Blog on the Run: Reloaded

Thursday, May 15, 2014 12:18 pm

Stressing the country out; or, Tim Geithner should have been fired about umpty-‘leven years ago

Tim Geithner, the guy President Obama inexplicably put in charge of the bank bailouts, has a new book out called “Stress Test.” (The term derives from the laughably phony “tests” endangered large banks were put through to see whether they had so many crap assets on their books that they needed to be liquidated; the fix was in, so not one large bank was broken apart of liquidated. Instead, we gave them bazillions of taxpayers’ dollars which they spent on bonuses for themselves instead of lending money to businesses to create jobs.)

The consensus seems to be — unsurprisingly, to me — that it sucks. Particularly, it’s incoherent where it’s not downright dishonest. The Washington Center for Equitable Growth rounds up some of the responses:

Glenn Hubbard:

About housing… I must say I split my side in laughter because Tim Geithner personally and actively opposed mortgage refinancing…. And now he’s claiming this would be a great idea…

David Dayen:

The guy who handed hundreds of billions of dollars over to banks with basically no strings attached [was] suddenly worried about fairness when homeowners get a break on their mortgage payments…. Even as he says in the book “I wish we had expanded our housing programs earlier,” he completely contradicts that to Andrew Ross Sorkin, saying [that his own] statement is “unicorny”…

Amir Sufi and Atif Mian:

Multiplying $700 billion by 0.18 gives us a spending boost to the economy in 2009 of $126 billion, which is 1.3% of PCE, 10 times larger than the estimate Secretary Geithner asserted in his book. So Mr. Geithner is off by an order of magnitude…

Economist Brad DeLong concludes:

In the “real world” Geithner did have full control over the GSEs and the FHA–because Paulson nationalized them in the summer of 2008.

In the “real world” Geithner submits his recommendation that Glenn Hubbard be nominated as head of the FHFA to President Obama on January 21, 2009, it is approved by the senate in February 2009, and thereafter there are no constraints on technocratic use of FHFA and the GSEs to rebalance the housing sector and aggregate demand.

Geithner should not say “I wanted the FHFA to act but I did not have the authority to get the FHFA to act” and at the same time say “having the FHFA act would have made no difference”; Geithner should to say “you cannot blame me because of the constraints” when we know that it was his own actions and inactions made those constraints.

Look: Tim Geithner did much better as a 2009-2010 finance minister than any of his peers. Look: the stress tests worked, and worked very well. (I disagree — Lex.) Look: Christina Romer and company say that if you need a bank rescued in 48 hours, Tim Geithner is your man. But the purpose of Stress Test is to explain to us what Tim Geithner thought and why he thought it, and thus why he did what he did.

And in Stress Test, on housing policy, he doesn’t.

Wednesday, March 12, 2014 8:27 pm

Was EVERYBODY to blame for the 2008 crash? Not just no, but, hell, no.

Dean Starkman at The New Republic, writing long and worth every word and minute:

With Wall Street’s demand for mortgages unending and some loan producers managing to book up to 70 loans per day, the system didn’t just crash. It was brought down.

But we’ve also been made to understand that subprime lenders and their Wall Street funders didn’t act alone. Instead, they were aided by the avarice of the American people, who were not victims of the crash so much as accomplices in it. Respondents to aRasmussen poll done during the throes of the crisis overwhelmingly blamed “individuals who borrowed more than they could afford” (54 percent) over Wall Street (25 percent). To this day, the view is widespread and bipartisan: Main Street was an essential cause of the meltdown. The enemy was us.

“It all goes back to the increase in the tolerance for debt,” David Brooks wrote a couple of years ago. …

One of so many instances in which Brooks has been flat wrong on the facts without professional consequence. But I digress.

Is that not the truth?

Actually: No, it’s not. The notion that American consumers share the blame for the mortgage crisis is a lie. And it is one of the most pernicious out there.

Everyone-Is-To-Blame (or EITB, for brevity’s sake) has done much to mute the public outcry essential for sweeping efforts to respond to the financial catastrophe. To the extent that Dodd-Frank fell short of the root-and-branch reform that followed the last great crash in 1929, EITB is to blame. The fact that banks too big to fail before the crisis have been allowed to grow to twice their pre-bubble sizes can be traced to a nagging sense that they didn’t act alone. And if you wonder why, six years after the fact, no significant Wall Street figure has been criminally prosecuted, I would suggest that EITB has muddied perceptions just enough to allow the administration to sidestep the necessary legal mobilization. If everyone is to blame, then criminal indictments of individual executives can be framed as exercises in scapegoating.

Everyone-is-to-blame did its worst damage to the Home Affordable Modification Program, or HAMP, an effort rolled out in the immediate aftermath of the crisis to reduce borrowers’ monthly payments through refinancing or principal write-downs. It was the mere idea of HAMP that set off Rick Santelli on his 2009 rant about “losers’ mortgages” and their “extra bathroom,” sparking the Tea Party revolt. The prospect of helping delinquent borrowers, while others paid theirs on time, unleashed a flood ofressentiment that filled the Congressional Record with denunciations of “irresponsible” actors who “lied” only to wind up in line for “gift equity,” and “tax-payer subsidized windfall.” Wisconsin Representative Jim Sensenbrenner introduced the concept of “happy-go-lucky borrowers” and “cagey borrowers.” Jim Bunning, then Kentucky’s junior senator, felt compelled to warn against helping homeowners “who made bad decisions.” The outpouring tapped into a sentiment powerful enough to silence even some liberals and turned hamp into a political disaster for the Obama administration. Left adrift, the program went from a potential lifeline for borrowers to a fee-machine for servicers and a Kafkaesque nightmare for those it was supposed to help.

As an agent of obfuscation, EITB is a gift that keeps on giving. In October, The Washington Post’s editorial board objected to a $13 billion mortgage-era civil settlement with J.P. Morgan largely because it unfairly singled out the bank, when, in fact, “everyone, from Wall Street to Main Street to Washington, acted on widely held economic beliefs that turned out not to be true.” A forthcoming book by Bob Ivry, a Polk Award–winning investigative reporter for Bloomberg News (and, full disclosure, a friend), eloquently inveighs against big banks and their Washington lackeys, but also includes this assertion: “In the years leading up to the Great Bubble-Burst of 2008, everybody got a chance to cash in. … If you wanted to buy a place to live, you could get more house than you ever dreamed. You could use your rising home equity for the Disney vacation, the power boat, the fourth bedroom or the college education.” …

True. But that’s not the same thing as mortgage fraud, which, though not trivial, was an incredibly small part of the total problem:

In 2010, an FBI report drawing on figures from the consultancy Corelogic put total fraudulent mortgages during the peak boom year of 2006 at more than $25 billion. Twenty-five billion dollars is obviously not nothing. But here again, teasing those mortgages out of that year’s crisis-related write-downs of $2.7 trillion from U.S.-originated assets leaves our infamous “cagey” borrowers to blame for only a tiny share of the damage, especially since not all of the fraudulent mortgages were their fault. The ratio looks roughly something like this:

Yes, some of our cab drivers, shoeshine boys, and other fellow citizens tricked a lender into helping them take a flyer on the housing market. But the combined share of the blame for bad mortgages that can be placed on the public sits—and I’m really rounding up here—in the high single digits, and not the much larger, fuzzier numbers in our heads.

The fact is that defrauding a bank that actually cares about the quality of a loan is actually rather difficult, no matter how aggressive or deceitful the borrower. Lenders, on the other hand, can lie with relative ease about all sorts of things, and mountains of evidence show they did so on a widespread basis. For starters, it’s lenders who establish the loan-to-value ratio for a property: how much money the buyer is borrowing versus the house’s estimated worth. Banks didn’t used to let you take out a mortgage too close to the home’s total cost. But play with those numbers and, voilà, a rejected loan application turns into an accepted one. Leading up to the crash, some banks’ representations about loan-to-value ratios were off by as much as 40 percentage points.

Then there was the apparent rampant corruption of appraisals, which also have nothing whatsoever to do with borrowers. Before the bubble popped, appraisers’ groups collected 11,000 signatures on a petition decrying pressure by banks to arrive at “dishonest” or inflated valuations.

And that’s to say nothing of lenders misleading borrowers directly—a practice that the Financial Crisis Inquiry Commission, the Levin-Coburn report, and lawsuits by attorneys general around the country have all found was very much systemic. Mortgage brokers forged borrowers’ signatures and altered documents; Ameriquest (those guys again!) had its own “art department,” as it was known internally, for precisely that function. Oh, and remember those 137,000 instances of “suspicious activity” about possible borrower misdeeds? For the sake of perspective, Citigroup settled a Federal Trade Commission case alleging sales deception that involved two million clients in a single year. That’s what we call wholesale, and it was happening before the mortgage era even really got started.

Today, there’s a big and growing body of documentation about what happened as the financial system became incentivized to sell as many loans as possible on the most burdensome possible terms: Millions—and millions—of borrowers were sold subprime despite qualifying for better.

Perhaps the most astonishing and unappreciated finding comes from The Wall Street Journal, which back in December 2007 published a study of more than $2.5 trillion in subprime loans dating to 2000 (that is to say, most of the subprime loans of the era). The story, by my former colleagues Rick Brooks* and Ruth Simon, painted the picture of a world gone upside-down: During the worst years of the frenzy, more than half the subprime loans issued went to borrowers who had credit scores “high enough to often qualify for conventional loans with far better terms.” In 2006, the figure hit 61 percent. Along with its article, the Journal illustrated the alarming trend line with a version of the following graphic:

It goes without saying that no one would voluntarily eschew a prime loan for subprime—subprime is called that for a reason, carrying higher, often escalating rates; pre-payment penalties that “shut the backdoor” by precluding refinancing; and other burdens tacked on for good measure. The Journal concluded that its analysis “raises pointed questions about the practices of major mortgage lenders.” That’s putting it mildly!

He goes on to suggest some reasons why Everybody Is To Blame is such a popular world view. But what he keeps coming back to, what we must keep coming back to, is that it is wrong. If you actually look at the numbers — you know, like bankers are supposed to do — you consistently find that the overwhelming majority of the financial damage was caused by the banks, often through unethical and sometimes even illegal means.

Even so, today, we refuse to punish those responsible. If there’s Blame to be laid at the feet of Everybody, this is it. Charlie Pierce is fond of saying that for all Occupy Wall Street’s many foibles, gaffes and mistakes, it at least got people shouting at the right buildings — i.e., corporations rather than government, and the big banks in particular. Unfortunately, some of the country’s top journalists and pundits still get it wrong, and they and the lawmakers on the take form a daisy chain that keeps anything substantive from happening, not only to punish those who were responsible last time but also to do what it takes keep something like this from happening again.

It’s not Everybody’s fault. Everybody is NOT to Blame. The banks and their executives and boards are to blame. And part of citizenship in a constitutional republic is to hold them to account.

*Disclosure: Rick Brooks worked with me at the N&R in the early 1990s.

Thursday, July 26, 2012 8:29 pm

Sorry, but, yes, the 2008 bank bailouts really were as much of a reaming of the American taxpayer as we thought at the time

Another crappy “both-sides-do-it” column: Betsey Stevenson and Justin Wolfers write at Bloomberg that our current political debate on the economy is a “sham” because leading economists unanimously agree that  the bailouts helped the unemployment situation. But economist Dean Baker provides the missing context: While that claim might be technically true, the bailouts could have been structured far more constructively than they were, both to address then-current problems and to help prevent the recurrence of similar problems:

The Wall Street banks were on life support in the fall of 2008. Without trillions of dollars of government loans and guarantees (much more came from the Fed than the TARP money that went through the Treasury), they would be dead, deceased, pushing up daisies, out of business. The boys and girls getting those huge paychecks on Wall Street were at Uncle Sam’s doorstep pleading for help. There was no one else to save them from destitution.

In this context there were three main choices. One was to drag out Mitt Romney and give them a lecture about the free market and tell them the government is not about giving people stuff. In this case the banks go under leading to a full-fledged financial melt-down. In this story, the economy certainly takes a bigger immediate hit, but the advantage is that we have a Wall Street free world. Goldman Sachs, Citigroup, Morgan Stanley, J.P. Morgan and the rest would be history. They are in receivership, waiting to broken up and sold off. This parasitic sector that has led to so much waste, corruption and inequality is no longer a drag on the economy. Consider this short-term pain for long-term gain. (Just kidding about the Romney part, he supported the bailout.)

The second choice is hand over the money, which is the route we took. Oh yeah, Congress did put conditions on the money, but we know that was just for show. One of the most disgusting things I’ve seen in my years in Washington were the excellent stories on how executive compensation was treated in the TARP that the Washington Post and Wall Street Journal ran after the TARP passed.

Both articles featured comments from compensation expert Graeff Crystal who explained that the government could have changed compensation patterns on Wall Street forever (the Wall Street boys needed the money), but Congress instead took a pass. It would have been great if Crystal’s views were part of the public debate before the bill was passed.

This brings up option number 3, hand the money over but with real conditions. Congress could have said that banks that got TARP money, funds through the Fed’s special lending facilities, or benefited from the various Treasury and FDIC insurance commitments had to:

a) strictly limit all pay in all forms for the next five years;

b) set up a clear, legally enforceable plan for writing down underwater mortgages on their books;

c) agree to a breakup schedule that would get them below “too big to fail” size by a set date.

To my mind, option #3 was clearly the best route since it would fix the financial industry and avoid the crash that would result from going cold turkey in option #1. But let’s say that the choice is just the full crash in option #1 or the handout in option #2. In order to seriously decide between these we need some basis for assessing the size of the downturn. Saying that the short-term impact would have been worse in option #2 doesn’t tell us anything about the proper policy choice. We pay short-term costs for long-term benefits all the time. We need the terms of the trade-off.

In ths respect, the commonly claimed “second Great Depression”scenario is, to use a technical economic term, “crap.”  The first Great Depression, by which I mean a decade of double-digit unemployment was not locked in stone by the mistakes made at its onset. There was nothing that would have prevented the government from having the sort of massive stimulus spending that eventually got us back to full employment (a.k.a. World War II) in 1931 instead of 1941 and without the war. The fact that we remained in a depression for more than a decade was due to inadequate policy response.

In this respect, to claim that if we let the banks collapse we would have been destined to suffer a decade of double digit unemployment is absurd. That would only be the result if we continued to have bad policy, not just in 2008, but in 2010, in 2012, right through to 2018.

The serious question is how bad could we reasonably expect the downturn to have been if we had gone the cold turkey route. The place to look for insight on this question is Argentina, which went the financial collapse route in December of 2001. This was the real deal. Banks shut, no access to ATMs, no one knowing when they could get their money out of their bank, if they ever could.

This collapse led to a plunge in GDP for three months, followed by three months in which the economy stabilized and then six years of robust growth. It took the country a year and a half to make up the output lost following the crisis.

While there is no guarantee that the Bernanke-Geithner team would be as competent as Argentina’s crew [indeed, subsequent events have shown that they are not — Lex], if we assume for the moment they are, then the relevant question would be if it is worth this sort of downturn to clean up the financial sector once and for all. I’m inclined to say yes, but I certainly could understand that others may view the situation differently.

Anyhow, this is the debate that we should have had the time and at least be acknowledging in retrospect.

We had the bastards down in the fall of 2008, and we didn’t hit them with the chair. A century from now that failure will be considered the key turning point in the transition of the U.S. from a democratic republic to a full-on oligarchy.

Saturday, December 19, 2009 3:19 pm

Odds and ends for 12/19

The GOP’s 2010 narrative, courtesy of non-GOP Eli at Firedoglake: “Look, we were the ones who voted against giving Wall Street hundreds of billions of dollars, who voted against that tool at the Fed who doesn’t care about your job, who voted against forcing you to spend your hard-earned money on junk insurance you can’t afford to use.  Obama and the Democrats are screwing you over to funnel money to corporate fatcats, and we’re trying to stop them.” I bet it works, too.

Global-warming conspiracy theoristsat the Pentagon.

The health of the commercial banking industry, as summarized by Peterr: If you’re the FDIC putting your budget together for 2010, “you don’t double your receivership budget if you think bank failures are slowing down.” Fun fact: The figure being doubled was itself almost doubled in mid-year 2009 from what it was set at at the beginning of the year, because of the growth in bank failures.

Glenn Beck, cracked: When I was a kid, Cracked was the less nuanced competitor to Mad magazine. But in the Internet age, Cracked has found its footing. Consider this unpacking of the Glenn Beck phenomenon, which includes this gem: “The difference between a Glenn Beck conspiracy and the coronation scene in Carrie is Carrie didn’t overreact as hysterically.”

Different standards: Can you imagine the media hissy fit if Democrats were to try to filibuster an Iraq-Afghanistan spending bill just to delay some other legislation that was part of the GOP agenda? But when Republicans do it to try to delay health-care legislation, it’s perfectly OK, or at least unremarkable.

Blech: I started off my Christmas break with sinuses stuffy AND running AND hurting, and a lot of chest congestion. I’ve hit the Neilmed bottle twice, and it has helped a little but not as much as I had hoped.  Rather than playing in the snow with Hooper and Victoria, which is what I wanted to do, I’ve spent most of the day in bed. On the bright side, the streets appear navigable, so I should be able to run to the store tomorrow for the appropriate junk food to consume during Panthers/Vikings.

Speaking of which, I am probably deriving far more amusement than I should from the thought that the teams will be playing tomorrow night on the frozen tundra of Bank of America Stadium because the Vikes are now an indoor team. But I’m not under any illusions about who’s going to win, just as I hope John Fox is not under any illusions that Jerry Richardson is going to keep him on.

Saturday, February 14, 2009 6:15 pm

Because we were running out of bad news

Filed under: I want my money back. — Lex @ 6:15 pm
Tags: , ,

Paul Krugman guesstimates that the four biggest commercial banks have a combined market cap of $200B — and that’s including shareholder belief in the likelihood of a bailout — and problems totaling about $450B. He adds:

Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”.

I say our culture needs to get over it because the nationalization train left the station at least as far back as AIG, if not sooner.

UPDATE: Now even Alan Greenspan is saying that nationalizing some of the banks may be the “least bad option.” So if Bush used Greenspan for political cover for the 2001 tax cut, I see no reason why Obama shouldn’t do the same if — or when — it becomes necessary to nationalize some banks.

Thursday, December 11, 2008 9:57 pm

Wrecking an economy, 90 houses at a time

Filed under: We're so screwed — Lex @ 9:57 pm
Tags: , , , ,

The housing bubble that led to the current economic collapse has a lot of complex, interlocking causes, from unqualified buyers to unscrupulous lenders to undiligent mortgage repurchasers to ignorant investment bankers to inattentive (or worse) regulators.

This article in the St. Petersburg (Fla.) Times focuses on one guy who traded in houses in the Tampa Bay area and whose deals, multiplied across the country, illustrate how a significant part of the crisis came to be. Fun fact: One buyer, who worked for a car wash, reported his income as $40,000. A month.

Also depressing, but not surprising: the level of ignorance in the comments.

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