Honest Economists Need Not Apply
If only someone could have seen this financial crisis coming, say, in 2003. If only there was an economist who predicted the housing bubble. If only there had been criticism of subprime lending years back. If only someone had discussed the wider implications of the housing bubble and the financial deregulation that spurred it on. Wasn’t there some wild-eyed radical to speak up and say financial mechanisms like derivatives hedges are putting us all at risk? I mean, the only experts the media can rely on are people who were totally surprised by the meltdown. They happen to be the same folks who missed the late-’90s stock-market bubble bursting, but since they uphold elite interests, they’re going to keep their jobs as primary news sources. I mean, really, who could have known?
If only someone could have written something like this years ago:
This situation is frightening for two reasons. First, as a short-run matter, if housing prices fall sharply in some of the areas where the effects of the bubble are largest… new home buyers (and those who recently refinanced their mortgages and took money out) could find they have negative equity in their homes. … When this happens, there is a huge incentive to just let the mortgage holder foreclose on the home. If this were to happen on a large scale, the survival of many banks and financial institutions would be at risk.
I mean, that person would probably be the most sought-after economist in the news today, right? He would be a household name, and major news outlets wouldn’t be turning to Alan Greenspan to explain why everything is falling apart.
I wouldn’t buy a new car if i were you.
Great stories about the economy:
http://www.youtube.com/user/DannyAmericaNow
youtube.com>videos > search “dannyamericanow”
click on from:dannyamericano
Big Brother Reply:
September 16th, 2008 at 3:10 pm
LOL I don’t know what you mean about the cars, but this is the second time you made me click on that weird army soldier thing. So here’s one for you.
Mosquito Dan Reply:
September 16th, 2008 at 3:23 pm
That should of been my main page. There is other videos under my favorites. you can also click on “see all” at the bottom of favorites. There is about 16 political videos on there.
http://www.youtube.com/user/DannyAmericaNow
If it didn’t go to my main page, respond please.
Mosquito Dan
I’m glad someone said it. The FED is responsible for this. I was once skeptical of the gold standard but honestly it looks like the gold standard would have prevented these bubbles because the inflation would not have occurred. The Fed would not have been able to just bond out more valueless money to banks who then could loan out their “no risk” new loans from the Fed to high risk borrowers. We really need to get rid of the Fed and hold Congress’s feet to the fire on the financial situation and I think a return to the gold standard will help to keep this kind of thing from happening again. I have a feeling it’s going to happen one way or another. Either we are going to choose to do it soon or our money is going to hyper inflate and be completely worthless. I know it’s a bad time to invest in gold but I think I am going to do so anyway I really don’t like the looks of our economy for the future.
John from Cleveland Reply:
September 16th, 2008 at 6:31 pm
The FED was not the ones who lent the money to the lenders. It was wall street. That is why all the major brokerage houses are collapsing.
Don’t blame the FED for this.
Here is my brief discussion as to why our economy is completely ass-fucked:
1. We experienced stupid growth through the 90s.
2. This growth was completely UNNATURAL from normal economic growth.
3. The growth was on the back of easy credit and financing from various sources. Essentially, people were NOT spending their own money on the everyday items they needed
4. Because of rapid, and again UNNATURAL, appreciation on homes, people used their property as ATMs to get the cash they needed to pay down their debt. Then they simply did it to themselves again and again.
5. OH NO, my home is no longer what it was worth. “I can’t borrow money to pay off my mounting debt. I should just blame everyone around me but myself.” Oh well, time to foreclose and/or file bankruptcy.
6. A flood of foreclosed homes hit the market destroying the entire industry by lowering values on all homes.
I FAULT AMERICAN CONSUMERISM FIRST! PEOPLE SHOULD REALIZE THAT THEY DON’T NEED A 72″ TV IN THEIR BEDROOMS.
Big Brother Reply:
September 16th, 2008 at 9:54 pm
Except a huge portion of the crisis has nothing to do with consumer-level exchanges, John. It’s way more complicated than that. Deregulation allowed all sorts of crazy lending to take place not only at the consumer level but between institutions. Greenspan is the #1 culprit here. Sure, consumers bear their share of the blame, but let’s not kid ourselves — they didn’t get together in a meeting, as a bunch of experts, and explicitly decide to ignore very severe warnings that EXACTLY THIS CRISIS WOULD HAPPEN. The Fed, in all its wisdom, did just that.
You are definitely right on one level, but it really depends where you look, in terms of responsibility. I mean, if you know that
1. Americans have no financial literacy;
2. Americans are being bombarded with consumption-oriented propaganda designed by highly trained psychologists; and
3. financial institutions will prey on this weakness if you allow them to
…why on earth, then, would you stop regulating those financial institutions and make it possible for them to get their hands on cheap credit, hedge each other’s debt portfolios to the high heavens, inflate housing prices way beyond sane levels, etc, etc?
Here is an analogy to what you are doing in your observation here, John. You see an experiment where the scientists set up a pot of water next to a frog. The frog jumps in and the scientists slowly bring that water to a boil. When the frog boils to death, you, John, ignore the scientists altogether and exclaim: “Look, the frog hopped into the water! IT’S HIS FAULT. THE FROG IS SO STUPID! I BLAME THE FROG!
Erik from New York Reply:
September 16th, 2008 at 10:25 pm
Big Bro I agree with 99% of what you said. The only thing I disagree with is the fault of deregulation. I think deregulation is more of what we need but that being said we do not need The Fed or Congress aiding and abetting bad economic practices. Since what the Fed does is print money with no solid backing the problem goes somewhat like this: Banks have so many outstanding loans they run out of reserve cash, they can not borrow from each other anymore because they are all outstretched already, The Fed buys bonds from the banks and supplies them with cash which they just print up to fill the demand (inflation begins), banks continue to make bad loans and “stimulate” the economy while interest rates fall. Viola the bubble is born. Borrowers can not pay back loans and the bubble bursts and not only was the dollar devalued in the process but now whatever was bought with the bad loans was also. I hate to repeat myself and promote what some might call crazy but it seems logical that a precious metal, or other rare commodity, or anything other than just economic faith, to back currency is not such a bad idea.
Big Brother Reply:
September 16th, 2008 at 11:09 pm
I’m glad we basically agree, Erik, I don’t get why you’re letting deregulation off the hook. It is so obviously a precursor to what we’re dealing with, I can’t fathom denying it. Less regulation would be catastrophic. Here is a great article on why deregulation is to blame. I know laissez-faire/free market types love to blame regulation for everything, but in this case those folks just have to eat crow(shit). There’s no dodging the blame on this one; it’s a totally predictable situation that a lot of people saw coming, and they spelled out exactly why and how it would go down, and it started with deregulation. Yeah, the whole basis of the Fed is fundamentally flawed, but leaving its impact unfettered by regulatory schemes is the reason we have such an extreme situation on our hands.
Erik from New York Reply:
September 16th, 2008 at 11:14 pm
Ok, I misunderstood what you were talking about to some degree I suppose. I am a supporter of a more deregulated market place but that is only after completely eliminating the Fed. The one place that government should have it’s hands in the economy is when it comes to printing our currency. That is a responsibility expressly given to Congress in the Constitution. The Fed needed to be super regulated, I agree, so much so that it should never have existed and Congress itself should have been doing the job. So apparently we are both in 100% agreement.
Big Brother Reply:
September 16th, 2008 at 11:34 pm
Okay, well let’s leave it on a point of agreement. I like happy endings!
Erik from New York Reply:
September 16th, 2008 at 11:20 pm
BTW here is what RP predicted and was called a kook for.
http://www.thetrumpet.com/index.php?q=5349.3644.0.0
And if you are going to get away with citing a website that agrees with your theories I should be afforded the same grace without threat of ridicule….lol
Big Brother Reply:
September 16th, 2008 at 11:36 pm
Wow, Ron Paul predicted it 3 months ago? How prophetic! My links are from years ago. The last one, with the dereg details, was from Jan 2008, but all the others were from 2003-2006. That was when it wasn’t too late.
I didn’t mean to ridicule anything, though. If you have honest criticisms of my sources (of course I’m going to link to stuff I agree with), then I’m all ears. I’m SURE it is not airtight.
Erik from New York Reply:
September 17th, 2008 at 12:03 am
I just posted it to be argumentative really….lol. I also like happy endings but have to get some sort of last word just cause I like being a dick. I do happen to agree with much of what Ron Paul believes and he has said that the economy would take a big shit for a long time that was just the first website I found. I just want to make this one disclaimer before I get labeled. i am not a Ron Paulite. I do agree with much of what he says because I am a Libertarian. I do not however agree with everything he does especially not the abortion issue. I don’t know why but I felt I had to say that.
John from Cleveland Reply:
September 17th, 2008 at 7:36 am
The Fed does not print money at all. The Treasury does. The Fed just distributes the cash to banks when they ask for it.
Erik from New York Reply:
September 17th, 2008 at 10:24 am
John you are arguing semantics the Fed orders the printing of money.
Our government is now in the business of bailing out corporations when they fail due to bad management.
What’s wrong with this picture?
The wingers like to talk about the free economy.
Something is really starting to smell rotten!
Erik from New York Reply:
September 16th, 2008 at 11:04 pm
Yeah bailing out these big corporations is not so free is it. Seems more like the good ole’ boys network in full effect.
HOW TO MAKE YOURSELF RICH:
1. Make corporation that is necessary for the USA to survive (oil, travel, banking, investment, insurance)
2. Run it into the ground
3. Let the government take over while you walk away with $100 million.
Erik from New York Reply:
September 17th, 2008 at 10:28 am
Is it not completely sickening that this seems to be the three steps that most companies use to enrich their tops players. No longer are companies in competition to provide the best goods and services to the consumer but instead they want to drive stock prices up until they get filthy rich and then walk away while the house is burning down with they massive “severance” check.
There is good reason to blame regulation, not deregulation in this whole mess. The financial markets have not been deregulated in whole at any time in the last 50 years. That one or two regulations were repealed does not erase the effect the entire regulatory scheme has on business and the flow of capital.
Banks heavily leveraged in mortgage investments are in trouble because of the distortions in the housing market caused in large part by Fannie Mae, not simply because Glass-Steagall (regulation) was replaced in 1999 with less restrictive regulations (Gramm-Leach-Bliley Act). While it is true eliminating the barrier between investment and commercial banking puts commercial deposits at risk (and the Feds through FDIC), the failures we are now seeing aren’t because of that risk.
Fannie Mae (at the root of this particular crises) and the Community Reinvestment Act (CRA), which represents regulation, essentially forced banks into many of these bad mortgage risks. The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities, written in 2000, explains how money was funneled into left wing groups such as ACORN Housing (community organizers) and NACA, who directed many of the bad mortgages now at the root of the sub-prime mess.
Some economists have been warning of the dangers of interventionism since last century. Here’s one from 1950, explaining why partial government intervention will eventually lead to socialism (whole government intervention). It isn’t a path a years, but many decades, and we are quite near the end.
It is also worth noting this report issued in 2004, by regulators, warning Congress and whoever would listen of the fraudulent accounting at Fannie Mae. Some in Congress did listen:
Todd in FL Reply:
September 19th, 2008 at 10:18 am
I should add that I’m not saying the fraud at Fannie Mae is the ultimate cause - I do blame Fed monetary policy and years of cheap credit for mal-investment everywhere, not just the mortgage markets.
Sweet Random Mutation & Natural Selection in Nature! Could we unlock the friggin’ spam trap for registered users? It would be nice to be able to post a link-rich response to the link-filled entry at the top.
Brian,
Would you please remove my post from last week from the moderation queue?
Dr Ravi Batra DID in fact predict this - he was just off by a few years - His book “The Great Depression of 1990″ He has written several others - Hey I have a question: Why didn’t the Fed do this in 1929? Hmmmmmmmmmmmmmmmmmmm
[…] reference to one of the few people who said this crisis was coming way back when (as mentioned in a previous post). Dean Baker offers several “progressive conditions for a bailout,” which I find a […]