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The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules...

techs

Lifer
Sep 26, 2000
28,561
3
0
http://online.wsj.com/article/...915.html?mod=yhoofront

Ten Days That Changed Capitalism

The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse.

On the Richter scale of government activism, the government's recent actions don't (yet) register at FDR levels. They are shrouded in technicalities and buried in a pile of new acronyms.

But something big just happened. It happened without an explicit vote by Congress. And, though the Treasury hasn't cut any checks for housing or Wall Street rescues, billions of dollars of taxpayer money were put at risk. A Republican administration, not eager to be viewed as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess.

"The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II," economist Ed Yardeni wrote to clients.

First, over St. Patrick's Day weekend, the Fed (aka the Lender of Last Resort) and the Treasury forced the sale of Bear Stearns, the fifth-largest U.S. investment bank, to J.P. Morgan Chase at a price so low that a shareholder rebellion prompted J.P. Morgan to raise the price. To induce J.P. Morgan to do the deal, the Fed agreed to take losses or gains, if any, on up to $29 billion of securities in Bear Stearns's portfolio. The outcome will influence the sum the Fed turns over to the Treasury, so this is taxpayer money; that's why the Fed sought Treasury Secretary Henry Paulson's OK.

Then the Fed lent directly to Wall Street securities firms for the first time. Until now, the Fed has lent directly only to Main Street banks, those that take deposits from ordinary folks. That's because banks were viewed as playing a unique economic role and, supposedly, were more closely regulated than other types of lenders. In the first three days of this new era, securities firms borrowed an average of $31.3 billion a day from the Fed. That's not small change, and it's why Mr. Paulson, after the fact, is endorsing changes to give the Fed more access to these firms' books.

Increased Leverage

In the days that followed, the Republican Treasury secretary leaned on two shareholder-owned, though government-chartered, companies -- Fannie Mae and Freddie Mac -- to raise capital that their boards didn't want to raise. In exchange, their government regulator allowed them to increase their leverage so they can buy about $200 billion more in mortgage-backed securities.

So Fannie and Freddie will get bigger, a welcome development when mortgage markets are in trouble. Already, they have regained lost market share. They accounted for 76% of new mortgages in the fourth quarter of last year, up from 46% in the second quarter, Mr. Paulson said Wednesday. But everyone knows that if Fannie or Freddie stumble, taxpayers will get stuck with the tab.

And then, the federal regulator of the low-profile Federal Home Loan Banks, which are even less well capitalized than Fannie and Freddie, said they could buy twice as many Fannie and Freddie-blessed mortgage-backed securities as previously permitted -- more than $100 billion worth.

Was this necessary? It's messy, uncomfortable and undoubtedly flawed in many details. Like firefighters rushing to a five-alarm fire, policy makers are making mistakes that will be apparent only in retrospect.

Too Great to Ignore

But, regardless of how we got here, the clear and present danger that the virus in the housing, mortgage and credit markets is infecting the overall economy is too great to ignore. The Great Depression was worsened because the initial government reaction was wrong-headed. Federal Reserve Chairman Ben Bernanke spent an academic career learning how to avoid repeating those mistakes.

Is it working? It is helping. One key measure is the gap between interest rates on mortgages and safe Treasury securities. A wide gap means high mortgage rates, which hurt an already sickly housing market. A lot of recent activity, including Wednesday's previously planned auction in which the Fed is trading Treasurys for mortgage-backed securities, is aimed at increasing demand for those securities to drive down mortgage rates.

The gap remains enormous by historical standards, but has narrowed. On March 6, according to FTN Financial, 30-year fixed-rate mortgages were trading at 2.92 percentage points above the relevant Treasury rates; Wednesday the gap was down to 2.22. Normal is about 1.5 percentage points. Money markets are still under stress, as banks and others hoard cash and super-safe short-term Treasurys.

Is it enough? Probably not. Although it's hard to know, the downward tug on the overall economy from falling house prices persists. The next step, if one proves necessary, is almost sure to require the explicit use of taxpayer money.

Cushion the Blow

The case for doing more is twofold. One is to cushion the blow to families and communities, even if some are culpable. The other is to disrupt a dangerous downward spiral in which falling prices of houses and mortgage-backed securities lead lenders to pull back, hurting the economy and dragging asset prices down further, and so on.

In ordinary times, a capitalist economy lets prices -- such as those of homes, mortgage-backed securities and stocks -- fall to the point where the big-bucks crowd rushes in, hoping to make a killing. But if the big money remains on the sidelines, unpersuaded that a bottom is near, the wait for bargain hunters to take the plunge could be very long and very painful.

So the next step, no matter how it is dressed up, is likely to involve the government's moving in ways that put a floor under prices, hoping that will limit the downside risks enough so more Americans are willing to buy homes and deeper-pocketed investors are willing, in effect, to lend them the money to do so.




For 7 years Bush has done his best to destroy American financial health.
Its nearing time to reap what he has sown.
 

ayabe

Diamond Member
Aug 10, 2005
7,449
0
0
If anything this should finally show once and for all that sound and prudent regulation is required in order for our economy not to eat itself from within due to greed.
 

Jaskalas

Lifer
Jun 23, 2004
30,245
3,783
126
Originally posted by: ayabe
If anything this should finally show once and for all that sound and prudent regulation is required in order for our economy not to eat itself from within due to greed.
So you support the bailouts under the term regulation.

I stand opposed to them, but only with vague ideas. The proof for the pudding remains to be seen. If this increase in debt and deflation of the dollar are things we can manage more so than the "economy eating itself", then the save would be worth it.

On the other hand, if we break under pressure now the results would be worse than if we let nature take its course. What I think we have here is piling onto a house on cards with the American people underneath all that weight. We keep adding on to reinforce it when perhaps it was time to let it go.
 

senseamp

Lifer
Feb 5, 2006
35,023
5,106
126
Ahh, yes, nothing like an injection of socialism to save capitalism from collapse.
 

palehorse

Lifer
Dec 21, 2005
11,521
0
76
As with most things, I'll try to wait and see if it works before I pass personal judgment...
 

Vic

Elite Member
Jun 12, 2001
48,518
9,479
126
Originally posted by: senseamp
Ahh, yes, nothing like an injection of socialism to save capitalism from collapse.
Socialism is how capitalism got here.

I'm not defending what's happened here, just remarking that this has been as engineered an economic disaster as one could possibly imagine.
The article comments how capitalism would have let prices fall to the point that bargain seeking buyers would rush in (like you intend to do, as I know). What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
The Fed is fixing the very same mess it caused. It's like getting handed an icepack from the guy who just punched you in the face.
 

miketheidiot

Lifer
Sep 3, 2004
11,062
1
0
Originally posted by: Jaskalas


I stand opposed to them, but only with vague ideas. The proof for the pudding remains to be seen. If this increase in debt and deflation of the dollar are things we can manage more so than the "economy eating itself", then the save would be worth it.
debt is an inflationary pressure, not deflationary. I wonder if you even know what the terms you are using mean, it sure doesn't look like it.
 

miketheidiot

Lifer
Sep 3, 2004
11,062
1
0
Originally posted by: Vic
What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
i don't see how this is necessarily the case.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: Vic
Originally posted by: senseamp
Ahh, yes, nothing like an injection of socialism to save capitalism from collapse.
Socialism is how capitalism got here.

I'm not defending what's happened here, just remarking that this has been as engineered an economic disaster as one could possibly imagine.
The article comments how capitalism would have let prices fall to the point that bargain seeking buyers would rush in (like you intend to do, as I know). What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
The Fed is fixing the very same mess it caused. It's like getting handed an icepack from the guy who just punched you in the face.
I disagree somewhat, since nobody can "force" the market to stop doing something, especially when that market is trillions of dollars of capital flooding in.

Lets not forget that half the reason why there's a problem now is because this is an engineered crisis. Accountants thought it'd be a good idea to force people to value investments at short-term valuations, rather than fundamental ones. Thus, if the market suddenly drops in those investments, because one reason or another, you *have* to value your similar investments at those values, regardless of the underlying value.

This is akin to buying a brand new car for 80k with 16k down, then driving it off the lot whereby it's now worth 64k. Instead of just keeping your same loan parameters, the bank requires you to put down an additional 12k in capital because your asset was suddenly "marked to market". If the entire world worked like that we'd be stuck in a never-ending spiral of marks, as we are now.

People would have to sell their car to get out of the position, putting more "marks" out there. This would then depress the value of the car, forcing people to put more capital into the deal, forcing more "marks".

It's really a contrived collapse of the market for the sake of "transparency".

Now, if somebody really wanted to fuck with us, they'd simply buy up billions in "illiquid" assets and continually sell them for pennies on the dollar, forcing successive rounds of "marks". These short-term valuations would erode the capital bases instantly and force the banks into insolvency.

Yay for moron accountants overreacting (FAS 140, SarbOx...etc)
 

Vic

Elite Member
Jun 12, 2001
48,518
9,479
126
Originally posted by: miketheidiot
Originally posted by: Vic
What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
i don't see how this is necessarily the case.
Where did the lenders get all this money to lend?
 

Vic

Elite Member
Jun 12, 2001
48,518
9,479
126
Originally posted by: miketheidiot
Originally posted by: Jaskalas


I stand opposed to them, but only with vague ideas. The proof for the pudding remains to be seen. If this increase in debt and deflation of the dollar are things we can manage more so than the "economy eating itself", then the save would be worth it.
debt is an inflationary pressure, not deflationary. I wonder if you even know what the terms you are using mean, it sure doesn't look like it.
To be fair, he said "deflation of the dollar," which is just an ass-backwards way of saying inflation.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: Vic
Originally posted by: miketheidiot
Originally posted by: Vic
What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
i don't see how this is necessarily the case.
Where did the lenders get all this money to lend?
Trillions of dollars came from overseas investors. Japanese carry trade is one example.

China, Europe, the rest of Asia, not to mention hedge funds and others flooding into the debt markets after fleeing the .bombs.
 

Vic

Elite Member
Jun 12, 2001
48,518
9,479
126
Originally posted by: LegendKiller
Originally posted by: Vic
Originally posted by: miketheidiot
Originally posted by: Vic
What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
i don't see how this is necessarily the case.
Where did the lenders get all this money to lend?
Trillions of dollars came from overseas investors. Japanese carry trade is one example.

China, Europe, the rest of Asia, not to mention hedge funds and others flooding into the debt markets after fleeing the .bombs.
Okay, you're just going to play your usual role of defending the Fed regardless. I'm not terribly interested in playing along. The fault IMO belongs with the Fed for lowering rates too aggressively and for too long after dot.stupid and 9/11. Look at how disconnected the markets have become. That is the result of all this excess liquidity so unevenly distributed.
 

Rainsford

Lifer
Apr 25, 2001
17,515
0
0
Hehe, the WSJ editorial page is unhappy with the government interfering in the free market...what an unusual stance for them. ;)

History has pretty much proven that appropriate action by the government can result in more stable free markets. It's not socialism or communism, it's just a good idea. And as much as the WSJ would like to threaten everyone with the specter of FDR, the truth is that what he did became necessary because totally unregulated free markets failed miserably when it came to not eating the economy at the drop of a hat.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: Vic
Originally posted by: LegendKiller
Originally posted by: Vic
Originally posted by: miketheidiot
Originally posted by: Vic
What it failed to mention is that capitalism would never have let the market get this inflated to begin with.
i don't see how this is necessarily the case.
Where did the lenders get all this money to lend?
Trillions of dollars came from overseas investors. Japanese carry trade is one example.

China, Europe, the rest of Asia, not to mention hedge funds and others flooding into the debt markets after fleeing the .bombs.
Okay, you're just going to play your usual role of defending the Fed regardless. I'm not terribly interested in playing along. The fault IMO belongs with the Fed for lowering rates too aggressively and for too long after dot.stupid and 9/11. Look at how disconnected the markets have become. That is the result of all this excess liquidity so unevenly distributed.
The Fed had absolutely no control over rates, even now you can see the disconnect between the long and short term rates. Rates aren't set by the Fed in mortgages, they are set by funding and funding costs are set by liquidity. Liquidity isn't set by the Fed in the broadest terms, it's set by investors. Investors flooded into the market, despite getting less returns, because they thought it was easy money in a booming area.

Capital is jumping into one pocket from another. First the .bombs, then to housing, then to commodities, and eventually back to distressed debt as it gets cheaper.

That being said, the Fed could have increased capital requirements, reducing liquidity, rather than raising rates and I will certainly agree with that. However, to the largest extent, they had very little control over what was happening.
 

Vic

Elite Member
Jun 12, 2001
48,518
9,479
126
You knew exactly what I meant by "rates" in this context, LK. Don't play me on this one because it's a sore subject. I'm fielding the same "the fed cut rates by X% does that mean I get X% off my mortgage rate if I lock today?" calls as I did 6 years ago. No dumbass you should have locked yesterday like I told you to.

Anyway, this capital "jumping" is the problem I was referring to. And have referred to often in the past and for years. These "investors" are playing hit-and-runs on our economy and then not be held accountable for damage (hell, they get bailed out). Then we get told that this is "capitalism" or "friendly socialism." And it's not. It is fascism.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: Vic
You knew exactly what I meant by "rates" in this context, LK. Don't play me on this one because it's a sore subject. I'm fielding the same "the fed cut rates by X% does that mean I get X% off my mortgage rate if I lock today?" calls as I did 6 years ago. No dumbass you should have locked yesterday like I told you to.

Anyway, this capital "jumping" is the problem I was referring to. And have referred to often in the past and for years. These "investors" are playing hit-and-runs on our economy and then not be held accountable for damage (hell, they get bailed out). Then we get told that this is "capitalism" or "friendly socialism." And it's not. It is fascism.
It is capitalism in that they can arb the market. As far as getting bailed out, not much you can do but try to get the cows back in the barn.

I am all for more regulatory oversight and changing laws, I know several which need to be changed.
 

dmcowen674

No Lifer
Oct 13, 1999
54,894
46
91
www.alienbabeltech.com
Originally posted by: LegendKiller

Investors flooded into the market, despite getting less returns, because they thought it was easy money in a booming area.

Capital is jumping into one pocket from another.

First the .bombs, then to housing, then to commodities, and eventually back to distressed debt as it gets cheaper.
The giant monopoly game by these so called "investors" is coming home to roost.

The people are finally wising up to and tiring of their game.
 

Throckmorton

Lifer
Aug 23, 2007
16,830
2
0
Originally posted by: Jaskalas
Originally posted by: ayabe
If anything this should finally show once and for all that sound and prudent regulation is required in order for our economy not to eat itself from within due to greed.
So you support the bailouts under the term regulation.

I stand opposed to them, but only with vague ideas. The proof for the pudding remains to be seen. If this increase in debt and deflation of the dollar are things we can manage more so than the "economy eating itself", then the save would be worth it.

On the other hand, if we break under pressure now the results would be worse than if we let nature take its course. What I think we have here is piling onto a house on cards with the American people underneath all that weight. We keep adding on to reinforce it when perhaps it was time to let it go.
As I understand, this sub-prime stuff was allowed by deregulation...
 

Drift3r

Guest
Jun 3, 2003
3,572
0
0
Originally posted by: Throckmorton
Originally posted by: Jaskalas
Originally posted by: ayabe
If anything this should finally show once and for all that sound and prudent regulation is required in order for our economy not to eat itself from within due to greed.
So you support the bailouts under the term regulation.

I stand opposed to them, but only with vague ideas. The proof for the pudding remains to be seen. If this increase in debt and deflation of the dollar are things we can manage more so than the "economy eating itself", then the save would be worth it.

On the other hand, if we break under pressure now the results would be worse than if we let nature take its course. What I think we have here is piling onto a house on cards with the American people underneath all that weight. We keep adding on to reinforce it when perhaps it was time to let it go.
As I understand, this sub-prime stuff was allowed by deregulation...
Ding...ding...ding and we have a winner!
 

Vic

Elite Member
Jun 12, 2001
48,518
9,479
126
Originally posted by: Drift3r
Originally posted by: Throckmorton
Originally posted by: Jaskalas
Originally posted by: ayabe
If anything this should finally show once and for all that sound and prudent regulation is required in order for our economy not to eat itself from within due to greed.
So you support the bailouts under the term regulation.

I stand opposed to them, but only with vague ideas. The proof for the pudding remains to be seen. If this increase in debt and deflation of the dollar are things we can manage more so than the "economy eating itself", then the save would be worth it.

On the other hand, if we break under pressure now the results would be worse than if we let nature take its course. What I think we have here is piling onto a house on cards with the American people underneath all that weight. We keep adding on to reinforce it when perhaps it was time to let it go.
As I understand, this sub-prime stuff was allowed by deregulation...
Ding...ding...ding and we have a winner!
No, subprime has existed for decades. There was no subprime specific deregulation.
 

brownzilla786

Senior member
Dec 18, 2005
904
0
0
If the fed didtn save bear stearns the market would have went HAYWIRE^1000. It would have made such a big ripple effect and no one would have faith in the financial institutions. They did what had to be done
 

smashp

Platinum Member
Aug 30, 2003
2,443
0
0
Corporate Welfare and Wall Street Affirmitive Action is all this was

They Punished People who played by the rules, Didnt Take On extreme Risk, and Had properly positioned themselves to pick up the pieces of those that failed.

 

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