We have two of them and they address a common topic:
It seems to every administrator that it is only by his efforts that the whole population under his rule is kept going, and in this consciousness of being indispensable every administrator finds the chief reward of his labour and efforts. While the sea of history remains calm the ruler-administrator in his frail bark, holding on with a boat-hook to the ship of the people and himself moving, naturally imagines that his efforts move the ship he is holding on to. But as soon as a storm arises and the sea begins to heave and the ship to move, such a delusion is no longer possible. The ship moves independently with its own enormous motion, the boat-hook no longer reaches the moving vessel, and suddenly the adminstrator, instead of appearing a ruler and a source of power, becomes an insignificant, feeble man…
–Leo Tolstoy, War and Peace.
And from the Economist, there is this:
. . . How far should the balance between governments and markets shift? This special report will argue that although some rebalancing is needed, particularly in financial regulation, where innovation outpaced a sclerotic supervisory regime, it would be a mistake to blame today’s mess only, or even mainly, on modern finance and “free-market fundamentalism”. Speculative excesses existed centuries before securitisation was invented, and governments bear direct responsibility for some of today’s troubles. Misguided subsidies, on everything from biofuels to mortgage interest, have distorted markets. Loose monetary policy helped to inflate a global credit bubble. Provocative as it may sound in today’s febrile and dangerous climate, freer and more flexible markets will still do more for the world economy than the heavy hand of government.
Moe Lane
Steve Maley
Dan McLaughlin
Neil Stevens
Daniel Horowitz
Capitalism can handle itself
Nikitas3 (Diary) Saturday, October 11th at 6:36AM EST (link)It is interesting to watch reaction to this financial crisis. The left is declaring (as usual) that capitalism is dead. But in fact capitalism always has and always will handle itself. It is socialism that capitalism cannot handle.
Markets that form naturally in free economies are imperfect. Because nothing man does is perfect.
Those markets can and do correct themselves because market excess – say, rampant speculation – is part of a market’s natural give and take. Speculation is a natural thing; it often is called “investment”. When it becomes excessive, it become dangerous. And it does not become dangerous until a market is upset. When the oil market is upset by artificial environmentalist restraint, speculators can step in and destabilize it further.
What markets cannot correct is incomprehensible stupidity injected by socialism. When socialism says that you should subsidize biofuels that take food away from the population, or lend money to poor people who cannot pay it back, the market is dumbfounded and does not know how to react. Therefore socialism does much more damage to a market economy than that market’s own self-inflicted wounds.
Prudence is re-defined as discrimination
Spiral (Diary) Saturday, October 11th at 8:55AM EST (link)Correct. When government tells banks, “If you refuse to lend to someone who has little income, few assets and a spotty credit history, that’s not being a prudent banker, that’s practicing discrimination. You don’t want to be considered a racist bank, do you?” This is a distortion of the free market.
When government tells depositors, “Go ahead a deposit money in a bank. All banks are insured by the FDIC, the federal taxpayer. You won’t lose your money even if the bank is lending out money on risky home mortgages,” that’s another way the government distorts the market.
When the FDIC “scores” a home mortgage with a 20 percent downpayment as a higher risk asset than a bundle of corporate AA bonds, which are backed by sub-prime mortgages, the government has distorted the free market.
When Fannie Mae and Freddie Mac purchase mortgages and issue securities based on the mortgages, with an implicit backing by the federal government, that is a distortion of of the free market.
Now we are making bankers just another class of welfare client. The taxpayer is being burned yet again.
The Obama Bread Lines
KEEP IT SIMPLE
Scope (Diary) Saturday, October 11th at 10:14AM EST (link)I particularly liked the quote from the Economist. You’re hard pressed to find anyone talking about the “misdirected subsidies” in this current market mess. As soon as our illustrious leaders Bush, Pelosi and Reid passed the disgusting Farm Bill, prices of food globally sky rocketed. McCain voted no I believe because of the subsidies.
To give massive amounts of taxpayer money to the biggest farmers to grow corn for ethanol turned them from millionares to multi-millionares.
In the latest taxpayer bailouts also included more subsidies for “alternative energies” rather than putting those monies into Nuclear Power Plants or even upgrading or building new refineries so that we could use the resources that we know we have and can cost-effectively use. The US also has the largest supply of coal which is out of bounds now, even though clean coal technology has already been developed, just not up to the Environmentalists standards which are obscene. They just keep moving the bar higher and higher.
While the price per gallon for gas is coming down thankfully, it will remove all memories of $4 gallon gas temporarily which will shelve the drill here drill now debate. That is until the next oil crisis!
I posted this elsewhere
itrytobenice (Diary) Saturday, October 11th at 12:34PM EST (link)on Pejman’s ‘Contrarian’ blog, but I don’t want other people to be misled by your poor information:
The FDIC is not funded by taxpayers. It is entirely funded by banks on a risk adjusted basis.
You are so far wrong on your analysis of how those risk ratings are derived as to leave me helpless as to where to begin. Suffice it to say that quality home mortgages, which include those with down payments, are absolutely not a detriment to the banks ratings, earnings or FDIC assessment.
Proper grammar saves lives.
Let’s eat Grandma.
Let’s eat, Grandma.
I linked to an FDIC document that
Spiral (Diary) Saturday, October 11th at 6:52PM EST (link)shows the risk scores for home mortgages and AA corporate bonds.
The FDIC’s risk scores to incentivize mortgage backed securities over home mortgages with 20 percent downpayment.
Read those posts and then get back to me.
The Obama Bread Lines
The FDIC document does encourage risky loans
Spiral (Diary) Saturday, October 11th at 7:01PM EST (link)Take a look at FDIC document and you will see how the FDIC, through its regulations, is using carrots and sticks to get banks to purchase mortgage backed securities backed by risky mortgages instead of having banks originate their own mortgages with their own appraisers and their own financial team.
See the table in the body of the document.
See how AA rated investments are given a risk score of 20?
Now look at Table 3 and notice how a LTV of 80 (a 20 percent downpayment) gets a risk score of 35. That’s a higher risk score than buying securities backed by mortgages, mortgages that the bank did not originate itself.
This is how banks could, with the regulatory encouragement of the FDIC, end up holding mortages that might appear in the bank’s eyes to be low risk assets and would appear by the FDIC’s regulatory eyes to be low risk assets but are actually higher risk assets.
The Obama Bread Lines
OK, I think I see the problem.
itrytobenice (Diary) Sunday, October 12th at 1:36PM EST (link)You are talking about the risk rating as it applies to capital requirements, not the risk rating as it applies to FDIC premiums.
You are correct that AA rated securities qualify for a better risk rating than consumer mortgages, however, that is a function of several different factors.
One, which is highly debatable at this point, is the independent rating services (S&P, Moody’s). The fact that the security has been evaluated by those agencies was supposed to give both regulators and investors an auditor’s eyes on the underlying loans.
Another, which is more valid, is the spreading of risk. when you have an investment of $300,000 out of a pool of $2,000,000, you have managed to spread out the risk to your capital based on sharing it with multiple investors. It functions similarly to a participation for a large commercial loan.
In addition, there is an implicit guarantee of the Feds for FNMA/FMAC securities. Banks were not careless to rely on that guarantee. Now congress and taxpayers, who allowed them to run amuck, deserve some derision.
Also, AA rated securities are not all mortgage bonds. Many of them are munis.
Additionally, you have to realize that investments in these pools is not a large part of most bank portfolios. There are about 10,000 banks in the US. Of these, about 9,000 are local community banks. The big money center banks have large investment portfolios in mortgage backeds and exotics. But community banks use their investment portfolio as a liquidity tool. We own them because the rates are better than fed funds, and we have to have liquidity…well, because we have to.
We don’t own any more than we have to, because they pay far less than a mortgage loan, a car loan, or a commercial loan. Banks try to stay as loaned up as we can without taking on high risk lending.
There are significant risks to any banks that hold these securities, as they have to mark them to market in times of distress (like now) and divest themselves when they drop below investment grade. That is why the banks that have failed during this crisis have, for the most part, failed due to liquidity issues, not credit quality. I suppose that’s why it’s the CAMEL rating, not just the CAME.
And just to brag a little, many of these big troubled banks have their investment accounts managed by a 35 year old MBA. The community banks I work for have their investment accounts managed by 60 year old bankers who have been around the block a few times, but don’t have high dollar educations. One of them doesn’t even have a BS. Both of them have significant ownership interest in the bank. We have mark to market gains in our investment accounts, not losses. I guess big MBAs aren’t worth what they once were.
These banks didn’t buy sub-prime mortgage backeds. They did buy standard 80% FNMA CMOs. These have not suffered the liquidity crisis of the derivatives.
Also, I wouldn’t call FDIC taxpayer funded, even though the American taxpayer is ultimately on the hook, as there has never been a charge against the taxpayer since it began. They may yet suffer a loss, as it looks like we are heading toward unlimited deposit guarantees, but the fund is well capitalized for our current risks.
Proper grammar saves lives.
Let’s eat Grandma.
Let’s eat, Grandma.
Re: Okay, I think I see the problem
Spiral (Diary) Sunday, October 12th at 2:48PM EST (link)Sorry for the communication gap. I have been reading up on this stuff a lot lately. So, I am not up-to-date on the proper terminology.
But what upsets me is when you hear that the reason why we just had to have this Paulson plan is because these banks are holding these “toxic assets.” And usually these “toxic assets” are, you guessed it, MBS (Mortgage Backed Securities.)
I always wondered by the guy who helped me refinance my house was thrilled by my house appraised for more than it was really worth. He just wanted the deal made and he knew that I didn’t want to pay PMI. He knew he was going to sell this mortgage to someone else and wouldn’t be “holding the bag” if I didn’t pay the mortgage and the loan became delinquent.
Then I got to thinking, “If I were running a bank, why in the heck would I purchase mortgages (or mortgage backed securities) when I have not had a chance to (a) verify income, (b) look at the credit history and (c) appraise the underlying property? Why wouldn’t I originate my own mortgages and insist on a 20 percent down payment?”
It seems that there is a lot of passing the buck and the buck always seems to get passed to the taxpayer.
I have no problem with the concept of junk bonds or high risk investments. But when some banker says, “I need help. I have toxic assets. I thought that these assets were low risk. But now I am having trouble keeping my bank going.”
And then you get people saying, “Well, the federal government must step in here. After all, banks are the lifeblood of our economy.”
All of this verbal slight of hand is going to cause the federal government to go broke or result in the socialization of the banking sector or both.
Okay. Don’t get me started. But whatever happened to President George W. Bush’s promise to usher in the “responsibility era,” where we don’t blame our mistakes on others?
The Obama Bread Lines