Say Anything Blog

It is sometimes necessary to restrain human greed…

It is always necessary to restrain the greed of govt to control us and our money.  No more “affirmative action” loans!

If you don’t know by now, don’t mess with it.

You’re right, Mike.  Regulation must be kept to a necessary minimum.  There must be laws against corruption and fraud, and those laws must be enforced.

The debate is over to what extent markets must be regulated, and liberals often defend their support of excessive regulation by suggesting that those who oppose that regulation are anarchists, or near to supporting anarchy.

Which is simply hyperbole.  Nothing more, nothing less.

I don’t want anarchy.  I do want a certain level of common sense regulation.  But we are nowhere near either of those things yet.

When the people fear their government, there is tyranny; when the government fears the people, there is liberty.

-- Thomas Jefferson

Rob’s recently listened-to songs:

I mean, the federal government just passed a law regarding what kind of light bulbs we can use.

I don’t think excessive deregulation is a problem we need to worry about.

When the people fear their government, there is tyranny; when the government fears the people, there is liberty.

-- Thomas Jefferson

Rob’s recently listened-to songs:

I don’t think excessive deregulation is a problem we need to worry about.

Not in general but in specific areas that appears not to be the case. Just as you don’t advocate no regulation, I don’t advocate excessive regulation and the credit debacle appears to flow more from the former and not the latter. Take this post, not as an argument for widespread regulation of everything, but as a suggestion that some things need more regulating than they currently receive.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

Demonstrate to me what deregulation caused this “crisis”. 
On the other hand I’ve already described what regulation contributed to it.

What’s going to happen to US industry when the global warming extremists like John McCain double the price of electricity?  I would think all these factories will close and set up in countries where they aren’t scared of technology.

I’d be very curious as well to hear just what de-regulation caused or contributed to the so-called “mortgage crisis” or “credit crisis” as you prefer, and what specific sorts of new or re- regulation ought to be imposed to preclude this from happening again.

Ben Stein is normally a shrewd if somewhat stolid observer economic and financial events, but in this instance, I believe he is mistaken.

The problem with regulation, perhaps the main problem, is that the market will invariably find new ways to bypass whatever regulatory regime is imposed.  We are thus left with well--intended if short-sighted regulators chasing after a market intent on behaving,...well… like a market.

It wasn’t too much de-regulation that brought this on, but rather too much regulation in the first place.  Without the risks, there are no rewards.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

Georgia law, explained that imposing liability on downstream owners would “reduce significantly the amount of credit that is available to lenders who are not willing to ensure that the loans they finance are made in accordance with the law.”

the national banks turned to the Treasury Department’s Office of the Comptroller of the Currency.

While the banks’ legal arguments were thin, the OCC issued regulations in early 2004 nullifying the state laws as they applied to national banks. In part, the OCC reasoned that the states just got it wrong: As the then-comptroller explained in a speech to the Federalist Society, “We know that it’s possible to deal effectively with predatory lending without putting impediments in the way of those who provide access to legitimate subprime credit.” With the state laws nullified, national banks were free to engage in the sharp practices the states were hoping to stamp out.

Bush Save the Bankers,Administration Incompetence

This is a perfect example of how the failure of central government works.  First they create a crisis resulting from over-regulation.

Secondly, having created the crisis, they argue that the fact that a crisis exists is a justification for even more central control.

I have always regarded the term “deregulation” with the same contempt I have for the term “tax breaks”.  They both presuppose a “proper” level of govt interference, and then label anything less than that as substandard.

I also wonder how one can level the charge of “predatory lending” against lenders who have been proven to have given full disclosure to their clients.  It seems to be that the clients are defrauding the lenders.

If you don’t know by now, don’t mess with it.

Robert108, what about the mortgage companies who advised their agents on how to exaggerate the income of the applicants, in order to increase the number of contracts signed?

Seems like the people who got taken were the underwriters in most cases, with a certain amount of duplicity between the loan origination company and the applicant.

Robert108, what about the mortgage companies who advised their agents on how to exaggerate the income of the applicants, in order to increase the number of contracts signed?

Good example of separation of consumer and payer.  Hardly “predatory lending”, though, is it?
Still, if everyone in the chain takes the loss from bad loans, that would remove any incentive, wouldn’t it?  What “regulations” prevent that from happening?

If you don’t know by now, don’t mess with it.

I think there is already law in place, it’s called “fraudulent loan applications”.

And if they target individuals, knowing full well these individuals are a high risk and whom they believe can be easily manipulated into going in over their heads on a mortgage, but where the lending company assumes very little risk, well that sure sounds like predatory behavior to me.

We should agree that “regulation” (aka applicable business law) is necessary to protect us all from acts of human nature.  Otherwise we wouldn’t need law at all.

Otherwise we wouldn’t need law at all.

I don’t agree with you on your black/white assessment of human nature, Carrick, but such regulation as ensures strict accountability for one’s actions is absolutely necessary.  The usual governmental lust for micromanagement is generally detrimental, and unnecessary.

...but where the lending company assumes very little risk…

There’s the key, right there.  What regulations allow that to happen?

If you don’t know by now, don’t mess with it.

MikeAdamson - ...but as a suggestion that some things need more regulating than they currently receive.

Meaningless without specifics.

The states even the AARP saw what was happening and wrote law.

What regulations allow that to happen?

imposing liability on downstream owners would “reduce significantly the amount of credit that is available to lenders who are not willing to ensure that the loans they finance are made in accordance with the law.”

The national banks lobbied hard against the law. They were rolling the dough out in tractor trailers.

the OCC issued regulations in early 2004 nullifying the state laws as they applied to national banks.

And the beat went on.
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TW...this accounting of how deregulation has facilitated the development of the credit crisis is useful. This is good, this is very good, this is quite good.

The simplest description, in my opinion, is that major financial players created a multi-trillion dollar market by securitising mortgages and bonds and creating derivative products based on those securitised fixed income products. This market is not regulated, supervised, overseen or reviewed and is opaque to all except those who have entered into transactions. I describe this market as an unregulated one...with me so far?

The market is so big and the players in it are so big that the Federal Reserve has intervened so as not to place the larger financial system in jeopardy. If the players in this unregulated market were permitted to live or die by the consequences of their transactions then that would be one thing but they’re not if their failure might threaten the system. I describe this as ad hoc intervention after the situation becomes a problem when what should have happened was some very basic oversight or regulation before the situation becomes a problem.

As for issue of “affirmative action” loans as my friend r108 describes them and upon which you base your referenced post, they’re what we call a “red herring.” Neither the government, the lenders nor the borrowers created a gigantic and unregulated market in securitised mortgages and bonds whose value can not be ascertained because nobody wants the stuff. It’s the players in the unregulated market who are carrying assets with exaggerated values that require writing down to the tune of billions of dollars per quarter that floated this boat and who require governmental intervention because the whole house of cards might collapse otherwise. As my conservative friends are fond of saying, why should the American taxpayer be required to assume risk without promise of reward simply because an unregulated market has screwed the pooch?

Mind boggling.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

Bat One

It wasn’t too much de-regulation that brought this on, but rather too much regulation in the first place.  Without the risks, there are no rewards.

I disagree. It was an unregulated market which has acted according to the logic of an unregulated market and now requires intervention to save the players and/or prevent future failures in the larger financial system. The players acted on and in their best economic interest, they created a monstrosity of deals which can’t possibly be honoured and now they threaten the stability of our financial system. Playing this one by the free market book, we should let the players fail if they must, allow the disruptions and dislocations to work their way through the system and then start up again.

Who wants that pain and why should that be imposed on me? Sound familiar? What a crock.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

lik

Meaningless without specifics.

Financial actors should not be allowed to create multi-trillion dollar markets in opaque securities without some form of oversight or regulation. How’s that?

r108

here’s the key, right there.  What regulations allow that to happen?

None...that’s the problem IMO.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

Financial actors should not be allowed to create multi-trillion dollar markets in opaque securities without some form of oversight or regulation.
How’s that?

How are they insulated from the consequences of their actions? Markets don’t do that.

If you don’t know by now, don’t mess with it.

Could I remind everyone of my favourite line from Stein’s article?

One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.

We’re not playing philosophical parlour games here, we’re talking about the real world.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

It was an unregulated market which has acted according to the logic of an unregulated market…

Please give us your version of what you believe is “the logic of an unregulated market”, Mike.

You seem to assume that humans are naturally corrupt, unless the “pure” govt is there to restrain them, when it seems that the exact opposite is closer to the truth.

How is it that the average, corrupt citizen suddenly becomes all wise and all knowing and all moral upon being either elected or selected to govt?  No socialist I have ever asked that question has ever given me an answer.

If you don’t know by now, don’t mess with it.

We’re not playing philosophical parlour games here, we’re talking about the real world.

Exactly; and in the real world, the vast majority of corruption is in govt, not with the private citizens acting in their own interest.  Govt acting in its own interest is far more corrupt and greedy than any group of private citizens.

If you don’t know by now, don’t mess with it.

Mike, I should have gone back and clarified my question as I really did have it wrong.  Ben Stein talked about some of the deregulation in his article.

Where I should have gone with it is that over regulation also had a part in the problem as my above link showed.

At this point is there any justification of introducing regulations on the industry.  Perhaps, if the taxpayer if going to get stuck cleaning up the mess.  So should we?  Probably not excepting for perhaps helping a good bank take over the assets of one like Bear Stearns.

I imagine the money lost at Bear will have more of a positive effect on straightening out the capital markets than any further regulation.

I would also wager that any new regulations that come out of Congress make the situation worse rather than better. 

There are still probably tens of millions of people that are living in a home because of the sub prime mortgage market that would be renting without it.  Remove sub prime mortgages and are we better off.  Government never gets enough blame for it’s actions. 

Finally what IS the problem really with the mortgage problem?  Not enough liquidity in the markets?  Isn’t that what the Federal Reserve IS there for?

What’s going to happen to US industry when the global warming extremists like John McCain double the price of electricity?  I would think all these factories will close and set up in countries where they aren’t scared of technology.

Mike: I know you really want to convict big business for all this, but I think if you go below the surface a bit, you will find that there was a tax advantage in creating those middleman financial entities who were able to escape the consequences of their actions.
It’s always about the govt, IMO.
We don’t need more regulation, we need less govt.

If you don’t know by now, don’t mess with it.

robert108.  I agree with you because they can write laws that favor themselves and their friends.  In the real world, people will go bankrupt if they do not meet the customer’s needs and operate their business in an efficient manner.

Communism is evil

Like Bear Stearns they took their profits and walked away leaving the taxpayer to guarantee the crippled paper they left behind. That’s how.

How are they insulated from the consequences of their actions

The internal report on UBS 37B writedown

Essentially, bonuses were measured against gross revenue after personnel costs, with no formal account taken of the quality or sustainability of those earnings.

Liquidity:
The Fed is in the process of papering the world with dollars driving the currency’s worth down.
Loaning money at negative rates is not sustainable.

TW...good comments. I think the mortgage problem is reasonably straight forward. House prices rose too much too fast and when the prices started tumbling then many mortgagees found themselves with houses worth less than their mortgages. The use of more exotic terms like no money down and teaser rates served to exacerbate the problem. I’m not terribly sympathetic to the guy who bought high and now owes more than the house is worth or who was able to buy only because conditions were ideal and now he can’t afford the payments. I am sympathetic to the guy whose pension fund bought AAA paper which turns out to be crap and to the taxpayer who is now responsible for guaranteeing the Bear Stearns junk that Morgan Stanley didn’t want.

I’m also sympathetic to the view that too much regulation is not a good thing but I’m not sympathetic to the view that regulation is always a bad thing and that there is no such thing as insufficient regulation. I’m sympathetic to the view that governments often bungle when they intervene but I’m not sympathetic to the view that the existence of government bungling means that government should never intervene.

We’ll see how the “crisis” plays out but I expect we’ll see more ad hoc intervention going forward. I prefer my regulation be proactive rather than reactive...my fundamental point is that if you let Wall Street screw around then more often than not it’s us that gets screwed in the end.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

I am sympathetic to the guy whose pension fund bought AAA paper which turns out to be crap and to the taxpayer who is now responsible for guaranteeing the Bear Stearns junk that Morgan Stanley didn’t want.

While I’m certainly no housing expert (and we had no bubble to burst here) it seems to me that IF there are houses there underlying the paper then the bonds are hardly worthless.

What’s going to happen to US industry when the global warming extremists like John McCain double the price of electricity?  I would think all these factories will close and set up in countries where they aren’t scared of technology.

MikeA.  No, it was Jimmy Carter and the Social-Democrats in the mid 70’s that overreacted to supposed “discrimination” with: lend money to everyone, especially “African Americans”. that is the root cause of this problem.  “The chickens have come home to roost!”

Communism is evil

House prices rose too much too fast…

Because of govt interference in the market, in the form of artificially low long term interest rates.

It didn’t happen by magic, Mike.
I have never said there should be no regulation, nor has anyone else here but you.  In fact, regulation comes in two forms; that which is designed to facilitate the doing of business with enforcement of contracts and basic ground rules for honest conduct, and then there’s the regulation that is politically motivated, intended to produce a social outcome(like “social justice”, for instance).  That’s the road to hell paved with “good intentions”.

If you don’t know by now, don’t mess with it.

C RZ...there may well be some mortgages defaulting which originated as a result of mid 70’s legislation but I think you’ll find that the bulk of them can not trace their existence to that source.

r108...I agree that low interest rates played a key role in the explosion of house prices. That said, nobody was holding a gun to the heads of the investment banks when they were creating a huge and unregulated market in securitised mortgages and bonds and in derivative products based thereon.

I doubt that you support State intervention on behalf of the financial system anymore than you support State intervention on behalf of individual citizens so I don’t have any bones in particular to pick with you on this issue. If one believes in free markets and the right to assume risk in order to secure reward then logically one should believe that those banks which made bad investments should live with the consequences of their decisions. That has not been happening over the past year or so and I predict even more ad hoc intervention in the months and years ahead. As I’ve stated above, I prefer my regulation proactive rather than reactive.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

That said, nobody was holding a gun to the heads of the investment banks when they were creating a huge and unregulated market in securitised mortgages and bonds and in derivative products based thereon.

Do you understand how a competitive market works, Mike?  If there is an advantage to be had, those companies who use it gain a competitive advantage over those who don’t.  The ones who take advantage stay in business, and those who don’t go out of business.
No “gun” is required.  This is how the real world works, Mike.

If you don’t know by now, don’t mess with it.

If there is an advantage to be had, those companies who use it gain a competitive advantage over those who don’t.  The ones who take advantage stay in business, and those who don’t go out of business.

That’s the theory at any rate. In this case, those that jumped in with both feet are relying on the Fed to keep the system going while those that didn’t have cleaner balance sheets but still pay the price that the lack of liquidity demands. The complaint I have with Wall Street is that they don’t want to play by your free market rules yet they don’t want regulation either. The investment banks want to be free to make profits but want to be supported when facing losses...is this really what you want to be defending?

The dilemma for free market conservatives is that they don’t have a dog in this fight...they obviously don’t support governmental intervention but that’s exactly what Wall Street expects. You should properly be railing against both sides although that might get in the way of haranguing the socialists.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

That’s the theory at any rate.

It’s not a theory; it’s real life.  If you had ever run a business, Mike, you wouldn’t even attempt to argue that point.
It’s quite common for the govt to give, then, when it becomes politically embarrassing, to take it away, and the investors suffer.  Enron is a classic example of that.
Enron invested in a commodity whose market value is unknown; when the govt changed energy policy due to public embarrassment over the predictable shortages and rising costs, the govt hung Enron out to dry by changing the rules.  I don’t deny that some Enron execs did shady accounting to try to keep from being screwed, but the entire concept was a bad one, which is why I didn’t invest in it.

If you don’t know by now, don’t mess with it.

Mike,

Speaking as you were of philosophical parlour games, please explain to me the process of de-regulation by which this happened.  What exactly was de-regulated, and by what legislation or regulatory body’s action did this take place?  What rules were rescinded?  Which regulations governing which entities and which type(s) of transactions were eased or erased, which actions are now supposedly responsible?

I do not mean this inquiry to be a mere quibble.  Words meant something.  If you, and of course, Ben Stein, are going to use the word “deregulation” then you ought to able to specify exactly what was de-regulated and how that action caused the effects you’ve claimed.  Both of you strike me as inordinately reasonable and polite individuals.  Surely a request that you explain yourself in detail isn’t unreasonable.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

Bat One...thanks for the questions. As near as I can figure, the growth of the financial derivatives market can be traced to exemptions contained in the Commodity Exchange Act and the Futures Trading Practices Act which remove over the counter derivative trading from the requirements of those Acts. I give you Alan Greenspan testifying before Congress in 2000:

The President’s working group has considered whether regulation of OTC derivatives is necessary to achieve these public policy objectives of the CEA. In the case of financial OTC derivatives transactions between professional counterparties, the working group has agreed that such regulation is unnecessary and that such transactions should be excluded from coverage of the act. Importantly, the recommended exclusion would extend to those securities-based derivatives that currently are subject to the greatest legal risk from potential application of the CEA.

Greenspan’s testimony is quite interesting given what has transpired in the years since 2000. My view is that a deliberate decision was taken to exclude such derivative trading from regulatory scrutiny because of the bilateral nature of the trades and the existence of statutory law to deal with disagreements between the parties. What the decision makers didn’t forsee was the impact that losses sustained in the value of the assets underlying the derivatives would make on the larger financial system. It’s certainly a complex area and beyond the scope of a comment on a blog. I’d recommend this article by Michael Panzer written in 2005 if you’d like a etter handle on the issues involved.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

Mike,

Thank you for the information… sort of.  You still have not indicated that the derivatives transactions you refer to were specifically de-regulated, my question, or whether, as seems more likely, they were excluded from original regulation… a different kettle of financial fish.  It is a difference with an important distinction, given the political atmosphere.

I also must note my amusement that you refer to Dr. Greenspan and his testimony as the starting link in your chain of authority on this issue.  There is a compelling case to be made that Greenspan, as Fed Chairman, bears more responsibility for the current mortgage/credit “crisis” than anyone, as he was the one who dropped interest rates far lower than he should have and held them down far too long.  The result was that many who dealt in credit markets were lured too far out on the risk/reward continuum in search of better yields.  Remember, for every borrower there must be a lender, and vice versa.

That is not to excuse those who foolishly bought CDOs, Swaps, and other derivative products of which they knew and understood far too little.  But there is little doubt that my analysis of Greenspan’s action is correct, despite his recent denials to the contrary.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

Bat...no doubt that Greenspan’s policies bear considerable responsibility for the situation. I linked Greenspan’s testimony because it is an explicit acknowledgment that no regulation was believed necessary for OTC derivative trading...that and Google returned it early.

Deregulation vs. no original regulation. I agree that they are different cases with different implications both legal and political. I don’t think it matters too much though to my general point that financial markets require some regulation, monitoring, oversight, whatever as events in one part of the financial system impact others and events in the financial system as a whole spill over into other parts of daily life.

I also acknowledge that many buyers placed virtually blind faith in the rating and reinsurance agencies...not very prudent IMO.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear
*Edmund Burke*

Deregulation vs. no original regulation. I agree that they are different cases with different implications both legal and political. I don’t think it matters too much though to my general point that financial markets require some regulation, monitoring, oversight, whatever as events in one part of the financial system impact others and events in the financial system as a whole spill over into other parts of daily life.

Mike,

It matters to this extent only:  de-regulation is a specific action, taken with a specific purpose or intent.  In this case, the events, and the market by-passed the regulations that were in place pretty much on their own.  There was no intent to release forces that were better left restricted and limited in scope.

Its all well and good to cry out for more regulation of financial markets.  But without specifics, specific goals, specific processes, specific regulations by specific agencies, the cry is pointless.  We already have far too many regulations by too many agencies… regulations which, demonstrably, even the regulators do not understand.

That said, I couldn’t agree with you more.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”

Mike,

As for Dr. Greenspan, if you check his record you’ll see that he has managed to predict seven of the last two recessions.  A remarkable accomplishment!

He also managed over his career to thoroughly bamboozle the equally sanctimonious Pooh-Bahs of Congress, a less impressive action given that for most congressmen and senators, what they actually know about finance wouldn’t justify the cost of the 3X5 card it would take to write it down.

“Poverty of goods is easily cured; poverty of the mind is irreparable.”