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December 18, 2010


Danube of Thought

I suggest we await the analysis by the No Labels people. They are bound to give us the straight scoop, and without rancor.

Cecil Turner

However, the numbers don't tell that story very convincingly - the conservator's report on Fannie and Freddie from 2010 showed them losing market share during the housing boom.

Okay, I'll admit this stuff ain't my cup of tea, but the place I'd expect to find the main losses is where Fannie and Freddie guaranteed the loans (which is what I thought "underwrite" meant). And this from the conservator's report seems to speak to that point:

Single-Family Credit Guarantee Segment Results

Credit-related expenses have been the primary driver of losses in the Single-Family Credit Guarantee segment. Nontraditional and higher-risk mortgages concentrated in the 2006 and 2007 vintages account for a disproportionate share of credit losses.

But I'm not sure what I'm reading here.


So, um anybody read Iowahawk lately?

I think I even did a LUN!


The story goes that Mrs. O'Grady's cow kicked over a lantern and began the Great Chicago Fire of 1871, but it can be proven, beyond any doubt, that Mrs. O'Grady's cow didn't directly set each of those destroyed structures on fire. But does it really matter ?

Fannie Mae and Freddie Mac set the stage for a market awash in "toxic assets" which lead to the Financial Panic of 2008.


I suggest we await the analysis by the No Labels people. They are bound to give us the straight scoop, and without rancor.

Yeah, or that knowledgeable guy "Most Economists" that Clarice told us about...what is his opinion on all this?


That's pretty damned funny there Janet!

Lots mo suckahs than befoahs.

Whoa, Donald; 'Demagogodden' is pretty damned funny there.

H/t IH.


Kim, I don't h/t properly do I?

I got no couth...anywhere.


Breaking: DREAM Act cloture vote fails, 55-41


The financial crash wouldn't have happened - at least to the extent it did - without the uncertainty of knowing which firms were exposed to mortgage losses as well as the fear that their balance sheets couldn't be trusted. Not being able to accurately assess risk, the market reasonably concluded that everybody was tainted... and potentially fatally so.

And I'd argue that Fannie and Freddie's cooking of their books played a large part in creating the atmosphere in which the balance sheets of even supposedly establishment firms were suspect.


If FM/FM stood ready to purchase those mortgages (or the assets backed by them), they effectively set the value whether they actually held them or not. Just like when the government sets the price of cheese by promising to buy any excess at that price--they don't actually have to buy much of it. So whatever FM/FM were willing to value the crap at, if it was any higher than their fundamental value, they were responsible.

Sword of Damocles

"I am confident that the largest players in the US mortgage market played a role in distorting that market."

An oblique and understated admission, but any crumb from Maguire's plate of day old bread is worth noting.

Is he perhaps venturing onto the undiscovered
landscape of Wikileaks? You are coy, Maguire.


Posted at 11:30 AM ET, 12/17/2010
WikiLeaks' Assange says he'll release bank information in Jan.
By Sarah Halzack

In an interview with CNBC on Friday, Julian Assange said his organization plans to release information about banks some time in January.

The WikiLeaks founder did not say which firms would face leaks or what type of data or information that would entail. But in recent weeks, speculation has swirled that Bank of America is the prime target. Those assumptions are largely based on an October 2009 interview that Assange gave to Computer World, in which he said, "At the moment, for example, we are sitting on 5GB from Bank of America, one of the executive's hard drives," he said. "Now how do we present that? It's a difficult problem."

Assange also said Friday that his organization "has been attacked" by banks in the United States, United Kingdom, Dubai and Switzerland. It was unclear what type of alleged attacks he was referring to.

Keep an eye on how Bank of America's stock performs today. The last time Assange spoke of his plans to release information about a financial institution, Bank of America's stock dropped more than three percent."

Well, investors pay as much attention to Wiki as Maguire does.

Let's see how they do in January......

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Have I said I'm not an economist? Nope, I'm not. With that caveat, perhaps the more econ literate could comment.

It seems to me that the US economy from Reagan on can be characterized, in part, by a number of disturbing phenomena.

1. Flat personal income for the middle class, ameliorated by cheap foreign consumer goods imports.

2. Booming income growth for the wealthy (where does that fit in, here?)

3. A series of recurrent speculative bubbles on an increasing scale culminating in the collapse of the housing bubble and the near collapse of our financial system.

How does all this interrelate? TM is surely correct to maintain that the official GOPer version, while correct as far as it goes, is not an adequate global explanation. How about the role of USG policy--treasury, commerce--and the related Fed policies? The runup in debt both domestically and militarily plays a significant role as well. But it seems to me that we need to focus on the recurring bubbles and the failures to get control over the financial system in their aftermath is key, as part of a systemic problem of interrelated parts.

I think Niall Ferguson in Money (title?) tries to give a global overview.


Breaking: DREAM Act cloture vote fails, 55-41

Praise the Lord!!

LUN details at The Corner

Default or Eat Crow

"Breaking: DREAM Act cloture vote fails, 55-41"

S'OK. Let it wait for the new Dream Congress.

Immigration reform is really their baby, anyway.

The real fun begins when the Newbies heads start exploding in February.

'To raise the debt ceiling, or not to raise the debt-ceiling. That is the question'

Default or Eat Crow

I'm assuming the Newbies will understand the consequences of keeping the debt ceiling where it is.

See, Maguire? Going out on a limb ain't so bad.

Default or Eat Crow

DADT gets cloture vote 63-33.


Default or Eat Crow, I'll bite (pun intended). I'm for maintaining the ceiling and wringing as much debt out of the system as is reasonably feasible. With some of the TPers, I agree that everything has to be on the table, including military spending (which is to say, not necessarily cutting base defense spending, but reevaluating what's going to foreign adventures). Social spending, bailouts, ag subsidies--all reevaluated with the ceiling in place.

Steve C.

There's plenty of blame to go around. I completely disregard anyone if the first thing out of his mouth is "WHO" caused the problem. Leaders should be saying "WHAT" can be done now to fix things and "HOW" we can structure things in the future to prevent disasters in the future.

I would also create a new section in the SEC. It's been said that Napoleon had an idiot assigned to his staff. After he created a battle plan he would have the idiot read it and explain it to him. If the idiot could understand the plan, the generals could understand it. I would hire half a dozen of the smartest guys on Wall Street for a million dollars a year on a five year contract. Their sole function would be to invent financial strategies that complied with the letter but not the spirit of laws and regulations.

Danube of Thought

I don't think we should reach any definitive conclusions before hearing from Air America. Wouldn't be prudent.


I agree with jimmyk.

Would it have been possible to so aggressively float so much mortgage debt (of increasingly dubious character) absent the IDEA that the GSE's stood by to back up or prop up the bulk of the mortgage market?

Perhaps. If you were in a market where it was believed that there was buyer of last resort (with gigantic if not unlimited buying power) wouldn't that give you quite a bit of comfort in the additional risk you assumed? Especially if you KNEW that buyer was a)sensitive to political pressure b) generally a proven incompetent c) subject to other forms of "influence" as well?

While there isn't a "bright line" one can point to that proves the GSE's were to blame (much less to what degree) I find it fascinating that so many people casually and entirely dismiss the idea that the GSE's were/are not an enormous "moral hazard" to the whole consideration of mortgage debt risk.

Is it so absurd to think that many of the private parties that accepted the increasing risk in this market imagined (somehow) that the GSE's would either elect to back them up or be forced to do so at some point? Isn't this what HAS transpired to a significant degree anyway?


Is that your definitive conclusion? No definitive conclusions?

Default or Eat Crow

"I'm for maintaining the ceiling and wringing as much debt out"

That's the scary part. These Tea-Baggers don't care if they burn the hospital down
to solve the problem of escalating healthcare costs. (No hospital-No problem)

Napoleon used to have an idiot employed to read his tactics and strategies. If the idiot understood the papers, Napoleon knew his generals would understand it.

See any correlation?


burn the hospital down to solve the problem of escalating healthcare costs.

Not helpful as commentary. I've never seen that suggested, and I do know that there have been serious GOPer healthcare reform proposals. Wringing debt out of the system can be done in various ways, including systemic/structural reforms.

Danube of Thought

No definitive conclusions?

Not until we hear from Air America.

Those were the days my friends, we thought they'd never ends.

Oh, no, Donald, you attributed, and linked, just fine. Besides, the only place we had couth was at Seixon's.


GSEs with subsidized tax free borrowing were competing with private sector and lost how many hundreds of billions. GSEs also had history of corporate fraud conterance by dems in congress and set bad influence.

Default or Eat Crow

"I've never seen that suggested,"

Did you see quotation marks?

It's the IDEOLOGY of Ignoramus Americanus that concerns me.

Was that more helpful?

Cecil Turner

Oh goody, a troll dialogue (trollogue?).

Robert Bell

Tom: I look forward to your OEP, and in particular to how you might answer Barry Ritholz's ten questions (which I think are valid for anybody, not just GOP members of the Financial Crisis group).


There are probably more than 10 putative causes, and in effect only one data point though. While there were housing bubbles in many countries, local conditions might be able to explain them (e.g. Spain, Ireland), but maybe not if globally low interest rates were a necessary precondition.

I'd also have no idea how to understand if there were any proper subsets of Barry's 10 ideas which taken together could have caused the crisis.

jag: here is non-glib discussion



Robert Bell, Ritholz' ten questions are excellent IMO but most focus on technical issues re regulating the financial markets (as I understand it). I'd be interested in whether any of this can be related to systemic issues in our larger political economy (debt, trade, etc.). Haven't checked the other links yet.


How about 'Trolls agog'. Me, I'm agnog. Or is it me for eggnog.


Let's go back to Fannie's own press releases.

They bragged of their guarantee on a trillion dollars of loans to those who "otherwise would not have qualified".


Global Housing Boom
By Barry Ritholtz On July 20, 2010


“Can you support your position, in a fast, easy way, why the US housing boom was NOT caused by Fannie and Freddie, or the CRA? I understand all the factors you laid out in the book — but I would like to see more evidence to support your view.”

Well, its difficult to prove a negative — supporters of the “FNM/FRE/CRA caused it” should have to prove their case, as I did in Bailout Nation [1].

However, I have always found this chart to be quite compelling:

[Chart showing more extreme housing bubbles, mostly in Euro countries]

Pray tell what caused the same boom and bust in these other nations?

And how could Fannie/Freddie or the CRA be responsible — that only applies to the US — when you have the same, global, coordinated rise in prices? (And you can add Korea and New Zealand to the chart above).

For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

And if you can’t answer that, then what hope do we have that you will offer up empirical evidence that Fannie/Freddie/CRA caused this in light of the above?

UPDATE: July 21, 2010 10:35am

In a discussion with some of the more vocal “FNM/CRA caused the crisis” advocates, I made the following point that seems to have resonated with a few of them:

We must distinguish between US legislative policy — and that includes Fannie/Freddie and the CRA — with the monetary policy of the US Federal Reserve, and its impact around the world.

American legislative policies had some impact domestically, but the total result of the CRA was not global, not was the GSE impact Global. Hence, how could FNM/FRE/CRA cause a global housing boom & bust? Answer, it didn’t.

The US Federal Reserve’s monetary policy, on the other hand, did have a global impact. The US has the world’s reserve currency, the biggest economy and the most important central bank. When the Fed took rates down to 1%, it had an ginormous impact on everything priced in debt, dollars or leverage. That includes housing, around the world.



While there isn't a "bright line" one can point to that proves the GSE's were to blame (much less to what degree)...

Two points:

1. GSE bonds were on the books of foreign central banks everywhere and treated as sovereign debt because of the "implicit" guarantee. When those bonds started to decline in value it started a global balance of payments crisis.

2. Preferred shares of the GSE's were counted as Tier 1 capital at numerous local and regional banks, and when Paulson got his bazooka, those banks had a non-trivial amount of their Tier 1 wiped out requiring another bailout.

Gog of MaGONG plays ping-pong with his ding-dong

"How about 'Trolls agog'. Me, I'm agnog. Or is it me for eggnog.'

Helpful commentary.


You can bet Fannie Mae and Freddie Mae were the culprits. They had a reach for beyond government loans. They wrote the "risk" rules that all banks followed. So you can't just look at the loans they handled. Those risk rules required "no doc" loans and 110% loans. They failed to account for the rapid increases in appraised values.

But you also must blame the Federal reserve. They kept interest rates too low for too long. As Greenspan later stated, they relied on computer models for decisions. If he only had 30 years of data, rather than 20 years of data, he would have forseen the housing crises. That explains the lack of common sense. They used computer models with incomplete data. That amounts to a fatal flaw. A fatal flaw repeated in Climate Data used in Climate Models supporting Global Warming.

Danube of Thought

Has Janeane Garofalo been heard from? I suspect that there's a flat-out racist angle behind all of this.


If he only had 30 years of data, rather than 20 years of data, he would have forseen the housing crises.

Did Greenspan claim that? Do you have a link? That makes no sense to me. Macro data goes back at least to 1947, and most housing data I'm aware of goes back to 1970 or the early 1960s.

As for Ritholtz's point about the worldwide housing boom: The issue to my mind is mortgage valuation, not home price valuation. Lots of things can cause house prices to go up and down. What FM/FM did was inflate the value of mortgages (or assets backed by them), making them vulnerable to a house price decline. I don't know to what extent other countries did similarly idiotic things.

Just because something happened in more than one country doesn't mean that there aren't similar country-specific things going on all over. Ireland bailed out its banks, essentially providing government backing to mortgages.

But I guess a certain poster prone to cutting and pasting must be backing off from "It's Bush's fault", since we know that the housing boom was world wide.


FNM had a huge impact on the housing crisis, far beyond simple interest rate variations.

The only way sketchy underwriting (zero doc and low doc) loans could have been supported at scale was if Fannie Mae allowed them to flow through the system.

This massive, largely bogus block of business is the 90% underwater iceberg that ended up sinking Lehman.

Of course, no discussion is complete without touching upon Andrew Cuomo, Architect of Ruin.



Double narcisolator.


But I guess a certain poster prone to cutting and pasting must be backing off from "It's Bush's fault", since we know that the housing boom was world wide.

jimmyk, I'm sorry to see you choosing to snipe at me rather than addressing more of the issues that are being raised here. I pasted in Ritholtz 1) because he seemed to offer a succinct argument supporting TM's concerns/reservations that would also be easy to address, and 2) because discussion on an important topic seemed to be flagging. Ritholtz, as I think is well known, places the major share of the blame for what happened WORLDWIDE on the Fed. It still happened--or at least came to a head--during the 8 years of the Bushie presidency. Why should I back off from blaming Bushie?

Since no one seems to have addressed some of the other issues raised in the links that Robert Bell provided--although those links appear to my non-expert mind to be relevant--I'll do another paste job of a post that may offer TM further ammunition. In a way, it seems to address the Fed's involvement with the GSEs--perhaps a significant part of the puzzle. If jimmyk prefers to nip at my ankles (to do which requires a rather undignified posture)--so be it. I'd prefer that he address the issues rather than vent his personal animus:

This acquisition of mortgages was enabled by issuance of debt by the GSEs which currently amounts to about $1.5 trillion. Investors were willing to lend this money to Fannie and Freddie at terms more favorable than are available to other private companies, despite the fact that the net equity of the enterprises-- about $70 billion last year-- represents only 5% of their debt and only 1.5% of their combined debt plus mortgage guarantees. If I knew why investors were so willing to lend to the GSEs at such favorable terms, I think we'd have at least part of the answer to the puzzle.

And I think the obvious answer is that investors were happy to lend to the GSEs because they thought that, despite the absence of explicit government guarantees, in practice the government would never allow them to default. And which part of the government is supposed to ensure this, exactly? The Federal Reserve comes to mind. I'm thinking that there exists a time path for short term interest rates that would guarantee a degree of real estate inflation such that the GSEs would not default. The creditors may have reasoned, "the Fed would never allow aggregate conditions to come to a point where Fannie or Freddie actually default." And the Fed says, "oh yes we would." And the market says, "oh no you wouldn't."

It's a game of chicken. And one thing that's very clear to me is that this is not a game that the Fed wants to play, because the risk-takers are holding the ace card, which is the fact that, truth be told, the Fed does not want to see the GSEs default. None of us do. That would be an event with significant macroeconomic externalities that the Fed is very much committed to avoid.

While I think that preserving the solvency of the GSEs is a legitimate goal for policy, it is equally clear to me that the correct instrument with which to achieve this goal is not the manipulation of short-term interest rates, but instead stronger regulatory supervision of the type sought by OFHEO Director James Lockhart, specifically, controlling the rate of growth of the GSEs' assets and liabilities, and making sure the net equity is sufficient to ensure that it's the owners, and not the rest of us, who are absorbing any risks. So here's my key recommendation-- any insitution that is deemed to be "too big to fail" should be subject to capital controls that assure an adequate net equity cushion.

While I think the answer to our question may begin here, it certainly doesn't end, as indeed, thanks to Lockhart, the growth of mortgages held outright by the GSEs in 2006 was held in balance, and we simply saw privately-issued mortgage-backed securities jump in to take their place, with their share of U.S. mortgages spiking from 8.6% in 2003 to 17.4% in 2005. One might argue that the buyers of these private securities may have made a similar calculation, insofar as the same aggregate conditions that keep Fannie and Freddie afloat would perhaps also be enough to keep their noses above water. Or perhaps Professor Shiller is right, that psychologically each investor deluded himself into thinking it must be OK because he saw everybody else doing the same thing. Or maybe they were more rationally thinking, "the Fed wouldn't let us all go down, would it?" And the Fed says, "oh yes we would." And once again, regulation, not selecting an optimal value for the fed funds target, has to be the way you want to play that game.

If these bad loans were all a big miscalculation, perhaps that is something the Fed might consider addressing as a regulatory problem as well. The flow of accurate information is absolutely vital for properly functioning capital markets. I have found myself frustrated, in looking through the annual reports of some of the corporations and funds involved in this phenomena, at just how difficult it is to get a clear picture of exactly where the exposures are. I think the accounting profession has let us down here, which you might describe as a kind of networking equilibrium problem. But if the Federal Reserve were to develop and insist on certain standards of accounting transparency for its member institutions, that might help to be a stimulus to get much more useful public documentation for everybody.


Let me say it perhaps a bit more succinctly: if Ritholtz is correct that Fed policy is the prime cause of the worldwide problem, and if that Fed policy which is most at fault was front and center during the two Bushie administrations, it would stand to reason that I would continue to blame Bushie.

The lengthy excerpt I just pasted may be relevant to Rich's post, above. Comments of course are welcome.


Anduril, I did both address Ritholtz's argument and jab (not snipe) at you. I think it's only fair to point out that his argument undermines all the sniping (yes, that word) about how "Bushie" helped to create the subprime crisis.

I do think the Fed played a role in the boom and bust. I'm not as convinced of its worldwide impact. But movements in home prices wouldn't have caused a financial meltdown were it not for the mortgage mess that FM/FM and TBTF (the latter being a worldwide phenomenon) helped to create.

Oink ! Oink !

"But movements in home prices wouldn't have caused a financial meltdown were it not for the mortgage mess that FM/FM and TBTF (the latter being a worldwide phenomenon) helped to create."

When Wiki releases the BofA shenanigans, I'm sure you guys will pinch another loaf of sophistry to deflect from Bush Dynasty, and once again, blame big gubmint for not reigning in the Greeheads who know no bounds.

Oink ! Oink !



Things are stuck right now. FMA & FMAC are broke and the banks have toxic assets on their books the can't get rid of (their fault).

The banks can't even sell the trash at the 50% discount they could get for them because it would reduce their capital holding requirements (even though everyone already knows the toxic assets are not worth the 90% they claim).

Thus,the banks are stuck and can't lend, even though that's what they got the TARP for. But don't feel sorry for the banks, the toxic asset losses belong to them, not the taxpayers. They should have been allowed to fail and the toxic assets gotten rid of in the usual way and they'd be gone by now and lending would be occurring.

The old legacy "Money Trust" banks run by the usual bankster suspects are to blame: Citibank, Goldman Sachs, JPM, and some BAC.


I think it's only fair to point out that his [Ritholtz's] argument undermines all the sniping (yes, that word) about how "Bushie" helped to create the subprime crisis.

Well, I think I responded to that fairly cogently:

if Ritholtz is correct that Fed policy is the prime cause of the worldwide problem, and if that Fed policy which is most at fault was front and center during the two Bushie administrations, it would stand to reason that I would continue to blame Bushie.

And it's equally fair to point out that anyone who googles "barry ritholtz bush" will find ample evidence that Ritholtz does indeed believe that Bushie helped to cause the crisis. He gives plenty of credit to Clinton, as well, but argues (through a proxy) that Bushie (actually "Baby Bush") may have been the worst president in history.

It's always possible that Ritholtz misunderstands his own arguments and fails to realize that his own arguments absolve Bushie of blame. However, I think the presumption to be overcome is that Ritholtz understands his own arguments and that his arguments do NOT absolve Bushie but, rather, point to Bushie as one of the prime culprits--just as he claims they do.


kguerra, by extension, i take it that you don't think that obama calling corporate leaders to the white house and demanding that they hire will solve the unemployment problem either?

Melinda Romanoff

Does anybody dare to measure the impact of THE carry trade in international asset prices?


How many institutions would fail without carry trade? Were they just too big to fail?


Does anybody dare to measure the impact of THE carry trade in international asset prices?

I certainly don't. However, if you google "impact of THE carry trade in international asset prices" you'll come up with quite a few hits--actually, about 276,000. You be the judge of whether they're relevant.

Modifying the search to "measuring the impact of THE carry trade in international asset prices" brings the hits down to 215,000. I'm guessing that among all those hits someone dared to measure the impact. With what results I couldn't begin to guess.


that Fed policy which is most at fault was front and center during the two Bushie administrations

The president does not set Fed policy. He can only influence it through his choice of people on the Board, a small minority of the FOMC. Bush inherited Greenspan.

I don't actually care what Ritholtz thinks about Bush. If he doesn't recognize the inconsistency of his own arguments, that's his problem.

Melinda Romanoff

Keep in mind the Original carry trade is twenty years old this year. The hedgefund industry was largely financed by it.

Anything Greenspan did was peanuts compared to what this source of funding wreaked in global assets. Unfortunately, it also treated real estate as a liquid asset.



The president does not set Fed policy.

I knew that.

Bush inherited Greenspan.

Knew that, too.

He can only influence it through his choice of people on the Board, a small minority of the FOMC.

That's the theory. However, if you're telling me that the FOMC exists in a bubble and cannot be influenced except by discussions among themselves, then you can respectfully color me skeptical. My belief is that the President, through his appointees to Treasury and to economic advisory positions may influence Fed actions. It's also my belief that Congress may have some influence over the Fed. Here is a site that gives the arguments pro and con:


On paper the Federal Reserve System appears to be relatively autonomous, since it receives its operating revenues from its constituent banks, not from congressional appropriations, and since its governors, once in office, cannot be dismissed by the president. The governors' long terms mean that an occupant of the White House cannot expect to pick a majority of the governors. The Fed, moreover, conducts its meetings in private and is under no legal obligation to report to the executive branch. Given these conditions, one might think it could escape public accountability altogether.

Yet the Fed is also the creation of Congress, which takes a strong interest in its work and can always amend its charter. Furthermore, as a practical matter, the Fed's officers have to interact daily with senior executives in the Treasury Department, the OMB, and other agencies. The chair frequently testifies before legislative committees and regularly consults with the president's staff. All members of the board of governors realize the value of maintaining support at both ends of Pennsylvania Avenue because they know determined political opposition can undercut their policies. In short, the Federal Reserve's statutory independence does not immunize it from political pressures.

The ill-defined boundaries between the Fed and the rest of the Washington establishment leads to endless debates about its autonomy. Some observers emphasize the Fed's political nature, arguing that it pays close attention to the desires of the White House. Presidents normally want the money supply to flow freely enough to keep the economy booming and will pressure the Fed to achieve that result. Members of the board do not want to antagonize the chief executive and, if pressed, often cave in.

Some political economists go even further: They detect a political monetary cycle (PMC), during which the Fed relaxes monetary policy in the months before a presidential or congressional election, hoping that business will pick up and thus make the incumbent president's party shine in the eyes of the electorate. As soon as the campaign ends, however, it tightens the screws again to hold down inflation. According to this interpretation, the Fed rhythmically starts and stops the economy for partisan purposes. If true, the existence of a PMC would suggest that the Fed is at least indirectly accountable to the people, as democratic theorists hope.

Others, however, doubt the Fed's susceptibility to presidential influence and question the whole PMC concept.

You disagree, no doubt, but I think this is an issue that is open for debate. Certainly it IS debated. My argument is that if responsible players in WDC--the President, Treasury Secretary, economic advisors, members of relevant Congressional committees or some combination of the above--all express concern over Fed policies the Fed may in fact be susceptible to rethinking its policies.

I don't actually care what Ritholtz thinks about Bush.

That's fine, and you're not required to care.

If he doesn't recognize the inconsistency of his own arguments, that's his problem.

I agree. However, the question remains, are his arguments inconsistent with the view that Bushie is to blame, to some significant degree, for the problems that we're experiencing? I quoted one blog post arguing from one graph. It would hardly be fair to Ritholtz to dismiss his views based on my non-expert selection of his views. The fact is, that blog post was a fairly short presentation for a limited purpose--to argue against the official GOPer view that FM is THE cause of all the trouble. The post isn't intended to be a comprehensive presentation of his views--I presume that's what he wrote his book for. As far as I can tell, Ritholtz traces the causation to the Fed but also to legislative action and executive attitudes toward oversight--as in his ten questions. And he claims that Bushie deserves a major share of the blame.

In short, I still think TM is raising legitimate questions.


Thanks for that contribution, Mel. I'm actually trying to provoke a flow of information/views here. I'm going to assume, before heading to dinner, that Ritholtz's "ten questions" play into that to some extent.


In response to Mel's post, let me offer this paste job:

Dollar Carry Trade and Asset Bubbles
The global equity markets have been racing away since their March 2009 lows and one of the primary reasons for this upside is the easy money available to speculate in different asset classes. There is no doubt that the global economy has shown signs of recovery (backed by Government stimulus). However, things are still not that rosy that markets can trade at such high valuations. A large part of this upside in markets have been driven by this easy money.

This can lead to the formation of several asset bubbles in different countries and different asset classes in the long run. The Federal Reserve has recently assured the global speculators that they can go on with their speculative activities by hinting that interest rates would remain low for an extended period. This is not surprising as far as the Fed is concerned. After the NASDAQ bubble, they had kept interest rates artificially low for an extended period and this helped create the housing bubble and subsequent crisis.

However, here the strength of the Fed's policy is largely blunted. The Federal Reserve has no control over where the bubbles are created. Ideally they would have wanted all the excess money to go into different asset classes in the U.S. itself as they are obsessed with the need for creating inflation or preventing deflation at any cost. But a large part of these excess funds are getting deployed into asset classes in emerging economies. I wonder how this will help a majority of Americans.

So, in the long run the Dollar Carry Trade has the potential to create several asset bubbles in different asset classes and lead to further difficulties and crisis in financial markets.



Other economists fault Greenspan for his failure to closely regulate big banks. Alan Blinder ... says that the delay in raising rates in 2003-04 was a "minor blemish" on Greenspan's "stellar" record managing monetary policy. But Blinder says that he would give the former chairman "poor marks" for bank supervision, another key role of the Fed. ...

"Lending standards were being horribly relaxed, and the Fed should have done something about that, not to mention about deceptive and in some cases fraudulent practices," Blinder said. ...

Greenspan said that most of the subprime mortgages were originated by firms regulated by other agencies, but he adds, "In retrospect it was clearly a mistake" not to examine bank lending more closely. ...

Could the executive branch (the President) not have demanded some action, better supervision?


Donald's Iowahawk LUN is just great.
Chaos in the Dem-WH-progressives camp!

"Man, look for some heavy sh.. to come down," said one Democratic consultant familiar with the feud. "Will the White House start tapping congressional phones and auditing Soros organizations? Will Congressional Democrats join the GOP in issuing subpoenas of administration officials? Will the netroots start spilling the beans about illegal Democratic campaign activities? I'm telling you, it's gonna be 3-D Demoggedon, and the only ones who will survive are the ones who bomb first."

"Listen, you didn't hear this dish from me," he added in a furtive whisper, "but I hear one of the sides is working with Wikileaks."

Well, with Assange calling for Obama to resign, I guess that rules out Obama. Or it might be a self-inflicted boomerang.

Melinda Romanoff

Close, but the "Dollar Carry Trade" dates from late '07.

I'm talking about the one that started in '94-'95 in Japan, after their real estate bubble blew up in '88. Keep in mind we were still finishing the RTC and banks were under stress at the time.

Everybody seems to forget what was going on elsewhere in the globe at that time.

My personal opinion? Blinder and Rivlin, back then, were of the same mind as Summers and Romer were recently.

Don't get me started on Indonesia's problems and what Summers did to help, let alone his little hatchet man along for the ride. Ruined their economy for a long time.

I'll try to point out some of the more reasoned commentary of the period. the stuff you've dug up, interesting as it is, might be construed as a tad myopic. I wouldn't waste your time there, or get too worked up about it. Capital flows and comparable rates of return take a bit to explain.

None of which I can remotely do justice to right now. Sorry.

There's a reason the Fed is independent. For an example when it's not, look up Arthur Burns and what he did under Nixon. (That idiot doormat, IMO, set up the inflation of the 70's.)


OK, thanks. Look, there are a lot of people like me. We know this is all terribly important for the future, we want to be informed about it all, but how to understand it? Lots of people with impressive resumes for virtually every position. It seems clear that we were over leveraged, but how did that happen? Mismanagement/neglect of a basically OK system, or are these recurring bubbles, etc., symptomatic of systemic economic problems? If you tell me, I'll write the book and put your name in the acknowledgements. :-)

Melinda Romanoff

If my name leaks out, I get shut down as a business.

Soooo, I think I'll pass on the book.

Believe it or not, Mises covered a lot of this back in 1913, following a similar bubble in Austria in the 1890's, and it was global then as well. The problem back then was the strict (attempted) adherence to a metal standard in one currency, while the other floated. And, yes, Austria had two back then (Austro-Hungarian Empire, Add Russia, and that pretty much was eastern Europe and most of Asia, none bigger). They diverged, then bwammo. Out of that grew the Austrian School of Economics. Bright boys.

I'll ask you a simple question that I find very compelling for today's politics: Given that both populations are experiencing a deflationary credit contraction (trust me on this one), are the citizens of the US today better economically educated than their conterparts of the 1930's, and where is this most easily demonstrated?

Had there not been a Reagan, how would you have answered that?

Interesting, isn't it?

Gotta go.

Carol Herman

The papers were TOXIC! It stopped making sense, because snips of the paper were repackaged as "whole foods" ... when they were not.

You cannot REPO a house that's owned by hundreds of investors, who have FRAUDULENT paperwork! Sure. Lots of this crap flowed through our courts.

And, trillions of dollars went to China. Where many more investors thought they were buying American properties. When they were only buying TOXIC STOCK.

And, the bubble also pushed prices sky high. They've flattened out some. But lots of the banks aren't even putting this crap out on the market.

Ah, and then you go to China and you see GHOST TOWNS. That's another clue. Places were cities go up. And, no one lives in them. And, there are no cars. No city street life! (But a lot of money was earned by a few.)

Will it collapse in China, first?

With housing prices DOWN you cannot have inflation! With unemployment high, you cannot get the "car out of the ditch it is in."

And, the Federal Reserve Bank is a PRIVATE enterprise! Does no banking. It just sends out zeroes to member banks, who pay them a fee. Run by men NOT elected to office.

When was the Federal Reserve Bank created? back i 1920. When J. P. Morgan, and John Rockefeller 'merged' their fortunes and gave birth to this giant. Which is now global. Just in case you didn't know.



That link you gave to Watts Up, ">http://wattsupwiththat.com/2010/12/18/how-germanys-weather-team-views-the-hottest-year-ever/#more-29647"> How Germany’s weather team views the “hottest year ever” was excellent.

The German's are beginning to call BS on AGW, plus saying the Polar Ice Cap may grow and we may be entering a Little Ice Age. Who'd a thunk it. Amazing.

Army of Davids

I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.
Friedrich August von Hayek

Army of Davids

The spread between conforming (Fannie and Freddie) and Jumbo introduces lower mortgage rates to the market via government guarantee (formerly implicit...now explicit)

What does this do?

It increases the leverage in buying the underlying real estate asset.

This 100 to 150 bps is a central part of what blew up housing boom and bust.

But it isn't the only way Fannie and Freddie helped blow up the housing market.

Army of Davids

Should say

This 100 to 150 basis point spread is a central part of what blew up the housing boom and bust.

Fannie and Freddie also had internal leverage ratios that would make an investment banker blush.

Not to mention accounting fraud and serious internal conflicts of interest. (See CountryWide "Friends of Angelo") That didn't help.

Conservatives should look forward to this debate.


I'll ask you a simple question that I find very compelling for today's politics: Given that both populations are experiencing a deflationary credit contraction (trust me on this one), are the citizens of the US today better economically educated than their conterparts of the 1930's, and where is this most easily demonstrated?

Had there not been a Reagan, how would you have answered that?

1. Not to me.

2. Very tough. Today I believe I see greater faith in "experts." A stronger sense of "it can't happen here." In the 1930's I think the embrace of the New Deal may have been more out of desperation. People as a whole lived closer to a more basic level of economy activity, i.e., farming, manufacturing, trade, rather than finance.

3. The election of Obama--not that the GOPers offered much of an alternative.

4. I'm not sure people have learned much from Reagan.

Look forward to comments/corrections.


Army, I agree conservatives (not necessarily GOPers) should look forward to the debate. I agree with TM that there was more going on than FM, and conservatives need to be on top of it. That's why I'm bugging people for answers/opinions.


(((trust me on this one), are the citizens of the US today better economically educated than their conterparts of the 1930's, and where is this most easily demonstrated?))

I don't think citizens are better economically educated today because, for one thing, the finance industry and its intruments are extremely complex so as to be mostly incomprehensible, unless one makes a life work out of it. And I don't doubt that back then, just as today, about 50% of the population saw things one way, and the other 50% saw them another way, so la plus ca change, la plus c'est la meme chose.


I'm still not sure what catalyst caused the crash in 2008, but the timing has me suspicious that it was somehow connected to the election. During the worst part of the crisis when McCain was acting the fool, Obama was so cool. Did he know something?


((Thus,the banks are stuck and can't lend, even though that's what they got the TARP for))

and here I thought it was so the executives could collect their bonuses

Army of Davids


I have been a real estate investor for a few decades now so it's a little easier for me to see than many.

Lower interest rates will encourage higher asset prices.

Fannie and Freddie provided this in mortgages for the conforming market. (spread vs jumbo mortgage rates... a more true market)

When they are unwound... and they need to be for the long term sake of the taxpayer....they will result in a rise in mortgage rates of likely around 1.5% or 150 basis points.

That is far from the only way they contributed....but it is a solid place to focus.


You know Chubby, I think McCain gave up,
because he had tried to stop the subprime wave, and he had been rebuffed, it's like that episode of the original Twilight Zone, where the scientist goes back to try to assasinate Hitler,stop the Titanic from sinking, warn Pearl Harbor and Hiroshima, and no matter what he did, they happened anyways.For Obama, it's quite the reverse, he saw the opportunity like Adjami noticed about Canetti's wisdom of the crowds, and took ias a once in a life time opportunity, for'fundamental transformation'

Army of Davids

A good argument against GSE roles is that their were other housing booms around the world.

Spain is the most notable. What is not mentioned is that less fundamentally sound EuroLand economies benefitted with lower bond rates when they joined the EMU and were allowed to piggyback on Germany's sound credit ratings.

Chinese real estate is likely another worth considering. In this situation a lot of it is a result of "hot money" chasing the RMB based assets in China. In other words US fed policy and the dominant reserve currency has contributed to real estate booms in other countries. Yen carry trade likely was also a factor a few years back in getting this started.


thanks, Army.

yeah, Chubby, you and me both.


US fed policy and the dominant reserve currency has contributed to real estate booms in other countries.

i agree. what i wonder about is, at what level was the decision made to link our economy to china, and what was the thinking? did our rulers really think that all america could be transformed into an information economy?

Army of Davids


A few other areas where the government failed in the credit crisis.

1) Rating agencies.... a government sanctioned oligopoly. (Is this where ObamaCare takes health insurance companies?)

2) SEC approved 2004 investment banks increased leverage ratios from 12.5 to around 30 against Tier 1 capital (with allowances for other risk metrics to be considered instead)....regulatory capture or regulatory incompetence. This one is on Bush and McCain was right to call for Chris Cox resignation during his campaign.

3) The Fed...well a central bank monetary policy is in no way laissez faire.

4) Freddie and Fannie were twice mandated to increase the percentage of loans below the median loan size that they facilitated in the years leading up to the housing boom.

5) Office of Thrift Supervision (OTS) had oversight of Countrywide, WAMU and IndyMac. All major home lenders who underwrote sludge and kicked it on the secondary market. Regulatory capture? Regulatory incompetence?

6) Where were state regulatory agencies? In particular Arizona, Nevada, California and Florida.

Army of Davids

Again I encourage libertarians and conservatives to look into Fannie, Freddie, FHA, Ginnie Mae, OTS, OCC, state regulatory agencies, HUD, SEC, the Fed and other government involvement in the housing boom and bust that led to the credit crisis.

It is a conversation we benefit from.

Blaming this on laissez faire is misplaced. Saying there isn't a role for government is as well IMO. But the greed, corruption and incompetence around this event certainly didn't exclude government.


6) Where were state regulatory agencies? In particular Arizona, Nevada, California and Florida.

weren't they preempted in some cases by the feds?


Here's another example, I can't LUN for some reason;


Army of Davids


"hot money" into China has a lot to do with the very fast growth of their economy. Also has to do w/ capital controls of China's choosing. Some of our stupid politicians like to call it "currency manipulation". It's best they shut up.

But generally capital flows like water to where it is most loved. That is what has happened in China and India to a lessor extent. Right now it is not loved so much stateside. And even less in EuroLand.

Army of Davids

"were they pre-empted by the feds?"

Likely in some cases w/ TARP sized banks. But who knows. Point is the regulatory apparatus was there at the state level. If politicians in these four states had been worried about underwriting standards they probably could have made a difference.

Taxpayers in those states paid for the regulatory apparatus. I'm not one for a lot of regulation by any means. But the capacity to enforce underwriting standards if they wanted to was there from a means standpoint.


So Indymac was a spinoff from Mozilo's original operations


Army of Davids

Phil Angelides...former California Treasury and chairs the credit crisis (since the name of it escapes) report committee

I'll be interested to see if this guy gets attention for his role in California's coming issues w/ underfunded/overgenerous public pensions.

Army of Davids

I've read that IndyMac was the 3rd and the 7th largest lender from different sources. Likely 7th.

CountryWide and WAMU were two of the biggest.

CountryWide is now owned by B of A.

WAMU by JPMorgan.

MERS is another area where Fannie and Freddie played a role. MERS was getting beat up in the financial press for it's role in the foreclosure legal challenges.

Army of Davids

Isolating this to sub-prime is not the way to go. The housing boom and bust goes way beyond that.

It is only the sludgy little tip.


The subprime element, accounted for at least two of the six breached compartments, in the financial superstructure, much like S&Ls did
in the 1980s. MERS was certainly another factor as are others

Army of Davids

If Ritholtz blames the Fed for housing booms in EuroLand he is wrong on that.

You can look at the spreads on Spanish debt widen over the last few months as they are increasingly being viewed by the market as a credit risk that the Germany backed EMU is more likely to let ride on it's own economic/fiscal merits. Same in Ireland.

Spanish lending was benchmarked to the German Bund by default and US Fed policy played zero role in the housing boom and bust...which by the way could blow up the whole EMU.

May you live in interesting times.

Melinda Romanoff


You have the Chinese end of the monetary equation exactly backwards. They have pegged their currency to ours, not the other way around. When they stimulate their economy, growing at, according to them, 8.8% per year, they foster an overheat and inflation. How did they stimulate? Last year they lent out about $1.6T, and this year, $1.2T. They are running around the world buying up everything they can in 6.85 Reminbi per dollar. They have lots of dollars sloshing around at home. So they buy commodities, using dollars, this runs up prices. Some call it the Fed causing inflation, but might it better to be described as the off shoot of China abandoning their monetary policy to the Fed through the pegging of their currency to keep their cheap trade flowing?


You've nicely simplified somewhere between 25 and 30% of the actual events. I've said that before and I'll say it again. Far too quaint an answer, it's way more complicated than what you've tried to describe.

By the way, the hot money into China ranks below one tenth of what the Chinese have provided for themselves in one year. The deflationary pressures they've been able to export for near thirty years, let alone excess capacity, will keep the world economy slack for some time.

Melinda Romanoff

And, G'night.

Army of Davids

In the end it is Treasury and the taxpayer that has been forced to carry Fannie and Freddie as the government now appears to have one whopper of a Structured Investment Vehicle (SIV) backstopped by the taxpayer to the tune of around $150 billion and counting.

And the Fed has been forced to monetize hundreds of billions of agency issues as well. The lender of last resort becoming the secondary mortgage market by default and 90% of the secondary market funneling through Fannie, Freddie and increasingly Ginnie.

Army of Davids

Spanish debt blew up a housing boom and bust as the real cost of capital at the long end of the yield curve went substantially under the economic fundamentals of Spain.

They had German credit but with Spanish economic fundamentals.

Just like US borrowers were given taxpayer backed credit without the individual credit merits that a true market would have priced differently.

Spain's will be worse IMO.

Army of Davids

Thanks Melinda,

I'd put it at more like 40 to 50% myself. But we would likely agree that the complications of all this goes on and on.

I agree w/ you on China for the most part. They have let the air out of the balloon over there some 25% since July 2005 on currency issues so far but have likely got a lot to go.

And the "global savings glut" has been a factor both in the agency market and the treasury market. China has played their part. FOMC holds their share as well...no doubt.


Any explanation that doesn't feature and point to "Community Reinvestment Act" from Carter that was REGULATED into an economic distaster by Clinton's Justice Department via forcing bankers to loan to the Dem's constitiuency who could not afford the loans (minorities, poor, illegals, etc.) and to ignore things like salary, credit, ability to pay, etc.

Bankers used junk loans (interest only, adjustable rates, balloon payments) because these people couldn't qualify for a conventional loan and rate. But they were okay with it because for the first time the rules at Fannie and Freddie were changed to accept these subprime loans and boy did they.

They then bundled these loans (buried them more like it) and pushed them out to Wall Street as poison pills hidden in what used to be completely safe mortgage backed securities for the banks and Finance companies.

Loan originators were happy because they were making unprecedented fees so they went along with it right up until the bubble burst. The Dems - particularly Barney Frank, Barack Obama (who sued Citigroup as an Acorn lawyer to force more bad loans), and Chris Dodd blocked the Bush administration from Reforming Fannie and Freddie before they went bust with all the bad loans.

See "http://newsbusters.org/blogs/noel-sheppard/2008/09/20/ibd-carter-more-blame-financial-crisis-bush-or-mccain" for more details.

This crisis was caused by the Democrats believe that the Fair Market was meaningless and they could force lenders to give away loans to people who couldn't pay them, use Fannie/Freddie to cover it, and dump it on Wall Street to hide it. And of course the Media is completely uninterested in exposing it.

Cecil Turner

However, the numbers don't tell that story very convincingly - the conservator's report on Fannie and Freddie from 2010 showed them losing market share during the housing boom.

Okay, on rereading this mess, it's not at all clear to me that market share is a very useful measure of merit. In the first place, the total exposure is the sum of all paper held (essentially an integral of the market share graph), not the instant share volume. Secondly, it appears the real issue is how much of the really bad paper was held by the Enterprises. On the first, the general contention is that FM/FM held or underwrote about 50% of the market, which appear reasonable.

The second (more important) value is nearly impossible to suss out from the conservator's graphs, especially since they switch labels at truly annoying points. But for a representative sample, we can choose "Alt-A" (which appears in each table of interest), and view the critical years of 2006,2007. Per figure 1.1, Alt-A's accounted for 13 and 11 percent of the mortgage initiations, and (from 1.2) the enterprises had 40 and 58% of the MBS volume. But their percentage of "Alt-A" new business (primarily MBS issuance from fig 2.1) was about 20% on each. Which leaves a back-of-the-envelope SWAG of between 70% and 90% of the Alt-A's being underwritten by the Enterprises.

If that's valid and at all representative, the Enterprises are clearly the primary driver behind the resulting meltdown. I'd love to see something similar on the "subprime" loans, but can't figure out where the categories overlap (e.g., "interest only", "credit score <620," "LTV >90").


You have the Chinese end of the monetary equation exactly backwards. They have pegged their currency to ours, not the other way around.

I was speaking loosely. What I was trying to express was the idea that the US made the decision to import vast quantities of cheap consumer goods to ameliorate the fact that middle class income has been going nowhere for decades, when you look at some of the costs that have been skyrocketing (education, housing, etc.). The result was ballooning debt. My belief, which I can't really articulate, is that the Fed's actions were a reaction to this overall situation. Add in other factors, like GWOT, continued expansion of social welfare type programs, relaxed regulation.

I may bite the bullet and try slogging through Reinhart and Rogoff. Getting educated in this area without experience is tough.

Tx to everyone for comments.

Melinda Romanoff

To save you some time on R & R, take, on their good faith, that they have their data down cold, and read the last 96 pages on the US Credit contraction.

You will thank me for this later.

I understand what you were trying to convey, and here's what I was trying to counter. The manufacture of goods in China, where the costs of doing so, including shipping, was less than a penny per dollar cost here, also imported deflationary pressures on other aspects of the US economy. It was like opening a 30,000 sq ft facility that makes horseshoes, upriver from a blacksmith shop. That blacksmith had better drop his prices to stay relevant, or just become a service provider of installations.

That's just part of it. Nothing's as simple as just one aspect.

Cecil Turner

Okay, read through Ritholtz's ten questions, and I want my time back. He starts out with typical claims of how fair-minded he is, then delves into leftist ad hom ("reality based" "wingnut" etc.), which probably makes the trolls happy, lambasts the GOPers for blaming the crisis on government and GSEs, and then strives to prove his point.

Problem is, he immediately shores up the "blame government" position, as the majority of his points do exactly that. Fully half do this directly, lamenting purely government acts: 1, FED interest rates; 3, Commodities Futures Modernization Act of 2000; 4, Bear Stearns exemption; 5, repeal of Glass Steagall; and 9, lapse of Anti-Predatory Lending (APL) laws. The others do little to advance his case. Two (6 and 7) are essentially the same, citing the lending standards of non-bank lenders and their business model of securitizing subprimes through "wall street" (no mention that the prime "securitizers" were FM/FM). Finally, he's got the "global housing" point discussed above (8), one valid issue on credit ratings agencies (2), and a red herring about personal liability (10).

His conclusion says the concept is rather simple, and I have to agree. Because if that's the best counterarguemnt . . .

Army of Davids

Thomas Sowell has done some good work on the "Housing Boom and Bust"...highly recommend.

Agree w/ Melinda.."Nothing's as simple as just one aspect".

GSEs aren't just one aspect. But they are a good place to start.

Technology advances ...As well as a global labor arbitrage..is a dis-inflationary secular wind that the Fed is constantly trying to balance. Then there is the credit contraction as well. Though we seem to be seeing a flattening in that of late.

Worth keeping in mind when reading Reinhart and Rogoff as they look at history.

The Fed has one monster of a job on it's hands. These are times the world has never seen.

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