GOP logic:
A boom-and-bust speculation hysteria is wrecking the economy (last time dot-commers, this time mortgages, next time tulips).
Deregulation is the proximate cause of destructive market cycles.
Ergo, deregulate!
Conventional wisdom has it that the Federal Reserve is a big winner in the Treasury Department’s plan to overhaul how the financial system is regulated.
[…] But the Fed would give up its power to regulate the day-to-day affairs of banks, responsibilities that many in the institution view as essential to its role as guardian of the economy — even as the central bank gains new powers to insert itself into the affairs of any business creating risk for the financial system as a whole.
[…] “The Fed should not be enamored of this proposal at all,” said Ernest T. Patrikis, a former senior official at the Federal Reserve Bank of New York who heads the banking regulation practice at the law firm Pillsbury Winthrop Shaw Pittman. “It takes away a lot of authority, power and involvement.”
It would be hard to understand threats to the financial system, Patrikis said, without having a staff that is constantly scrutinizing the inner workings of banks*.
Thousands of employees at Federal Reserve regional banks spend their days examining the nuts and bolts of the financial system. They collect and analyze information on bank holding companies’ management structure, business lines, risk controls and vulnerabilities — responsibilities that would be shifted to the new regulator.
Needless to say the Fed is quasi-independent from political control while the new branch can be easily staffed with political hacks.
I need a drink.
(*) Non-trivial caveat – it’s also hard to understand risks to the economy when your Fed chair is an armband-wearing Randroid who thinks interest-only option ARMs are the neatest thing since New Coke. That doesn’t mean that we should strip power away from the Fed, although it does make a compelling case. It argues that we should be more careful about who we put there.
p.a.
Why did that damn Flying Spaghetti Monster put Onion writers in charge of the country? I know we’re not perfect, but I hate to think we really deserved 8 years of this- although millions of Iraqis may disagree.
jack fate
Don’t you think he was put there for exactly those reasons?
Face
Fill in the blank. Seriously, you could do this with about 10 different gov’t entities, thanks to the Bush Admin.
Caidence (fmr. Chris)
On a zoomed-out view, this actually looks smart. Instead of having the Fed scrutinizing the trees, have it back up and watch the forest instead.
But, this is Bush. And every time I think “Maybe he did this one right,” I end up far more suicidal by the end of the month.
jrg
Deregulation or no deregulation, the tanking economy will be all the Democrat’s fault come Jan 21st, 2009.
I’m starting to wonder if the Republicans are trying to destroy our banking and regulatory systems for exactly that reason… So that they can blame the dems.
The finance industry cannot and will not police itself. History has proven this time and time again. I was lucky enough to learn this in my early ’20s, and adjusted my retirement savings accordingly.
The Bush-voting baby boomers are going to be without health care, starving and begging for a little milk from Uncle Sam’s generous teets before it’s all over with, and they’ll still be blaming hippies and liberals for the US’s economic woes.
I weep for the future of this country.
Lee
I might be immune the the GOP logic, but shouldn’t that read:
Regulation is the proximate cause of destructive market cycles
One way is just wrong, the other way doesn’t make sense. Which leaves me confused either way :)
Tim F.
Yes.
jake
As usual, the magical elixir tastes like shit.
As usual, the “fix” is to prevent individual states from coming up with their own individual fixes, something large corporations hate because it cuts into the profit margin.
As usual, the sudden urge to make everything all better for hard working Muricuns contains high number of juicy bones for the assholes who got us into this mess and a few crumbs for the people who are suffering.
But of course the GOP will wail that if we don’t allow the Fed to dwitfiw, it will be all our fault when
the terrists chop off our headsteh gheys force everyone to have buttsectswe wind up living in cardboard boxes.(Sorry, my Talking Points Generator 2000(R) is starting to wear out.)
The Other Steve
You are kidding me? Bush’s proposal seriously calls for the Fed to have less oversight on banking?
God these people are so stupid.
jeffreyw
Take heart bro.
Shinobi
What is this?
Smells like piss.
Brachiator
The Bush Administration continues to outflank its opponents. Although Dubya comes across as a barely coherent dolt, nonetheless his goons come up with a 200 plus page re-organization plan in a what appears to be a matter of days. Dubya can now insist that Congress needs to act as soon as possible to approve of his proposals in order to “help th’ ‘murican peepul and keep the ‘conimy movin’. God bless ‘murica.”
I always wonder whether Congress will regain the courage to say to the President, “we write the laws, you execute ’em.”
Are you confusing current Fed Chair Ben Bernanke with previous chairman (and admitted Randroid) Greenspan?
This makes the headlines announcing the 1913 passage of the Federal Reserve Act even more ironic:
And some Wiki background (The Federal Reserve Act):
The problem today is that the GOP sees domination by the Money Trust as essential to the operation of the economy, and uses financial fear-mongering (the domestic equivalent of Iraq-mongering) to get the public to go along willingly with its proposals.
Tim F.
No, I’m not. The Mortgage meltdown is Greenspan’s fault; Bernanke just inherited it.
Incertus
1. Deregulation
2. ?
3. Profits!
I swear, our economy isn’t based on capitalism. It’s based on the underpants gnomes.
Dennis - SGMM
1. Deregulation
2. Shenanigans
3. Profits!
Just a suggestion.
Svensker
Does anyone anywhere trust the Bush Admin. to do ANYTHING right at this point? Even if it sounds right, it’s probably wrong. What’s that old saying? Every word out of her mouth was a lie, including “and” and “the”?
Seanly
Brachiator ~ I think he was referring to Andrea Mitchell’s boytoy, Teh Greenspan. His supposedly wonderful policies set up so much of the shit Bernanke is allegedly dealing with.
Remember all of the trouble, all of the busts, all of the proposals they whip out of their backpocket are a feature of their program, not a bug.
jake
Oh come on. There must be some way we can hook this back to the S&L disaster and use it to break a headlight on the St8Talk Xpress.
Incertus
Nope–the way this works is that nothing that happened before 1993 counts. It’ll get blamed on Clinton somehow.
Zifnab
At what point is the US Government – burdened by a $9 trillion debt – not going to be able to afford bailing people out anymore?
Surely someone sees this coming. There’s going to be a day when a GOP crony reaches into the money jar and comes out with an empty fist. Throwing half a trillion on a war, another $30 billion on a bail-out, another $120 billion on Chinese Economic Stimulus… we’re going to run out of money eventually.
The feces will, eventually, impact the rotary air impeller. Take a page from “The Good Earth”. There’s going to come a day when the rich are too rich and the poor are too poor. That’s the sort of climate that brings on the batshit crazy brand of Communism. And while I like to think I’m pretty liberal, I’m not that liberal. Bush can only go on telling us all to eat cake before the country, collectively, loses it.
It’s just surreal, sitting on this side of what I can see as some sort of loaming 60s hippie era / Communist Uprising / French Revolution. Maybe I’m totally crazy and even more wrong. I just don’t see good things for capitalism as we know it if we continue on this tac for much longer.
The Moar You Know
I’ll give him credit for really, truly, doing one thing right without fucking it up; signing the extension of Daylight Savings Time. I’m really happy about that.
Brachiator
Ah. OK.
Still no. The problem was not an inevitable result of Greenspan’s approach to financial markets. Bush Administration tax and regulatory policy, and the administration’s inability to understand economics at something greater than a junior high school level, nudged things along.
International banks, entirely independent of Fed policy, also willingly went along for the ride. Deutsche Bank, for example, is up to its armpits in dodgy US mortgages, and recently wrote down 2.5 billion euros ($3.9 billion) of leveraged loans and other debt.
over_educated
The sure fire solution to this countries money ills.
jrg
Yep, you nailed it.
As if the GOP cares… They will continue to exploit the so-called “free market” until they can no longer game the regulators. They will do exactly what they’ve done to religion – exploit it in a shameless, transparent, and cynical manner. Just as religion has been damaged by their machinations, the “free market” will take a hit.
These vultures simply do not care about religion or the free market, they’re meaningless talking points just like everything else. Neither of these things have anything to do with the price of tea in China, federal bailouts of irresponsible lenders, deregulation of our broken financial institutions, or next quarter’s asking price for Haliburton stock.
The more the “free market” is exploited by government-entrenched profitters, the less it means to the rest of us… The less it means to the rest of us, the more likely there will be a groundswell of support for the economic far left, which is something I’d rather not see.
Dennis - SGMM
Maybe someone here can explain this one to me. I kept hearing that the banks, investment houses, etc. didn’t know what proportion of the CDO’s, etc. they bought were based on risky mortgages. Okay. Then, when Bear Stearns needed to be bailed out they promptly came up with the figure of thirty billion in exposure to bad/shaky mortgages. It only took them a few days to specify how big of a tin cup the gov would need to fill to bail out their sorry asses.
So, why didn’t these guys do enough scrutiny in the first place to know how much of these financial instruments were based on questionable mortgages? There are many of us who knew for the last three years that if you could fog a mirror you could get a mortgage. How come the captains of finance seem so surprised by all this?
joe
No, they are just stunningly incapable of running the government well. Whether we’re talking about Katrina, or mortgage oversight, or anything else they try, the combination of ideological fanaticism and lack of concern about governing effectively – in fact, a lack of concern that comes from their ideological fanaticism – means they screw up everything they touch.
Why wouldn’t you give in to cronyism and plundering, if you don’t actually care about your department’s mission? Why not simply make it part of a partisan machine, if you don’t consider it important for it to do anything else?
When people who don’t think it’s important for the government to do its job well take over the government, the government ends up not doing its job well. Go fig.
TenguPhule
Because it was all about the year end bonus, not about responsibility. And now that the Easter Bunny has finished planting shit bombs in everybody’s portfolios, none of them wants to be the first one to get a wet surprise by looking closely at it. Because the moment they do that, the stuff turns from intangible ‘probably shit’ to quantifiable ‘yes, this is truly some stinky shit’. And then everybody else’s shit waves that were in motion become shit particles that suddenly exist at a specific value.
And then everybody finds they’re buried in shit.
TenguPhule
GOP SOP:
1) Do whatever the fuck we want.
2) Blame Democrats for it.
PaulB
Paul Krugman has more on this, calling the Bush proposal “The Dilbert Strategy.” The institutions that actually caused the problems, the investment institutions like Bear Stearns, will remain unregulated under Bush’s proposal. Quoting Krugman:
Dennis - SGMM
So W.C. Fields was right: you can’t cheat an honest man.
Svensker
Chickens, meet roost. The town next to me is filled with expensive homes where stock brokers and bankers who commute to New York live. The town is having difficulties meeting its obligations because of the downturn in tax revenues following a very slight softening in the real estate market. The town just announced that they are revaluing home prices for property taxes and that the average increase will be 70%. 70%. Do they think these bankers and brokers are not a bit worried about their wallets at the moment anyway, with many of them waiting to lose their jobs? Do they not realize what this will do to the precarious housing market? It will be interesting to see the reaction to the 70% increase. The shitpile is a lot stinkier than many people realize. And this is just one small — rich — town in NJ, that hasn’t been affected much yet.
binzinerator
Well, duh! Deregulation cannot fail; it can only be failed.
Rasputin said over at Crooks and Liars:
That won’t wash with the goopers. If [conservatism/deregulation/war in Iraq/GWOT] fails it’s only because [Bush wasn’t conservative enough/banks weren’t deregulated enough/we weren’t violent enough/we didn’t kill Muslims enough].
jrg
Just to nit-pick: when municipalities update tax values, they usually lower the tax rate to make up for it initially, then gradually increase the tax rate over time. This happened to me last year.
Brachiator
These claims that they did not know what was going on just does not stand up to the least amount of scrutiny.
Lenders deliberately disregarded their own established system of credit ratings and made loans to people who did not currently qualify for them, and would even be in worst shape when the interest rates on adjustables inevitably rose.
Lenders then bundled loans together and offered them to investors without any objective measure of rating the riskiness of the bundled loans (compare the various systems used to rate bonds, based on the credit-worthiness of a company or a municipality).
Maybe some lenders felt that a continued rise in the value of homes would provide some measure of value, but this was speculation on top of speculation.
Other bankers had to know that things would ultimately crash, but figured that they would be able to cash in and other suckers would take a bigger hit.
On top of all, this, some accounting firms simply failed to do due diligence in noting the shakiness of all this BS.
For example, here is part of a recent LA Times story about one of the top sub-prime lenders (Sub-prime lender allegedly inflated its profit):
Regulators were slow too slow to react, business reporters were so caught up in the go-go mania of big money shooting up everywhere that they failed to note the folly behind all this “irrational exuberance,” and accounting firms failed in their responsibility to serve as gatekeepers and honest umpires to the financial markets.
Original Lee
Two, four, six, eight,
See what we deregulate.
Bankers! Bankers!
That’s the name.
Now what else can we make lame?
Any guesses, folks? This administration has done its best to remove the enforcement teeth from as many agencies in turn, not to mention making oversight impossible for other essential functions (EPA library closings, anyone? National Archives ombudsman? U.S. Park Police?). Plus the new agencies they’ve established are not exactly performing as advertised. I can think of only a few federal agencies that have not gotten worse over the last 7 years, and that’s only because they were pretty messed up already.
binzinerator
Makes me wonder if it’s sorta like PNAC and the Iraq war. They were just sitting there waiting for their chance.
The goopers actually thrive on fuckups. Every fuckup means an opportunity to help themselves to more and more of the cookie jar. It’s not about the end result — no way they really give a fuck about that — it’s about the opportunity to enable their program of outright theft and wealth transfer to the top 1%.
Every disaster is an opportunity for these guys to take even more money from the people who are getting fucked over. Broken and dilapidated government is the necessary environment in which goopers thrive, like plague rats in a stagnant sewer.
BC
“. . . it’s also hard to understand risks to the economy when your Fed chair is an armband-wearing Randroid who thinks interest-only option ARMs are the neatest thing since New Coke.” This is another aspect of the cult of personality. Greenspan was revered in the 90s as the father of our prosperity – in fact, McCain had a cute line that if Greenspan died, they’d just prop him up and keep him in office. Bush has a cult of personality that props him up. Reagan is a saint, sort of along the lines of Lenin, in the GOP. I am astounded at the way the GOP has of invoking the sacredness of these people to the point that they cannot be crticized even for failings that are apparent to everyone. I hope to God that our next president will be normal, in the sense that we can freely criticize him/her and not have our loyalty to the country questioned.
binzinerator
Even without the fraud, how can you have any bonus awards, let alone “excess bonus awards”, when your leadership bankrupted your company?
Dennis - SGMM
So it’s not a matter of if this sort of thing will happen again, it’s a matter of when.
I recall back in the Nineties when the tech bubble was inflating. Every IPO was greeted with a shower of money. In one case some little Linux outfit IPO’d, touting their “Low Cost Server Solutions.” The stock immediately shot up to $500 a share. No one stopped to notice that, because of the licensing terms of the Linux kernel, the software had to be available for free download (It was on the company’s site although it did take some digging). Five Benjamins a share for something that they had to give away. I had been working for an ISP for some years by then and I kept thinking “Heaven help whoever gets left holding the bag, when all of these guys go under.”
It was us. If I had all of the stock options I was granted during those days on actual paper I’d have a lifetime supply of asswipe.
Grumpy Code Monkey
Okay, so Obama and Hills are Sweeney and Mrs. Lovett. But does that make Bush Pirelli or Tobias?
Cheney, obviously, is Judge Turpin.
person of choler
“Needless to say the Fed is quasi-independent from political control while the new branch can be easily staffed with political hacks.”
Comfort yourself with the fact that Obama or Hillary will soon be appointing the political hacks.
Brachiator
Yep. The news reports say that some think the worst may be over, but here is a story hot off the presses concerning a Swiss bank.
The news story also notes that the bank will create a new unit to “hold certain currently illiquid U.S. real estate assets.”
In other words, there is more shit left to hit the fan, and lenders are trying to figure out how best to duck it.
Bonuses are easy when you can game the system, get accountants to go along, and sell the public on the idea that your asses should be covered in order to … (altogether now) … “insure confidence in financial markets.” Meanwhile, here is a little more on the extent of the New Century financial scam:
When you cook the books, you gotta cook ’em long and good. And then get a business-friendly Bush administration to look the other way and mumble nostrums about the importance of “free markets.”
cleek
maybe my wife and i picked a bad year to invest our savings with UBS
J. Michael Neal
Contra Brachiator, the $30 billion figure is still a guess. The problem with so many of the derivatives floating around is that they can’t be valued. The models that were used to price them initially were based upon assumptions that no longer hold true. The most problematic assumption for the stuff that is based upon mortgages is that individual mortgage defaults were independent events. So long as house prices were going up, this was a correct assumption. If the assumption holds, you can use the Law of Large Numbers to come up with a pretty good estimate of how many of any given large pool of mortgages are going to default. If you can do that, you can assign a risk-based price to the different tranches of the securities.
Then house prices stopped going up, and defaults stopped being independent events. Once the events are no longer independent, the Law of Large Numbers stops working, and what was a perfectly good normal distribution of risk goes out the window, and there isn’t anything that can replace it. All of a sudden, no one has any idea what the securities are worth.
There are other problems. Take Credit Default Swaps. Let’s say that they’re written on a financial company that has a lot of exposure to mortgage securities. No one has any idea what those securities are worth. Because of that, no one has any idea how likely it is that the company is going to experience a default event. So, no one knows what the swaps are worth.
Hell, for a bunch of CDSs, it isn’t even entirely clear to anyone other than the two parties what constitutes a default event. That’s a problem with things that trade purely over-the-counter and not on exchanges; there isn’t a set contract. So, now you’re looking at a company, let’s call it Hair Burns, that has written a lot of credit default swaps. There is a truly ridiculous amount of notional value tied up in them. No one knows how much they are actually worth. Quite possibly, HB will be required to pay out more money on the swaps than they actually have. So, they may be insolvent. They may not be. Of course, that means that every single party that has purchased CDS insurance from Hair Burns not only doesn’t know how much the contract is actually worth, they don’t know whether or not HB will be able to pay them if it turns out to be worth a lot.
I’m guessing that $30 billion was the figure that got tossed around that was the point where JP Morgan agreed to take the risk of this pig-in-a-poke. Bear Stearns is probably worth somewhere between -$40 a share and +$60 a share. Probably. Your guess is as good as mine. What caused the immediate crisis was that no one was willing to take on the risk that they wouldn’t get paid, and so Bear couldn’t roll over its debt. We probably won’t know how much it’s actually worth for years.
I do think that, if the Fed is going to take on a large chunk of the risk, it ought to have an option on some of the profit. It’s a complicated question.
Brachiator is correct that these geniuses took on stupid amounts of risk. Pretty much every ten years, the wizards forget that independent events stop being independent at the worst possible moments. They did it to themselves, and I don’t have any sympathy for them. That doesn’t mean that they have any idea what the stuff is worth.
J. Michael Neal
It depends upon what you invested it in. If they talked you into one of their enhanced revenue funds that invest in adjustable rate securities, they just gave you a really nice haircut.
grumpy realist
Speaking as someone who almost got hired by Moody’s to put together CDOs, I’d like to put in a word for the quants: we add all sorts of caveats and “assuming that X holds”….and then when it gets to the front office, you can bet what happens: the sales critters strip out all that careful verbiage, slap “New! And Improved! AAA!” on it and shove it out the door.
The major difference between physics and financial stuff is that while molecules never scream and stampede into one corner of a box, humans often do.
liberal
grumpy realist wrote, Speaking as someone who almost got hired by Moody’s to put together CDOs, I’d like to put in a word for the quants:
But you guys profited from the whole industry, nonetheless, as you can see by comparing the salary differential between physics and finance.
No one forced anyone to take a job in math finance and cook up models that weren’t applicable to the real world.