3 ms·

>We got where we are through a lack of government (regulation) I hear this a lot, but what particular regulation do you think would have mitigated the crisis?

>We got where we are through a lack of government (regulation) I hear this a lot, but what particular regulation do you think would have mitigated the crisis? I can't think of any, except restricting subprime lending - which would be directly contrary to the Government's other goal of more home ownership. Meg Mcardle had a good discussion of possible regulation: http://meganmcardle.theatlantic.com/archives/2008/09/hindsight_regulation.php http://meganmcardle.theatlantic.com/archives/2008/09/hindsig...

RobertL 18y ago
Agreed Prrometheus. More regulation is just going to push more of the business overseas. If Congress screws this one up they could create a situation where there will be no investment capital industry in the United States in the near future.
gills 18y ago
The problem with the goal of "more home ownership" is that it was a tagline from the GSE's for "increase our deal flow", as they had somewhat of a golden goose with throughput being the only limit. It was and still is political suicide to oppose it. Stroke of genius, if you ask me. Even worse than non-enforcement has been the active encouragement by the legislature of lots of this stuff. Tightening up the lobbying and revolving doors might help cool off some of that, but I don't really know. Some of the regulation concepts being floated (not my ideas) are to ban off-balance-sheet vehicles, tighten definitions of what can be put in Level III/model-priced assets, and require that CDSs and other derivatives/wraps be traded on real exchanges so that a market-maker acts as central counterparty). I'm not a financial expert, just trying to learn about this stuff. Maybe someone more knowledgeable will chime in.
- michaelneale 18y ago
  Does it need to be a social change where renting is on equal social footing to home ownership? (I know it varies place to place, but in some places people say "rent money is dead money" - of course so is bank interest ;).
  - arockwell 18y ago
    Yes, there really does. Home ownership is the conventional wisdom, and its what got me to buy a house two years ago, and I really wished I hadn't (and I've been wishing that about a year after I bought out the house). Fortunately, the market I am in never really got too much of the housing bubble so unless everything goes to complete shit I'll be ok.
    - michaelneale 18y ago
      There is a lot of pressure, I remember it when I was younger. Now I have my own home outright, so I feel like I am not really allowed to state an opinion, otherwise its "do as I say not as I do" etc... so I should just shut up. I don't really know what is best. But debt sucks, mostly, but can work for you.
    - iigs 18y ago
      The amount of bad advice in this area is astounding. By far one of the best pieces of advice I've ever been given (and of course, summarily ignored) was to do the math on home ownership vs renting and putting the difference into another investment vehicle. Played right it 1) can make you more money, although that's tough to quantify right now with everything going to hell 2) make you more flexible, since you're not on the hook for a major life change if you want to change your investment vehicle and 3) diversifies you and provides more security -- your investment is not coupled to where you sleep at night. Same deal here. Bought in 2005 with the intent to live in the house for a few years and move to a different part of the country. Dreamed about a home run, hoped to break even, didn't expect the worst financial crisis since the great depression. Fine time to be holding the bag. :)
      - BrandonM 18y ago
        Not everyone wants to own a house for investment reasons. House ownership appeals to a lot of people who want to have their own place in the world. My dad is a "builder" -- he barely finished high school and he's never had a non-labor job, but he is very good at designing and building all manner of things. In the 12 or so years he's lived in his current home, he has completely redone the kitchen (a couple times), took an open-area second floor and made three bedrooms and a bathroom out of it, added an addition (an indoor/outdoor backporch area) on the back, converted the old bathroom and backporch downstairs into a beautiful, much larger bathroom, and so on. And that's just in the house, not to mention other changes he's made on the property (fences, a new dog kennel, redone garage, landscaping, etc.). Some people just like to tinker, and when you don't own something, that's not really a possibility. After renting at my current residence for over a year, there are some things here that annoy me: we have no porch to speak of, we have a huge kitchen that is laid out horribly (not even a dishwasher), there is a nice basement that is just begging to be finished, and all the walls everywhere are white. It sure would be nice to have a place of my own where I could fix these "problems", both adding to the value and increasing my happiness, all without having to move. And there is just something satisfying about owning something, about working towards a common goal with someone you love, in building something together. When the area you live in is pliable to your wants and needs, happiness is just a little bit of hard work away.
Flemlord 18y ago
Not getting rid of the Glass-Steagall Act would have limited the scope of the crisis. The act was put in place in 1933 to prevent the "too big to fail" problem with banks that led to the Great Depression. In general, we've had a Republican congress for the last 8-10 years that has been slowly deregulating the financial services industry. Staying on a gold standard would have prevented the crisis. The gold standard was eliminated by Nixon in the 70's. In general, there were many checks and balances in place that had to be removed for us to get to where we are now. All in the name of political expediency.
- Prrometheus 18y ago
  Edit: I've put a lot of work into the comment below, so I would appreciate if you'd read it and respond to it. I know it's harder to discuss the specific provisions of Glass-Steagall and its affect on the market place than just saying "oh, the Glass-Steagall repeal is responsible for everything wrong". However, if people are going to cite the argument so often that it becomes the commonly accepted viewpoint, then it ought to be incumbent on them to UNDERSTAND it. Anything else is hand-waving. I hear this a lot, too, but it's hard for me to see how the Glass-Steagall Act repeal had anything to do with the current crisis. In fact, deregulation seems to have mitigated the damage. The reorganization of Bear, Merrill, Morgan, and Goldman would have been impossible were the Glass-Steagall Act still in full force. They would have all gone bankrupt or had to be rescued by the government. Many of the entities that are in good financial shape are the large financial conglomerates that would have been illegal were G-S still in place. Customer bank deposits provide a stable source of funding when lenders are skitish. Reducing the supply of capital in an embattled industry would be the height of stupidity. Many foreign countries never had any law like Glass-Steagall in place and they don't seem to be suffering the same problems. As logic tells us, the current crisis seems to be orthogonal to the presence or absence of Glass-Steagall. Mcardle also had a wonderful post FACTUALLY summarizing the provisions of Glass-Steagall and its relation to the current crisis: http://meganmcardle.theatlantic.com/archives/2008/09/clear_as_glass_steagall.php http://meganmcardle.theatlantic.com/archives/2008/09/clear_a... I also addressed this issue on my libertarian blog a while back: http://distributedrepublic.net/archives/2008/09/22/the-end-era http://distributedrepublic.net/archives/2008/09/22/the-end-e... A large problem during the Great Depression was that the United States had laws that artificially limited the size of banks (see "Unitary Branching Laws"). The result was that institutions in the United States had smaller financial cushions in crisis time and were more likely to go under. The United States suffered a FAR higher rate of bank failure than other countries, and states with unitary branching laws had higher failures than those without. So I know blaming the Glass-Stegall repeal for our current problems is popular(populist) wisdom, but it seems to me that popular wisdom is, as usual, wrong.
bilbo0s 18y ago
I am still a little confused as to what exactly is causing this crisis. I looked into the whole sub prime Fannie and Freddie thing and I found some surprising things. The first thing I found was that poor people get home loans through mechanisms other than sub prime lending. They go through the whole Ginnie Mae umbrella, where all the inner city HUD and FHA stuff is handled, along with rural housing, housing for native americans and there is also a special allowance for veterans of the military to cover them under Ginnie. All of these groups use mechanisms OTHER THAN SUB PRIME! Or rather, sub prime or not, these people have loans that are guaranteed EXPLICITLY by the government, unlike the loans backed by Fannie and Freddie which had IMPLICIT guarantees. How can Ginnie Mae be sound and Fannie and Freddie be such basket cases? Even if 100% of the poor people defaulted, Fannie and Freddie would be untouched. Another question is, who, exactly, was using these sub prime mechanisms that Fannie and Freddie ended up backing? The auditors are claiming that they were primarily used by people making between $40000 and $150000 to afford mortgages that they would otherwise be denied. But something is out of place. Why would the middle class be defaulting at such a high rate? There is some money missing here. I have yet to get a really complete understanding of what went on exactly. After reading through all of the financial info, I am left even more confused. Is there an economist on Hacker News somewhere that can explain these inconsistencies to us? The only thing I could come up with is that these people wanted to live beyond their means. My quandary is that I have either severely underestimated the number of middle class Americans who want to live beyond their means, or overestimated my capacity for financial analysis. And yes . . . it could be both.
- wallflower 18y ago
  This American Life "The Giant Pool of Money" episode offers a good background on the crisis: http://www.thislife.org/extras/radio/355_transcript.pdf http://www.thislife.org/extras/radio/355_transcript.pdf Act I: "Alan Greenspan: 'The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.'... What he’s technically saying is he’s going to keep the Fed Funds rate at the absurdly low level of one percent. It tells every investor in the world: you are not going to make any money at all on US treasury bonds for a very long time. Go somewhere else. We can’t help you." Act II "And they sold so many mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified to get one .... had gotten one. But the pool of money had just gotten started. They wanted more mortgage backed securities. So Wall Street had to find more people to take out mortgages. Which meant lending to people who never would’ve qualified before." "At the height I was making between 75 and 100 grand a month" -Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York." Act III: "The global pool of money is avoiding anything with even the slightest hint of risk and that affects everybody, no matter who you are. It's harder to borrow money to buy a house, or build a factory, or bring your country boldly into the 21st century. Take Iceland. A year ago it was easy for them to borrow billions. Now, they're seen as too risky. Their central bank has to pay more than 15 percent interest get anyone to loan them money. They could do better putting their national debt on a credit card."
ojbyrne 18y ago
In Canada, the average Debt-to-Equity ratio for banks is 3:1. We only have a few. Large, heavily regulated, safe as hell.

RobertL 18y ago

Agreed Prrometheus. More regulation is just going to push more of the business overseas. If Congress screws this one up they could create a situation where there will be no investment capital industry in the United States in the near future.

gills 18y ago

The problem with the goal of "more home ownership" is that it was a tagline from the GSE's for "increase our deal flow", as they had somewhat of a golden goose with throughput being the only limit. It was and still is political suicide to oppose it. Stroke of genius, if you ask me. Even worse than non-enforcement has been the active encouragement by the legislature of lots of this stuff. Tightening up the lobbying and revolving doors might help cool off some of that, but I don't really know. Some of the regulation concepts being floated (not my ideas) are to ban off-balance-sheet vehicles, tighten definitions of what can be put in Level III/model-priced assets, and require that CDSs and other derivatives/wraps be traded on real exchanges so that a market-maker acts as central counterparty). I'm not a financial expert, just trying to learn about this stuff. Maybe someone more knowledgeable will chime in.

michaelneale 18y ago
Does it need to be a social change where renting is on equal social footing to home ownership? (I know it varies place to place, but in some places people say "rent money is dead money" - of course so is bank interest ;).
- arockwell 18y ago
  Yes, there really does. Home ownership is the conventional wisdom, and its what got me to buy a house two years ago, and I really wished I hadn't (and I've been wishing that about a year after I bought out the house). Fortunately, the market I am in never really got too much of the housing bubble so unless everything goes to complete shit I'll be ok.
  - michaelneale 18y ago
    There is a lot of pressure, I remember it when I was younger. Now I have my own home outright, so I feel like I am not really allowed to state an opinion, otherwise its "do as I say not as I do" etc... so I should just shut up. I don't really know what is best. But debt sucks, mostly, but can work for you.
  - iigs 18y ago
    The amount of bad advice in this area is astounding. By far one of the best pieces of advice I've ever been given (and of course, summarily ignored) was to do the math on home ownership vs renting and putting the difference into another investment vehicle. Played right it 1) can make you more money, although that's tough to quantify right now with everything going to hell 2) make you more flexible, since you're not on the hook for a major life change if you want to change your investment vehicle and 3) diversifies you and provides more security -- your investment is not coupled to where you sleep at night. Same deal here. Bought in 2005 with the intent to live in the house for a few years and move to a different part of the country. Dreamed about a home run, hoped to break even, didn't expect the worst financial crisis since the great depression. Fine time to be holding the bag. :)
    - BrandonM 18y ago
      Not everyone wants to own a house for investment reasons. House ownership appeals to a lot of people who want to have their own place in the world. My dad is a "builder" -- he barely finished high school and he's never had a non-labor job, but he is very good at designing and building all manner of things. In the 12 or so years he's lived in his current home, he has completely redone the kitchen (a couple times), took an open-area second floor and made three bedrooms and a bathroom out of it, added an addition (an indoor/outdoor backporch area) on the back, converted the old bathroom and backporch downstairs into a beautiful, much larger bathroom, and so on. And that's just in the house, not to mention other changes he's made on the property (fences, a new dog kennel, redone garage, landscaping, etc.). Some people just like to tinker, and when you don't own something, that's not really a possibility. After renting at my current residence for over a year, there are some things here that annoy me: we have no porch to speak of, we have a huge kitchen that is laid out horribly (not even a dishwasher), there is a nice basement that is just begging to be finished, and all the walls everywhere are white. It sure would be nice to have a place of my own where I could fix these "problems", both adding to the value and increasing my happiness, all without having to move. And there is just something satisfying about owning something, about working towards a common goal with someone you love, in building something together. When the area you live in is pliable to your wants and needs, happiness is just a little bit of hard work away.

Flemlord 18y ago

Not getting rid of the Glass-Steagall Act would have limited the scope of the crisis. The act was put in place in 1933 to prevent the "too big to fail" problem with banks that led to the Great Depression. In general, we've had a Republican congress for the last 8-10 years that has been slowly deregulating the financial services industry. Staying on a gold standard would have prevented the crisis. The gold standard was eliminated by Nixon in the 70's. In general, there were many checks and balances in place that had to be removed for us to get to where we are now. All in the name of political expediency.

Prrometheus 18y ago
Edit: I've put a lot of work into the comment below, so I would appreciate if you'd read it and respond to it. I know it's harder to discuss the specific provisions of Glass-Steagall and its affect on the market place than just saying "oh, the Glass-Steagall repeal is responsible for everything wrong". However, if people are going to cite the argument so often that it becomes the commonly accepted viewpoint, then it ought to be incumbent on them to UNDERSTAND it. Anything else is hand-waving. I hear this a lot, too, but it's hard for me to see how the Glass-Steagall Act repeal had anything to do with the current crisis. In fact, deregulation seems to have mitigated the damage. The reorganization of Bear, Merrill, Morgan, and Goldman would have been impossible were the Glass-Steagall Act still in full force. They would have all gone bankrupt or had to be rescued by the government. Many of the entities that are in good financial shape are the large financial conglomerates that would have been illegal were G-S still in place. Customer bank deposits provide a stable source of funding when lenders are skitish. Reducing the supply of capital in an embattled industry would be the height of stupidity. Many foreign countries never had any law like Glass-Steagall in place and they don't seem to be suffering the same problems. As logic tells us, the current crisis seems to be orthogonal to the presence or absence of Glass-Steagall. Mcardle also had a wonderful post FACTUALLY summarizing the provisions of Glass-Steagall and its relation to the current crisis: http://meganmcardle.theatlantic.com/archives/2008/09/clear_as_glass_steagall.php http://meganmcardle.theatlantic.com/archives/2008/09/clear_a... I also addressed this issue on my libertarian blog a while back: http://distributedrepublic.net/archives/2008/09/22/the-end-era http://distributedrepublic.net/archives/2008/09/22/the-end-e... A large problem during the Great Depression was that the United States had laws that artificially limited the size of banks (see "Unitary Branching Laws"). The result was that institutions in the United States had smaller financial cushions in crisis time and were more likely to go under. The United States suffered a FAR higher rate of bank failure than other countries, and states with unitary branching laws had higher failures than those without. So I know blaming the Glass-Stegall repeal for our current problems is popular(populist) wisdom, but it seems to me that popular wisdom is, as usual, wrong.

bilbo0s 18y ago

I am still a little confused as to what exactly is causing this crisis. I looked into the whole sub prime Fannie and Freddie thing and I found some surprising things. The first thing I found was that poor people get home loans through mechanisms other than sub prime lending. They go through the whole Ginnie Mae umbrella, where all the inner city HUD and FHA stuff is handled, along with rural housing, housing for native americans and there is also a special allowance for veterans of the military to cover them under Ginnie. All of these groups use mechanisms OTHER THAN SUB PRIME! Or rather, sub prime or not, these people have loans that are guaranteed EXPLICITLY by the government, unlike the loans backed by Fannie and Freddie which had IMPLICIT guarantees. How can Ginnie Mae be sound and Fannie and Freddie be such basket cases? Even if 100% of the poor people defaulted, Fannie and Freddie would be untouched. Another question is, who, exactly, was using these sub prime mechanisms that Fannie and Freddie ended up backing? The auditors are claiming that they were primarily used by people making between $40000 and $150000 to afford mortgages that they would otherwise be denied. But something is out of place. Why would the middle class be defaulting at such a high rate? There is some money missing here. I have yet to get a really complete understanding of what went on exactly. After reading through all of the financial info, I am left even more confused. Is there an economist on Hacker News somewhere that can explain these inconsistencies to us? The only thing I could come up with is that these people wanted to live beyond their means. My quandary is that I have either severely underestimated the number of middle class Americans who want to live beyond their means, or overestimated my capacity for financial analysis. And yes . . . it could be both.

wallflower 18y ago
This American Life "The Giant Pool of Money" episode offers a good background on the crisis: http://www.thislife.org/extras/radio/355_transcript.pdf http://www.thislife.org/extras/radio/355_transcript.pdf Act I: "Alan Greenspan: 'The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.'... What he’s technically saying is he’s going to keep the Fed Funds rate at the absurdly low level of one percent. It tells every investor in the world: you are not going to make any money at all on US treasury bonds for a very long time. Go somewhere else. We can’t help you." Act II "And they sold so many mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified to get one .... had gotten one. But the pool of money had just gotten started. They wanted more mortgage backed securities. So Wall Street had to find more people to take out mortgages. Which meant lending to people who never would’ve qualified before." "At the height I was making between 75 and 100 grand a month" -Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York." Act III: "The global pool of money is avoiding anything with even the slightest hint of risk and that affects everybody, no matter who you are. It's harder to borrow money to buy a house, or build a factory, or bring your country boldly into the 21st century. Take Iceland. A year ago it was easy for them to borrow billions. Now, they're seen as too risky. Their central bank has to pay more than 15 percent interest get anyone to loan them money. They could do better putting their national debt on a credit card."

ojbyrne 18y ago

In Canada, the average Debt-to-Equity ratio for banks is 3:1. We only have a few. Large, heavily regulated, safe as hell.