The people touting the market can plausibly say, “We never gave it a shot.” But those blaming the housing bubble on deregulation don’t really have a strong position. There really wasn’t deregulation, but instead changed regulation (or reregulation) after the changes in financial regulation that allegedly spawned the boom.
The mysterious von Pepe and I were emailing about credit default swaps, and how a bank could meet its capital reserve requirements by buying a CDS and (for purposes of regulation) effectively take the volatile asset off its books. The bank would still hold the volatile asset, but it supposedly now had taken care of the downside because of the CDS which acted as an insurance policy against default.
So as I said to von Pepe, “People keep saying that the CDS market allowed firms to evade regulation. No, the regulation allowed firms to use CDSs to evade capital requirements.”
This CNBC article explains:
The Fed’s bid to lower long-term interest rates on home mortgages and corporate debt is already running into trouble.
In the aftermath of last Wednesday’s announcement that it would buy back $300 billion of 2-10 year Treasury securities, yields on benchmark 10-year notes were cut 51 basis points, from 3.02 percent to 2.51 percent in a matter of minutes.
But rates have since crawled up on Thursday and Friday, and show no sign of falling today, leaving the market just 36 basis points lower than before.
And I liked this part:
The Fed is trapped. The current buy back program is too small to have more than a symbolic effect. Expanding it, though, would trigger fears about inflationary financing and risks bringing on the rise in bond yields and collapse in confidence and the currency the Fed is desperate to avoid.
I have been saying this more and more in the last couple of weeks: Everyone says, “Bernanke will have to suck those reserves out of the system once the recovery begins.” But what happens when unemployment is in double digits and CPI is rising at more than one point per month? People are acting as if that’s impossible. We’re back at the pre-1970s Phillips Curve consensus.
This CBS review of Tom’s new book Meltdown is really good. I don’t just mean, that I agree with guy, but I’m also saying objectively, he is very well-read for someone who gets a CBS spot. I think the Internet is really opening up the floodgates in terms of nuanced analysis.
In this post, I merely want to note the point that the existence of an omnipotent being who created the structure of reality–and who moreover is reputed to have an actual personality and enjoys interacting with humans–well that’s by far the most important aspect of your belief system. How you answer that question fundamentally influences what kind of life you will lead.
So I fully grant that I may be making a horrendous mistake by saying I “believe in Jesus.” Fair enough.
However, I think that I think about this issue more than most atheists. That doesn’t make me right, obviously. But it does mean that those (atheists and believers alike) who spend all their “philosophical” time tracing out the implications of their answer to that big question, are putting the cart before the horse. For example, if it turns out that there was a God, then the implications of evolutionary biology wouldn’t be so awesome. The strictly positive statements would still be true, of course, but they could no longer really say, “There is no ‘purpose’ or ‘goal’ behind evolution.” That would be easily seen as a bold conjecture on their part, because it would mean they were sure the (known) God was not acting slyly through some undetected mechanism to influence evolution, if only from establishing the initial state of the universe juuuuuust right.
And as I say, the danger holds for the evangelicals, too. It would be disastrous to structure your life around this one guy, if it turned out he was a fraud (or insane). So I encourage Christians reading this to think more deeply about why they believe. A true believer should relish this task, not shrink from it for fear of what he might realize. (Because of this, I don’t worry that my son might become an atheist–maybe just to spite me. That’s fine, I was an atheist too for a few years. The LORD can deal with that sort of thing. He’s fairly clever, and that whole omnipotence thing doesn’t trip Him up either.)
Last point: If you do want to ponder the implications of the possible existence of (the Christian) God, then you’re in luck: He allegedly wrote a book, all about Himself. They call it the Holy Bible (a fairly presumptuous title, eh? Who is this guy, some kind of guru?) They market it as a history book, but it just as well could have been sold as an autobiography: God: My Years With the Talking Monkeys.
In the previous post, I said it would not be hard to imagine the government taxing the heck out of hedge funds that hadn’t taken a dime of bailout money. Well, von Pepe just sent me this NYT article that contains the following ominous paragraphs:
WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.
The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.
Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.
Von Pepe’s only comment: “It’s over.”
So I said in this unusually pessimistic appearance on Scott Horton’s radio show.
This AIG bonus bill has really sealed the deal for me. Suppose you were put in charge of AIG. How would you structure compensation packages to attract the right people who would actually turn the company around? Why, I think you would want low base salaries and bonuses tied to objective measures of performance, which could be quite lucrative depending on what happened with corporate profits.
Well shucks, the government just took that option away from you. Try again.
Now look, I am NOT defending the $165 million as “efficient.” Obviously the people running AIG (and who offered those contracts) didn’t know what they were doing; that’s why they have asked the government for $170 billion so far.
But what I am saying, is that now it will be much harder for not only AIG, but also all other financial institutions, to turnover their employees and retain/attract the right people needed to fix this mess.
As a matter of fact, I imagine the most competent people are jumping ship for other industries en masse now. Now they realize, that even if they succeeded in their difficult task, the government would swoop in and take their earnings.
Seriously, just think about that: Suppose you run a completely private hedge fund, which had no ties to government bailout money. Is it inconceivable that if you made $20 billion shorting U.S. Treasurys, that Uncle Sam would design some special new tax that basically gave them the right to take $19 billion of it from you? And make it realistic: You made $20 billion from “shorting America” while unemployment is 10.4%. You think the public is going to cry foul when the feds take your money?
I am pretty pessimistic now about the next 8 years. (Yes I think Obama will be re-elected. FDR had no problem with re-election, and the economy was awful. But he was an amazing orator and could blame it on the previous Republican buffoon. Same today.)
However, I do want to point to two positive trends, amidst the general march toward central planning. First, like FDR with alcohol, I think it is very possible that there will be a serious rollback of the Drug War as the Great Depression II intensifies. The government will be able to save money (from cutting the DEA and releasing all of the nonviolent drug offenders) and even raise new revenues from taxing marijuana and possibly harder drugs if they go that far.
A relaxation of the Drug War is really critical now, because there is going to be so much unrest in big cities during the next few years. If it’s ever a good time to stop the flow of billions of dollars into the pockets of violent drug gangs, it’s right before the Great Depression II hits, I think.
Second positive trend: Sure it’s just talk, but I have to say I’m impressed with how “weak” Obama allowed himself to be in this message to the Iranians. Yeah yeah, of course it was mostly done to impress American voters, but Obama looks like he’s the kind of guy who isn’t afraid to walk away from a fight. To repeat: I am NOT saying he is fundamentally changing foreign policy. I’m saying that it’s big of him to give this message, knowing what the talk radio hosts etc. will do with it, in the same way that I was impressed by Sarah Palin’s Saturday Night Live performance.
…is of the ratings agencies. Seriously, if you had to pick a single group who were most directly responsible not in terms of moral culpability, but in terms of their huge intellectual mistakes being directly tied to the housing bubble…well it’s gotta be the ratings agencies. I couldn’t find how many total employees Moody’s, Fitch, and S&P have, but I bet it’s a fairly small group of people, given how much influence they had. Don’t get me wrong, Greenspan had more per capita influence on the housing bubble, but you can’t tell the story of what happened without invoking the absolutely horrendous job the ratings agencies did.
So what I was originally going to post is that these firms have largely emerged unscathed. After all, AIG shareholders have gotten trounced, as well as the shareholders of other firms that got in over their heads and benefited the most during the boom years. But I don’t see S&P posting billion dollar losses. It’s true, the agencies’ profits are down, but that’s because of the general downturn in the credit markets; it’s not that their former customers are taking their business elsewhere.
But there’s a new twist: Dan Simmons sent me this WSJ article that explains that the ratings agencies might see up to a billion-dollar windfall from the Fed’s recent announcement of further experiments in hyperinflation. In any deal spurred by the Fed’s program, the ratings agencies need to come in and provide the requisite labeling–for a fee. This part’s great:
Now the government is in the uncomfortable position of rewarding these same firms through a new program that will result in numerous companies issuing securities. If the ratings companies are wrong this time around, the Federal Reserve and the Treasury — and therefore taxpayers — will be on the hook for some losses.
A Federal Reserve spokesman declined to comment. At a Senate hearing in Washington earlier this month, Fed Chairman Ben Bernanke said the central bank has looked at the models of the major rating companies and is “comfortable” they can rate securities eligible for the new program “in an appropriate way.”
The reason that Moody’s et al. are invulnerable to competition is–you guessed it!–government regulation. When banks, life insurance companies, and other heavily regulated financial institutions buy financial assets, they typically need a minimum rating (e.g. AA or better). (This regulation is intended to ensure that your life insurance company can pay your wife when you die.)
But then that begs the question: Who is an acceptable rater of the bonds a bank buys? The bank president can’t simply call up his brother-in-law and have him send over a notarized letter declaring everything on the books is a AAA.
Although I think the rules for being an acceptable rating agency are in theory open to a wide field of competition,* in practice the regulations ensure that Moody’s et al. have a cartel.
If any companies should be liquidated because of their executives’ mistakes during the housing boom, it is the ratings agencies. But instead of heads rolling, they get a nice cut of every injection of new Fed money into the credit markets.
*von Pepe chides me in email and says that the government really is picking the cartel. The SEC requires the ratings for the regulated buyers to be performed by “Nationally Recognized Statistical Rating Organizations,” and if you check out the definition of this phrase, it turns out that only the Big Three of Moody’s, Fitch, and S&P qualified up to a few years ago, and now only 7 or so qualify. But that was my point, that if you read the actual regulation, it doesn’t say, “You need to get your rating from Moody’s,” but in practice to comply with the regulation you have to go to the big boys.