This is an incredibly important issue that was swept under the rug during the campaign. Neither party wanted to discuss it, for obvious reasons. The democrats are largely responsible, as they created, nurtured and protected FNM and FRE over the years. (Jon, while the article you pasted was excellent, I do think you underestimate the importance of the GSEs in the mortgage market.) But the republicans controlled the Treasury Department and the Federal Reserve, as well as the SEC, and surely could have done something to get FNM/FRE under control as well as address the issues jon raised. They share the blame, but rather than be held responsible, they managed to stick the taxpayers with a huge bill for a slush fund over which we have no control or even knowledge. Mav's larger point, that liberals have triumphed, seems inescapable. Obama will move quickly to legalize 14 million illegals and open the borders for as many more as want to come in. The US is in the process of becoming a banana republic. We already have over 50% of the population on the government dole, either as employees of state, local or federal entities or as direct recipients of transfer payments (now known as "tax cuts" in Obama-ese). I have said this before, but the only realistic way of maintaining our traditions and culture is for the US to devolve into two or three separate countries. Probably it is too late for that, as we saw formerly red states like Virginia and NC succumb to the liberal infection.
Bush is such an enigma to me, neither conservative nor democrat... what the hell is he anyway? Democracy doesn't work, people are just too selfish and dumb. Look who South Dakota elected for the senate, that guy who can't even talk. Gov't now owns huge swaths of the shittiest part of our economy, GM is next. Obama and the demos are going to pay off the bottom 2/3 of our country in order to secure their votes. Wall Street, which should have been left to die, is now a fully owned subsidiary of Pelosi Inc. It's going to be a bad time to be a responsible and successful person if you don't tow the demo line. My personal doomsday plan is to learn the new rules, hide some cash, and use the nanny gov't to keep me in my house. I feel like a mobster who always keeps a stash ready.
Agree with your analysis Jon - one aspect you left off your analysis was the effect of leverage. The SEC excluding the five major investment banks from the 12-1 requirement allowed them to lever up at the same time they were buying/selling all of these CDSs - which themselves had little or no capital requirements. So it's leverage on top of leverage. No wonder then that investment banks have become an endangered species.
I agree with both of you leverage is absolutely a cultural problem. From people with credit cards to companies, to financial juggernauts, right on up to the federal government. Seems like that is the real problem.
bend over and lube up boys... NEW YORK (CNNMoney.com) -- The Bush administration is set to unveil on Tuesday a potentially extensive new program to modify mortgages and help at-risk homeowners and stabilize the battered real estate market. The plan centers on Fannie Mae and Freddie Mac, which between them own or back about $5 trillion in loans. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages. http://money.cnn.com/2008/11/11/news/economy/loan_modification/index.htm I doubt I'll even have enough money to buy a cigarette for the afterwards
The whole premise behind your argument is wrong. And I did read that long line of bs article you copied to this thread. How much of the sub prime loan market that fnma HOLDS is irrelevant. It's how much of it is conforming and/or guaranteed that IS relevant. Fnma does not have to own these subprime mortgages for the damage to be done. Fnma does not own all the mortgages that are guaranteed by it. If they are guaranteed or just conforming, that is what allows the rating agencies to provide the bs ratings on these cmo's and cdo's that weren't in reality worth a pot to p*ss in. When they have a good investment rating, then they can be sold in the marketplace. And that, my friend is the beginning of how these things exploded in number. When fnma, at congressional urging, began accepting these types of loans. All at the urging of the affirmative action loan crowd. As far as the cds, that is a much more complicated subject. There is no question that the availability of these things helped the marketing of the cdo's that wall street sold. Not having reserves, but instead netting cds against each other to hedge their exposure, is not exactly unique, ya know. That is what portfolio margin is all about for daytraders. It just went into effect about a year ago, and it cut the amount of margin that traders need in the same manner that wall street uses for these cds. It's the very same principal. Cds's went down because the highly rated cdo's weren't worth a sh*t. That's the bottom line. Cds's did not start the whole thing.
I think everyone understands that the sub-prime market was part of what started the destruction, but the question is why did such a small part of the mortgage market cause such huge effects? For that, I look at, as you rightly point out, the rating agencies which rated the CDOs as triple-A when they were junk, which in term caused CDS insurance to be given out an exceptionally low cost, which was multiplied by the leverage that the investment banks were carrying. And then you have some really crazy financial creations like CDO^n which are backed by other CDOs. From what I've seen, it was clear that all the economic players were structured around the idea that housing prices had to always go up. If a person has levered up 30-1 (as Bear Sterns was), a 10% or so downswing in pricing will wipe out your capital. Seems like we had this enormous economic engine created on the back of a very small slice of the mortgage market - all geared around prices always going up. So when prices started to fall, the leverage worked in reverse. If it was just the sub-prime area of the market that imploded, I would expect that the result would have been much, much smaller. So is the sub-prime market alone to blame here? Seems like a general real estate bubble may have had a large impact when prices started to fall. Credit was too loose for too long (hey there Greenspan!) This is why I keep coming back to the leverage issue.
So is the sub-prime market alone to blame here? Seems like a general real estate bubble may have had a large impact when prices started to fall. Credit was too loose for too long (hey there Greenspan!) This is why I keep coming back to the leverage issue. The bubble was fueled by explicit government policy, the GSEs created artifical demand by actively creating homebuyers where none existed before and the cap gains exclusion produced an unlocking effect. Greenspan for his part was warning all along the way of the bubble, he didn't do much about it except to give warning. Fannie and freddie have far more control over the housing market than the fed in the end. They hold or guarantee $5 trillion, that's a lot.
You blame the GSEs - I blame the Fed - Greenspan kept rates too low too long. That created a bubble across the housing spectrum. It's not just sub-prime that has blown up. Plenty of Alt-A and Prime are now on the same train. Seems to me that the difference is that sub-prime was levered up, so that small changes had big effects. I agree with you on the cap-gains - that had a huge impact in terms of looking at housing as a buy and flip market. I also blame the private lending institutions and those who regulate (or don't regulate) them. Creating no-money down mortgages (and all the other awful mortgage programs) only enhanced the problem. How about confirming income?