaved ethically. I don't think genomics has found the gene (expressed or repressed) responsoble for this trait. So I guess it must be a learned behavior that is only taught realistically in the school of hard knocks, bumps and grinds.

While I mostly agree your post I think there is an important ingredient missing. At some point the Congress decided that everyone should participate in the American dream of owning a home whether they could afford it or not. I recall how banks were coerced into make loans to minorities regardless of risk under threat of legal prosecution for discrimination.

Surely a banker knows when a loan is a bad risk, that's what his business is all about. If a banker is forced to make a risky loan, surely he will look for ways of either avoid making the loan or passing it off to some other party. The solution they found was, as you state, to have the loans "sliced, diced and securitized and resold." Would this have happened if they hadn't had to make crappy loans in the first place?

And Congress changed the rules at Fannie Mae and Freddie Mac, to make more money available to securitizations of bad loans - some of it being "new money" as far as the two agencies were concerned, and some of it being diverted from money formerly available for dealing with good loans.

Sure there has been pressure to lend to minorities. The pressure was there because all the stats collected showed that minorities were disproportionately represented in the declination statistics.

But, oddly enough, there was one stat that did NOT reflect that disproportionality:

Default rates.

Minorities defaulted pretty much in proportion to their presence in the population of people *who got loans*.

That means the banking system as a whole was, in effect, applying the same lending standards to everyone. No discrimination.

Congress found this lack of discrimination unacceptable.