To, continue the conversation….
Joe, like you I have an imperfect understanding of the situation. I don’t have an overall theory as to why things occurred as they did. Here’s a few factors that I think at least contributed…
I think there was a general recognition of the possibility of a problem, both with Fannie Mae and mortgage lending generally. Fannie Mae has always been that weird entity that wasn’t really public and wasn’t really private. Over the previous period, it became too focused on profits. I’m pretty sure that Warren Buffet had a significant Fannie Mae/Freddie Mac position in years past because it was generally a cash machine.
The problem, a problem that I think government saw but didn’t do anything about, is that the housing market was running out of the “good” borrowers. Fannie Mae required growth in order to keep expanding profits. Expanding beyond “good” borrowers was acceptable public policy because it allowed for the expansion of home ownership.
Just as that was happening, Greenspan was attempting to fight deflation. The entire world was flush with cash. For example, for much of the last decade the Japanese central bank pursued a negative real-interest rate policy. Yes, that means that in Japan, after inflation, you were basically being paid to borrow money. In what was known as the carry-trade, people would borrow huge sums in Japan and invest in mortgages here. They were getting paid in both places.
When that much cash is around there needs to be a place to put it. That place ended up being property markets around the world. When you run out of good borrowers, you find slightly less good borrowers. Then even worse borrowers. As long as property prices are going up and as long you can off-load the mortgage you just made onto a cash-flush world, you keep profiting.
But, as WaMu found, if property prices don’t go up and you can’t offload that mortgage, well…
While tighter regulation of Fannie Mae may have helped somewhat, I think that the majority of the problem came outside of the types of loans that Fannie Mae would be involved in. Fannie Mae had regulated guidelines regarding what loans it could purchase. I betcha that Fannie and Freddie end up being the least expensive aspect of the bailout. I think there is more governmental culpability with Fannie however because of the underlying implication that it was a governmental entity.
It was in the unregulated areas of mortgage brokers and investment banks which the most egregious problems occurred. Over a period of years, we have gone from bank-funding of mortgages to investor funding of mortgages. Investors got careless.
Investors will get careless again. I know this sounds kinda weird, but I think that the world is too rich. People don’t know where to put money in order to achieve the kinds of returns they want to achieve. In the last decade, we’ve had bubbles in the telecom industry, the internet industry, commodities and housing.
Alternative energy, imho, is next. I’d suggest getting in early, getting out early and then sitting back complaining as the government bails out windmill owners.
“I know this sounds kinda weird, but I think that the world is too rich.”
This is an interesting concept that I’ve thought about before. If it’s true, it raises some ancillary questions.
Let’s replace the words “too rich” with “overabundance”.
Accepting the premise that there is an overabundance of wealth in the world, it’s important to realize that the wealth is hugely centralized. It mostly resides in a minute percentage of the global population of individuals and corporations, many of which are well-versed in similar investment strategies and tax-avoidance behaviors.
Now, for simple metaphors sake, lets consider this “wealth” to be a living entity.
If the bailout is successful, this entity will live on, most likely as Brian proposes, consuming other industries and economic possibilities, feeding and then consuming bubble after bubble.
So, the question I see is: Is this sustainable?
Is there potential to weaken this entity (bleed some wealth out of the system) such that it’s not so unwieldy and dangerous?
I don’t know, but from what I’m seeing in the early info we’ve got on the bailout, we’re not actually FIXING anything. I think we may just be kicking the can down the road. Admittedly, this is something our gov’t has proven to be exceptional at in areas such as social security and healthcare, but damn. I see this one coming back big time, and maybe next time it will be even bigger than our economy can absorb.
In my opinion, none of the politicians want to be the one to say it, but……WE BUY TOO MUCH CRAP!!! I see it as a mindset, ingrained in us. We want something, we have a little money but not enough, we go buy it anyway, pay for it later. Live for now, don’t worry about tomorrow. The people of this country need to wake up and realize that we are too materialistic, we dont save anything, we dont reuse anything, and we are constantly competing with our next door neighbors to see who can get the latest gadget or nice car, or fancy house. I think the people of this country should be learning a lesson from this, and its that you should learn to be a little humble.
Mike, I think you’re right in that overabudance is a more proper term. Your point about overconcentration has caused me to think that we’re looking at the issue incorrectly however. Or at least defining it incorrectly. As you say there is not an overabundance of wealth in the world. There are however a limited number of conventional ways for this wealth to be put to use in a capitalistically productive manner.
The problem, maybe, is that the United States is too dominant in too many areas, from education to finance to innovation. All that money comes here. Worldwide investment focus is entirely here.
Why is that?
Because, this situation aside, we do education, finance, innovation and business better than anyone in the world. Citibank, IBM, GE, Microsoft, Coca-Cola, McDonalds, Wal-mart. These are no longer American companies. They are global corporations run from the United States. Toyota is a global corporation run from Japan. And by global I don’t mean that their businesses are global. I mean that their ownership is global.
The United States financial system is the primary hub through which capital is exchanged and invested. This dominant position is self-reinforcing. Or at least it has been and I’m not convinced that this will change.
All of which leads me to this conclusion: if the pool of money available for potential investment is too big for the investments that are available, then ways should be found to expand the pool of investments. To which I mean that the answer is more capitalism. More overseas investment in countries with proper respect for law and property.
Why were the Chinese investing in the US property market? Shouldn’t there be other things to invest in? Of course. But how do you deploy $500 billion investing in microfinance in Guatamala? I don’t know.
In the large scheme, I’m not sure that there is anything that needs to be fixed by the bailout other than the redeployment of capital. Right or wrong, and I’ll admit I don’t know enough about the situation, but my perception is that there is just a big liquidity hole. Hundreds of billions of dollars of private wealth has been wiped out and it has caused instability at the center of the financial universe. No one but the United States federal government has the means or courage to step into the breach.
This is merely a redeployment of capital. There is a big hole right where the financial system can’t have any holes. Instead of private investors plugging that hole, the federal government will plug that hole using funds borrowed from private investors.
Or not.
I was watching a debate yesterday afternoon between Barney Frank and a House Repub. spokesman. They were sparring over a House Repub idea that I think is fantastic but which some/many people would object to: Lessen the need for government intervention by lowering the overseas tax burden on US corporations allowing them to bring back capital from overseas. US corporations have hundreds of billions of dollars sitting in bank accounts and investments overseas which they do not repatriate because the act of bringing it back into the country subjects it to tax at about 30%. House Repubs want to enact a moratorium on that tax (reduce it to 5% for a year) to encourage corporations to bring that money home.
A similar moratorium was instituted as part of the Bush tax cuts and approximately $350 billion was brought home. That’s half of the bailout.
Joe,
You are absolutely correct and I hope we DO learn from it. But, what you’re talking about is CULTURAL change. This is debatably even more challenging than reconstruction of an entire financial market. Whereas a constitutionally elected gov’t has precedent for enacting laws, regulating corporations, taxes and investment, I’m not sure we’d have much success in regulating personal shopping habits. I’m not suggesting that’s what you advocate, I’m simply saying there’s little the politicians can or should do in this regard. Would it hurt them to lead by example though? I don’t think so.
Brian,
“The problem, maybe, is that the United States is too dominant in too many areas, from education to finance to innovation.”
I think what you’re saying here is that our increased potential leads to increased exposure. I think you’re right. I also think that’s a risk/reward scenario that I’m not prepared to divest, at least not yet.
“More overseas investment in countries with proper respect for law and property.”
This is a great idea in theory. Unfortunately, I think you’ll find the areas experiencing the most robust growth, are also hotbeds of corruption and IP theft. I’m not sure what can be done here, but I think I think you’re right and the potential needs to be better explored.
“In the large scheme, I’m not sure that there is anything that needs to be fixed by the bailout other than the redeployment of capital.”
This is probably true. I guess what I was trying to say was that if we’re going to bail out an industry that has fallen victim to it’s on excess (via an overabundance of capital or otherwise), it behooves us to do so in a fashion that mitigates the opportunity for recurrence, in both a specific sense and in a more general one.
I don’t know, Obama thinks he can create a socialist volunteer army of (poor) college students through tax credits. Maybe shopping habits are next….
I wasnt driving at regulating or legislating prudent personal spending. Its a choice, but people need to wake up. Its about personal responsibility. We can’t we start teaching some personal finances in high school.
But who knows. All of sudden when gas started got to $4, people started realizing that maybe their fuel inefficient SUV had to go and that $4 latte every morning was really hitting their wallet too.
Im not too excited about all of Obama’s spending, I think he needs to talk to B. Clinton and get some advice on bringing back a balanced budget. On the other hand, McCain’s spending freeze, but continued $300B tax cuts, mostly to the wealthy didnt exactly inspire confidence in his proposal.
Either way, I know many people are worried about their personal situations with respect to the crisis. I’ve always tried to live well within my means, I guess that’s why I’m not as worried as some others.
“I’ve always tried to live well within my means, I guess that’s why I’m not as worried as some others.”
Bingo. 5 years ago, people would have laughed at the idea, called you a sucker. As of 2 weeks ago, you’re a bloody genius.
The people this “crisis” will really hammer are the people who were overleveraged to begin with. Unfortunately, that group is so vast, that it would bring down an entire industry these “keep up with the jones” were supporting.
You mention a balanced budget. What concept. I think a balanced budget amendment should be added to the constitution, but then again, I’m a wacko. 🙂
Kind of brings us back to politicians leading by example.
I don’t have any information on this but I want to ask a simple question. Do you ever wonder if the whole “we’re living beyond our means” meme is actually true? Obviously its true for some subset of the populace. But is it really true on a societal level or is it just something that we want to believe is true about our neighbors?
Brian,
In general its hard for me to say, because I don’t think that I compare myself to my neighbors, but here’s some evidence that at least some people do. I read this morning that 50 million credit card holders who carry a balance on their credit cards have an average debt of about $17,000 on those cards. That’s crazy. If I were in a hole like that, I dont know how I would ever get out of it without radical change in lifestyle. Man, I sound like Suze Orman.
I’m a huge proponent of questioning convention, but in this case, I think convention is reality. My own evidence being purely anecdotal, I did some quick reading…
From an MSN money article as of 2004
* About 43% of American families spend more than they earn each year.
* Average households carry some $8,000 in credit card debt.
* Personal bankruptcies have doubled in the past decade.
American consumers owed a grand total of $1.9773 trillion in October 2003, according to the latest statistics on consumer credit from the Federal Reserve. Thats about $18,654 per household, a figure that doesnt include mortgage debt.
Among the key drivers of debt expansion in recent years:
* Unusually low interest rates.
* The rising popularity of Internet shopping, in which credit cards are the currency of choice.
* The hot housing market, which has encouraged buyers to stretch for new homes.
* The aggressive extension of credit to consumers with weak credit scores.
Note the last two and how they related to the original topic of conversation.