The Bloviators Strike Back
By Pejman Yousefzadeh Posted in Economic Ignorance | Economy — Comments (16) / Email this page » / Leave a comment »
As if negative financial news is not difficult enough to deal with, we now have to put up with the Revenge of the Regulators--embodied in this E.J. Dionne article. For someone so ostensibly smart, Dionne can be preternaturally silly; the belief that the Fed's offer of a $30 billion line of credit in order to let JP Morgan purchase Bear Stearns is somehow a "bailout" for rich people constitutes an unbelievably ignorant appraisal of the situation. A purchase of Bear Stears at $2 per share constitutes a massive loss for the company and means that shareholder values have been entirely wiped out. Yet, Dionne seems to believe that the line of credit was extended so that the rich wouldn't have "trade in their BMWs for Saturns." The mind reels.
Dionne sneers at the argument that letting Bear Stearns go bankrupt would have created a financial shockwave of terrifying proportions--but he does nothing to actually refute the argument. He argues for increased regulation . . . but doesn't show how increased regulation would have helped ease the credit crunch. Were lenders supposed to just completely and entirely get out of the subprime market? Dionne doesn't make that argument but he kinda sorta implies it without facing the fact that if it weren't for the subprime market, a whole class of homeowners would have had no chance whatsoever of purchasing a home in the first place. For Dionne, regulation is not a policy proposal. A policy proposal would at least purport to show how its implementation would affect a particular policy issue. As far as Dionne is concerned, regulation is a mere shibboleth--a word to be tossed around like an ideological weapon against "capitalists" without any understanding whatsoever of the consequences.
Dionne argues that the Fed's involvement in the buyout of Bear Stearns justifies governmental action but he fails to point out that the $30 billion line of credit is a loan and not a subsidy. This is money that is usually available to banks; the only difference is that it has been made available to an investment firm. This is momentous, to be sure, but not a single taxpayer cent has been transferred from government coffers to help rich people keep their BMWs in lieu of having to buy Saturns.
Dionne tries to argue that the Great Depression was due to the failures of "geniuses of finance" and says of the current situation that "Never do I want to hear again from my conservative friends about how brilliant capitalists are." He fails to point out that the Great Depression was assisted by protectionist trade policies (which he spends no time whatsoever fulminating against), that it came to an end because of massively increased industrial production due to World War II (and not anything big government did through the New Deal) and that capitalism is unquestionably the most--yes, I shall write this--brilliant method of prosperity generation around. Are things perfect under capitalism? Of course not. But they are not perfect under any system and certainly, big government intervention does not beat the free market, no matter what Dionne's cherry-picked quotes have to say on the matter.
Of course, Reagan and Bush are blamed for "deregulation" without any explanation as to how "deregulation" had anything to do with the credit crunch. It would not be a Dionne article without a slam against Reagan and Bush and it would not be a Dionne article without the commensurate lack of explanation.
I suppose this is what we have to expect now. An economy that is currently on the bad end of the business cycle and pundits who forget that for the vast majority of the time, it is on the good end thanks to the very brilliant capitalists Dionne so foolishly derides. It would be one thing if Dionne merely shouted in the wind. One could ignore him in that case. But he writes for the Washington Post and therefore may have some influence on policymaking. This makes him scary, in addition to being wrong.
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The Bloviators Strike Back 16 Comments (0 topical, 16 editorial, 0 hidden) Post a comment »
... the fact that if it weren't for the subprime market, a whole class of homeowners would have had no chance whatsoever of purchasing a home in the first place.
Would that have been a bad thing? Are you implying that it would have been "unfair" to that class of prospective homeowners, if in the absence of the subprime market they had to wait longer and pursue financing elsewhere?
... the $30 billion line of credit is a loan and not a subsidy.
Great, a loan you say? What's the interest rate the government is assessing JP Morgan for using $30BB of taxpayer dollars? What return can the taxpayers expect for having their money used thusly? I assume the government negotiated hard for the best possible return on behalf of those whose money it stewards, and that the $30BB extended to JP Morgan will net a higher return than other possible means of investing this cash?
They're a central bank. They don't hold cash belonging to the taxpayers waiting for an investment opportunity. They do hold reserves of other countries's currencies, and they hold an inventory of about $830 billion worth of US Treasury debt.
If this line of credit needs to be drawn down, the Fed will do a few clicks on a keyboard and the money will simply spring into existence, and appear in JP Morgan's account. There's no transfer of taxpayer funds, and no opportunity cost, as you suggest.
What rate of interest? Whatever the discount rate happens to be at that point in time. Going into today, it was 3.25%. This is a policy interest rate, not a market rate. And it's not a very low rate, either. Three-month dollar LIBOR is about 2.5% right now.
The Fed line of credit is a lending facility of last resort, not necessarily the lending facility Morgan will actually use.
If this line of credit needs to be drawn down, the Fed will do a few clicks on a keyboard and the money will simply spring into existence, and appear in JP Morgan's account.
I hope to one day be so lucky as to have the Federal government invent money and have it appear in my account. Even if it comes with a whopping 3.25% interest rate!
Appreciate your facts, thanks!
Appreciate your facts, thanks!
We wish we could say the same for you. Unfortunately, the Federal government doesn't "invent" money.
"At times one remains faithful to a cause only because its opponents do not cease to be insipid." --Friedrich Nietzsche
What a poor choice of words, you're right. I'll retreat and modify: the federal government doesn't invent it, it simply causes it to "spring into existence", as blackhedd noted.
Appreciate your correction, thanks!
I do it all the time online to pay my bills. The payees don't get money "invented" into their accounts.
"At times one remains faithful to a cause only because its opponents do not cease to be insipid." --Friedrich Nietzsche
Yes, the money doesn't get "invented". I appreciated your correction, thanks again!
Instead, "the money will simply spring into existence" as blackhedd noted; according to him, "there's no transfer of taxpayer funds".
ageofreason
Dionne may be wrong but unless the nature of the Bear deal has been misreported, you are wrong too.
According to the Wall Street Journal, JP Morgan is protected against loss on the Bear securities by the Fed. Therefore Morgan's exposure is $236 million on the purchase of assets worth thirty times that, probably more. The Fed caved in and approved a deal the Bear stockholders would be crazy to ratify. (See below)
If the current financial turmoil has truly been caused by the rise and impending further rises in adjustable rate mortgages, the Fed could have done something far less risky than assuming $30 billion in risk to subsidize JP Morgan's $236 million takeover of Bear.
The Fed could offer to take a second mortgage on all primary residences on which appraised value exceeds mortgage debt by twenty percent or more. This second mortgage would pay fifty per cent of the monthly increase (one month at a time) in interest expense over the base rate.
The holder of the base mortgage would have to agree to fold the other fifty percent of the increased payment into the existing loan which would be extended for a period of up to five years.
In case of default the Fed's portion of the second mortgage would take first position and be fully paid back before the holder of the first mortgage got paid.
The homeowner could stay in the home and lose no equity in a foreclosure; the lender would get its payment rather than having to foreclose; and the Fed would get its money back with interest and with lower current outlay instead of giving more taxpayer money away without resolving the crisis.
This crisis must be revolved from homeowners up rather than from bankers down
Political Toughness and Experience
by herbert l. | edit | delete
January 28, 2008 03:28 PM EST
Margaret Thatcher was tough.
But she didn't get tough by riding around in the back of a governor's limousine for eight years and t
This proposal still has the same faults that it did when you posted yesterday your diary advocating this.
As yesterday's commenter noted, the locus of problems are those mortgages that have no equity or negative equity - and these are precisely the mortgages that are not covered by your plan.
In other words, there's no honey tree for the Fed to rob.
We'd be better off with Darth Vader in charge than these bloviators. At least, it certainly makes for better viewing on the screen.
Dionne is right. Wall Street cannot be counted on to regulate itself. I am not in favor of government regulation as a rule but the SEC, the Federal Reserve and the administration dropped the ball on this one. Lenders made mortgages to borrowers who have no chance of repaying because Wall Street was hungry for yield. For awhile that is exactly what they got by leveraging mortgage securities in excess of 20 to 1.
Problem is, Wall Street did not consider the fact that by buying mortgages from banks and mortgage lenders they were also transferring the risk of repayment to themselves. Banks and mortgage lenders were relieved of the incentive to care whether or not a borrower could repay the loan. Instead they generated enormous fees for themselves by making mortgages to anyone who wanted one and then more fees by selling the mortgages to investment bankers to securitize and resell to investors.
This whole crisis could have been averted if regulators had taken the time to noticed. Granted, one would think that the rocket scientists on Wall Street should have been able to figure it out on their own. But this isn't the first time that Wall Street has been blinded by greed. That is why the SEC was created after the last depression.
What proof do you offer that the existence of regulators would have prevented this current problem?
Or even, can you point to another industry where regulation led to the avoidance of catastrophe? [I mean never having any problems. Not just that there hasn't been a drastic collapse]
You see, the burden of proof that regulation helps lies with those that favor regulation. There are dramatically more industries that have flourished (and do so without scandal) that are not regulated in anywhere close to the manner that the SEC or the Federal Reserve have over banking/investments.
The failure is not one of the regulators, it is a failure of the regulated. The regulated failed to follow the principles that are set forth by their trade organization. Yes, greedy, but hardly the fault of the SEC and hardly a need to increase regulation.
Fighting for conservatism one day at a time.
futile and counterproductive. However, Wall Street should be an exception. It has a history of fraud and abuse and at times such as this one, the scale can be catastrophic. The spillover from this credit crisis negatively impacts our entire economic system.
I also agree that the current debt implosion is strictly due to mismanagement and greed of the financial industry. But there are also a whole host of industries, municipalities and individuals that were not involved but are negatively impacted and have to suffer the consequences.
There are numerous examples of regulations imposed upon Wall Street that have resulted in positive outcomes. Front running, for example, has been regulated since 1940 and has effectively put client transactions ahead of the brokerage firm.
Capitalism requires neutral rules that are applied to everyone. For example, contracts involving the sale of land are required to be in writing.
Wallstreet requires more complex rules since the types of transactions are quite complex. However, I wouldn't say that Wallstreet requires more regulation.
To me regulation implies someone giving the OK to do something.
In contrast, a rule means that pursuit of a particular outcome requires a particular process to be followed, or particular requirements to be met.
that many did not follow the rules. You can't argue that more rules would solve the problem. I actually think that a good portion of the firms that are losing money will learn their lessons on this one. They will learn that they have to control their risk and stop chasing the magic bullet for profits.
Fighting for conservatism one day at a time.
This makes him scary, in addition to being wrong.
I don't think it would hurt to re-emphasize the fact that Dionne is also ignorant and stupid. To anyone concerned that these remarks might amount to mere name-calling, please read Pejman's piece again; these conditions are documented. Ignorant, stupid, scary, and wrong are accurate appraisals of this particular Post writer, who would have had a better and more useful life as a ghostwriter for Fabio.
Drink Good Coffee. You can sleep when you're dead.