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talkpoliticsWe all know that the country is in recession. In fact, it is one of the deepest recessions in US history.
We all know that the current recession was caused by real estate crisis. The words "subprime mortgages" are familiar to the general public. What general public seem to have a very vague understanding of, though, is how we have gotten into this mess. Let me try to clear it out:
1) It all started long time ago, in the last years of Clinton administration. Economy was doing exceptionally well during the 90th, but by the end of the decade slight signs of trouble appeared on the horizon- high tech industry, which was booming during most of the 90th, as began to slip. Turned out, people overinvested into tech companies, and there was a limit to high much this industry can grow. As a result, some of the stocks began to crumble, causing a decline in the stock market that lead to the slight recession -barely noticeable recession of 2000- 2001.
2)In response to this Federal Reserve has put into use its usual tool of dealing with the recessions - increasing the monetary base. M- "monetary base" began to grow. As a result interest rate went down, as expected. Money became "cheap"- cheap to borrow, encouraging increased borrowing (and spending, and investing) that helped to get out of recession.
3) BUT - as people began to obtain cheap money usual question arose- where do we spend them? What is the best way? Since stock market has just went down, causing concerns in its reliability, the second best option became clear: REAL ESTATE. Hey, do you want a bigger house AND make money along the way? Sure, who does not! Real estate seemed reliable investment, it has not seen decline in years and, unlike stock, was something tangible, something you can use while your money grow. GO real estate!
4) As cheap money began to poor into real estate, prices began to grow, and market began to "heat up". It is only natural - more people buy means higher prices, higher prices means more return on investment, more return means more people want to buy. Time magazine mentioned a guy making 100 000 dollars in 1 hour- he bought condo in Miami, but was offered (and accepted) higher price for it immediately! Who would not want a piece of that action?
5) And what about the government? Government was busy. IT had two wars on it's hands, national security and all, as far as it was concerned economy grew, people were happy, this is all that matters, right? Let's cut some taxes, it will make people even happier and economy will grow even faster! Who cares what will happen in a few years, we only have to care about next elections! And by then things will be fine, better then ever. Interest rate was kept low, real estate market continued to heat up. George W. Bush won elections. Everyone happy.
(Markets anticipated interest rates to start growing around June 2002. In fact, short term interest rates were not increased by the Fed until June 2004 - two years later! Part of the reason is most certainly attempt to avoid negative consequences of the War in Iraq, that led to higher oil prices and high budget deficit which usually leads to recession. Unless,of course, you keep on artificially "heating the pot" by increasing the monetary base and keeping the interest rates low...)
6)Finally, the overheating of the market was acknowledged. In June 2004 target interest rate was increased slightly for the first time since 2001. It took two more years for market to reach its high point, and two more years to finally crash. Market, hot as a sun , began to cool. People who had brains began to realize, that prices are well above what they should be and will go down soon. Time to withdraw. Exodus has began.
By this point, however, it was way too late - number of people with 100% financed mortgages was way too high, prices way above where they should be.
We all know what happened next. By the time next president was in office real estate market crashed, causing deepest recession in US history. We have gotten a virtual disaster on our hands.
So, let's finally put the blame where it is due - incompetent leader who was in charge for 8 years, who allowed the government debt to grow to the highest level in history and real estate market to overheat and, consequently, to crash. Thank you, George W. Bush. I am sure we feel safer than ever in our newly foreclosed and devalued houses, unemployed and uninsured. Amen.
PS- "subprime mortgages" as a main reason for real estate market crash is a myth. IT was profitable and economically logical for the banks to lend money at 100% finance without prequalifications WHILE MARKET GREW. They made good money and this is what they are there for. Long term consequences for the country should be a concern of the appropriate government agencies and of federal government as a whole, not of private institutions. Under the conditions that existed it was good business to lend to anybody who wanted to borrow, since all the mortgages were secured by valuable property that continued to gain value. Repackaging this debt and selling it as bonds was a smart way to lower the risk and to obtain additional profits. Stockholders demanded profit, and if it was not delivered by one CEO he would be replaced with another one, as simple as that.
Do not blame the banks, they did what they had to do. Once again, it is the job of the government to oversee the business and make sure that successful short term profit making by private institutions does not lead to an unfortunate consequences for the economy as a whole.
PPS- On May 18, 2004, Alan Greenspan was nominated by President George W. Bush to serve for an unprecedented fifth term as chairman of the Federal Reserve. In June 2004 target interest rate was increased for the first time after 2001. Can't help but wonder whether there is a connection? Could it be that either:
1) Greenspan did not increase interest rates at SOMEBODIES request and got rewarded,
or
2) Nobody bothered to talk to him and he just did whatever without any guidance from the Government?
Either way does not look too good.
We all know that the current recession was caused by real estate crisis. The words "subprime mortgages" are familiar to the general public. What general public seem to have a very vague understanding of, though, is how we have gotten into this mess. Let me try to clear it out:
1) It all started long time ago, in the last years of Clinton administration. Economy was doing exceptionally well during the 90th, but by the end of the decade slight signs of trouble appeared on the horizon- high tech industry, which was booming during most of the 90th, as began to slip. Turned out, people overinvested into tech companies, and there was a limit to high much this industry can grow. As a result, some of the stocks began to crumble, causing a decline in the stock market that lead to the slight recession -barely noticeable recession of 2000- 2001.
2)In response to this Federal Reserve has put into use its usual tool of dealing with the recessions - increasing the monetary base. M- "monetary base" began to grow. As a result interest rate went down, as expected. Money became "cheap"- cheap to borrow, encouraging increased borrowing (and spending, and investing) that helped to get out of recession.
3) BUT - as people began to obtain cheap money usual question arose- where do we spend them? What is the best way? Since stock market has just went down, causing concerns in its reliability, the second best option became clear: REAL ESTATE. Hey, do you want a bigger house AND make money along the way? Sure, who does not! Real estate seemed reliable investment, it has not seen decline in years and, unlike stock, was something tangible, something you can use while your money grow. GO real estate!
4) As cheap money began to poor into real estate, prices began to grow, and market began to "heat up". It is only natural - more people buy means higher prices, higher prices means more return on investment, more return means more people want to buy. Time magazine mentioned a guy making 100 000 dollars in 1 hour- he bought condo in Miami, but was offered (and accepted) higher price for it immediately! Who would not want a piece of that action?
5) And what about the government? Government was busy. IT had two wars on it's hands, national security and all, as far as it was concerned economy grew, people were happy, this is all that matters, right? Let's cut some taxes, it will make people even happier and economy will grow even faster! Who cares what will happen in a few years, we only have to care about next elections! And by then things will be fine, better then ever. Interest rate was kept low, real estate market continued to heat up. George W. Bush won elections. Everyone happy.
(Markets anticipated interest rates to start growing around June 2002. In fact, short term interest rates were not increased by the Fed until June 2004 - two years later! Part of the reason is most certainly attempt to avoid negative consequences of the War in Iraq, that led to higher oil prices and high budget deficit which usually leads to recession. Unless,of course, you keep on artificially "heating the pot" by increasing the monetary base and keeping the interest rates low...)
6)Finally, the overheating of the market was acknowledged. In June 2004 target interest rate was increased slightly for the first time since 2001. It took two more years for market to reach its high point, and two more years to finally crash. Market, hot as a sun , began to cool. People who had brains began to realize, that prices are well above what they should be and will go down soon. Time to withdraw. Exodus has began.
By this point, however, it was way too late - number of people with 100% financed mortgages was way too high, prices way above where they should be.
We all know what happened next. By the time next president was in office real estate market crashed, causing deepest recession in US history. We have gotten a virtual disaster on our hands.
So, let's finally put the blame where it is due - incompetent leader who was in charge for 8 years, who allowed the government debt to grow to the highest level in history and real estate market to overheat and, consequently, to crash. Thank you, George W. Bush. I am sure we feel safer than ever in our newly foreclosed and devalued houses, unemployed and uninsured. Amen.
PS- "subprime mortgages" as a main reason for real estate market crash is a myth. IT was profitable and economically logical for the banks to lend money at 100% finance without prequalifications WHILE MARKET GREW. They made good money and this is what they are there for. Long term consequences for the country should be a concern of the appropriate government agencies and of federal government as a whole, not of private institutions. Under the conditions that existed it was good business to lend to anybody who wanted to borrow, since all the mortgages were secured by valuable property that continued to gain value. Repackaging this debt and selling it as bonds was a smart way to lower the risk and to obtain additional profits. Stockholders demanded profit, and if it was not delivered by one CEO he would be replaced with another one, as simple as that.
Do not blame the banks, they did what they had to do. Once again, it is the job of the government to oversee the business and make sure that successful short term profit making by private institutions does not lead to an unfortunate consequences for the economy as a whole.
PPS- On May 18, 2004, Alan Greenspan was nominated by President George W. Bush to serve for an unprecedented fifth term as chairman of the Federal Reserve. In June 2004 target interest rate was increased for the first time after 2001. Can't help but wonder whether there is a connection? Could it be that either:
1) Greenspan did not increase interest rates at SOMEBODIES request and got rewarded,
or
2) Nobody bothered to talk to him and he just did whatever without any guidance from the Government?
Either way does not look too good.
(no subject)
Date: 7/8/10 18:19 (UTC)(no subject)
Date: 7/8/10 18:22 (UTC)(no subject)
Date: 7/8/10 18:24 (UTC)(no subject)
Date: 7/8/10 21:51 (UTC)There's nothing wrong with mixing commercial and investment banking. What's wrong is pretending you are regulating them when you are not. That's the worst of both worlds.
Unregulated industries would require insurance to convince investors they had a way out of bad investments. Regulated industries point to the government and claim they will either be "prevented" from doing something that bad or bailed out if they do.
Instead we got regulators and oversight agencies not just turning a blind eye to the situation (which they did) but also helping cause it by participating in the fraudulent activities.
Perhaps if Frank and Dodd (among others) had ended up in jail then we wouldn't have to worry about future "watchdogs" paying attention.
Yes
Date: 7/8/10 18:24 (UTC)Re: Yes
Date: 7/8/10 19:35 (UTC)Re: Yes
Date: 7/8/10 19:42 (UTC)That been said, it seems to me that number of agencies could be increased, they could be made responsible to the borrowers and not lenders and the whole industry can be better regulated by the government. If there is a problem there must be a solution, surely what we have is not an ideal system.
Re: Yes
Date: 7/8/10 20:51 (UTC)Re: Yes
Date: 7/8/10 21:51 (UTC)Re: Yes
Date: 8/8/10 03:01 (UTC)(no subject)
Date: 7/8/10 19:44 (UTC)(no subject)
Date: 7/8/10 21:53 (UTC)(no subject)
Date: 7/8/10 20:09 (UTC)(no subject)
Date: 7/8/10 18:22 (UTC)(no subject)
Date: 7/8/10 19:26 (UTC)(no subject)
Date: 7/8/10 19:38 (UTC)(no subject)
Date: 7/8/10 20:15 (UTC)Let's face it, that's not possible. Not only because no-one would let him do it (Congress, Senate are in a stalemate, etc), but because it'd be politically inconvenient for any president.
I get the joke, but....
Date: 7/8/10 21:54 (UTC)(no subject)
Date: 7/8/10 19:25 (UTC)That said most of your analysis is correct save for the part where you whitewash the part Clinton and the Congress had in all this.
Well that and the fact that you are totally missing the fact that we have been riding a bubble economy since at least the early 80's.
Even the recessions we've had in that period were just short gaps between the collapse of one bubble and the start of the next.
(no subject)
Date: 7/8/10 19:35 (UTC)At the time Clinton left there was no housing bubble, no overpriced real estate and no problem to address, therefore I see no need to mention him. Otherwise you could probably trace it down to the Founding Fathers or Adam and Eve, after all if it was not for them we would not be here to experience any crisis at all :))
It is a fact that economy has busts and booms, the role of the government oversight is to make booms less "boomy" and busts not as painful.
(no subject)
Date: 7/8/10 20:16 (UTC)No, they're only printed virtually and they appear on some digital screen. Modern times, you know.
(no subject)
Date: 7/8/10 20:57 (UTC)The president has the responsibility for setting foreign policy however he cannot start a war, only Congress can do that (and in this case they did even if they weaseled out of it for pr purposes and called is an authorization on the use of force). Further even if the president commits US forces without authorization from Congress Congress can simply refuse to fund the operations. No money, no war.
The one minor ability the President has on the Deficit (and therefore the debt) is he can veto the Budget, of course even that can be overridden.
Finally yes there was a housing Bubble when Clinton left office, it was just smaller than the Dot Com Bubble at the time and so less noticed. The Loose money policies of the Fed have extended essentially back to Reagan and are the root of what has caused this succession of bubbles.
(no subject)
Date: 8/8/10 00:08 (UTC)Congress TRIED to refuse to fund, but it was immediately branded by some "refusing to support our heroic troops while in a harms way" and who wants this kind of thing mentioned on the next reelections? Imagine the video clip "he refused to support our heroic troops by voting to cut funding ...!!!" ect.
FYI there is no such thing as "small bubbles", either there is a bubble i.e. prices are inflated by speculative trade, or there is not. Housing prices in 2000 and even in 2001 were very much in line with value, they were HIGHER than before, but that in no way meant they were bound to crash or even go down.
(no subject)
Date: 7/8/10 21:19 (UTC)(no subject)
Date: 8/8/10 00:21 (UTC)Without proper transparency and regulation no system is capable of self sustaining function. It turns into tyranny and self destroys.
(no subject)
Date: 8/8/10 17:49 (UTC)The only thing I must add: "capitalism" is a somewhat outdated term, there is no clear definition of what "capitalism" is. For this reason it is considered improper in modern economics to speak of "capitalism", economists usually say "free market system". But whatever you call it, the system definitely has it's flaws, I agree to that. However, currently there is no known alternative, and as long as you realize that I have nothing to argue about.
(no subject)
Date: 7/8/10 21:58 (UTC)(It's not changes to Glass-Steagall that are at fault.)
I wouldn't blame one person, either. Perhaps two, though: Frank and Dodd both had the power to help stop the collapse of the housing market and instead insisted that there was "nothing wrong" and their allies even started playing the race card against those who sounded the warnings.
(no subject)
Date: 8/8/10 00:18 (UTC)If real estate market would not have been allowed to go into overheating there would be no need to worry about "unregulated derivatives market and credit default swaps", or at least they would not have caused a mess remotely similar to what actually happened.
And - crisis or not free market economy works much better than any other economy in existence. I leaved under socialism - trust me, this "crisis" is paradise in comparison.
(no subject)
Date: 8/8/10 17:42 (UTC)(no subject)
Date: 8/8/10 01:26 (UTC)AFAIK, the same economic advisors who argued strongly against derivatives regulation who worked very hard to silence criticis who stated such regulation was absolutely imperative are still economic advisors, under Obama's Administration.
When you say Phil Graham, do you mean Ben Bernanke?
Also, why should capitalism be blamed? Its not the private sector's job to be ethical or moral. Its the government that is tasked with "regulating" and ensuring that greed doesn't overturn common sense. If government regulation fails in its responsbility due to corruption or lax ethical standards, its no failure of capitalism. its something else that is responsible.
(no subject)
Date: 7/8/10 20:52 (UTC)Blame put on $2 trillion tax cuts over 10 years, check.
You didn't mention the deregulation myth, so you get a gold star there, but you otherwise missed the mark.
(no subject)
Date: 7/8/10 22:02 (UTC)(no subject)
Date: 8/8/10 01:01 (UTC)http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
As percentage of GDP taxes were DECREASING since 2000 (what they were 20.6% of GDP) dropping to 16.1% in 2004 and never recovering to more than 18.5%, which means that government was getting LESS tax money than it could have given GDP size. Economy was growing FASTER than taxes. Notion that lowering taxes somehow can "increase tax revenue" is a myth. Lowering taxes can only help to a certain point, which has been estimated by economist to be different for different countries but generally between 50 and 60% of income level. Once actual tax is below that level income effect becomes greater than substitution effect, i.e. people have so much money that they prefer to work LESS since free time for them is more valuable than money they can make (they are too reach to care about money, they care about luxury and comfort more). If you are at all interested read
http://works.bepress.com/don_fullerton/25/
http://ideas.repec.org/p/nbr/nberwo/1975.html
Second, it would be cute if there was no increase in spending, which dwarfed this puny fake revenue increases anyway.
Year 2000 = 269.5 surplus
Year 2004 = - 428.0 deficit
Year 2006 = -239.6 deficit
(no subject)
Date: 8/8/10 02:00 (UTC)(no subject)
Date: 8/8/10 02:46 (UTC)(no subject)
Date: 8/8/10 02:44 (UTC)Part of the reason for mortgage failures has to do real estate loans being unable to keep pace with housing and real estate construction. You can lower loan qualification standards to fulfill short term quotas and assume the observed increase of real estate prices will continue, such was the case here.
A good deal of computer based, market analysis are based upon something called brownian movement. Quants -- mathematicians who run hedge funds and investment wings of banks, use modified versions of physics formulas relating to brownian movement, in order to analyze and anticipate future market behavior.
The trouble with this type of arrangement is, it has intrinsic limitations in regard to being able to simulate or anticipate bubbles and other market behaviors that resemble large scale market, per short term temporal timeframe, changes. It creates something like a blindspot. Thus, a good deal of the predictive models and analysis were never able to anticipate the coming crash.
Another aspect of it has to do with the government showing favortism towards the private sector. Oil companies like BP receive special treatment. They're allowed to bypass safety procedures by government regulatory agencies tasked with overseeing them. Ditto with other corporate entities.
Likewise, the Bush Administration was riddled with corruption. There's tons of evidence they used the Iraq War as a blatant profiteering tool. Cheney gave tons of land that was supposed to be national parks or forest preserves to natural gas corporations to be exploited.