POLJUNK

Absolutely kills me how your team says we should never have gone to Iraq, or even that we should have gone to Saudi Arabia instead, because those were rather on target conversations about the sources of terrorism.

Your source for this economic terrorism is Barney Frank, protector of Fannie and Freddie, whom CNN recently called a genius. How about you start there?

As for AIG, oh shit man, where to start? If we just fessed up and admitted we gave you a poison pill would you feel better? Ok, we did. Enjoy. Blame us for the next 3.7 years (and counting....). See how well that resonates and adjust accordingly, my friend...

This is a confusing comment, Scott. But if you're suggesting that the Republicans purposely played political games with economic policy while the whole shit house was coming down around us then I think the GOP's worries of being a permanent minority party may be just the beginning.

Fannie and Freddie is a different story (and again mishandled by Democrats--admittedly). I am assuming that by bashing Barney Frank you actually think there should have been MORE oversight in the financial sector, which would make you a rare breed of Republican. Can you elaborate on that point?

I'm just saying assume that they purposefully planted the poison pill... it doesn't matter after a certain point.

I'd love to hear specifically how so Bush did worse by the economy compared to Frank and Dodd... as for looking for more oversight in the financial sector, no, I'm saying from the beginning Fannie and Freddie were massive government intrusions into the market sector and interfering with private economies. Their collapse triggered most of this crash. Where did the buck start? It seems to me it began with the ill-guided attempt to make any person eligible for a massive mortgage despite their ability to pay. So to your main point about AIG, this is truly stupider following stupid. How the hell can they fail to manage a private firm? Well, just the same how the hell did they fail to manage Freddie and Fannie? Argh... these politicos have zero business acumen. Dodd, Frank and Clinton (doh I said it!). Governmental oversight by *THIS* congress is truly akin to asking a fish to guard a bicycle.

Blah. Kills me!

So Fannie and Freddie take the lion's share of the blame? Come on Scott. They've been around a while--surely there's a bit more to it than "government intrusion"? (If it's any consolation, I'd like to see sleazeball Barney Frank run out of Congress too.)

And no one who understands foreign policy would seriously suggest invading Saudi Arabia. However, "get Saddam!" was not the first thought in anyone's mind after 9/11 except Dick Cheney and Don Rumsfeld.

since when DIDN"T politicians of both sides talk out of both sides of their mouths?
Personally, I firmly believe that this country needs a strong, competent Republican
party. But, if carping is all we get, we're in for a long wait.

Re Fan and Fred, John Fund has been after them and asking the right questions for many years. I take his word at it because he's documented it well... he was shouting when nobody would listen. The left can attack CNBC, but not WSJ on this... they have been dead on target.

http://online.wsj.com/article/SB122257274028583113.html

Scott,

What are your thoughts on the Bush Administration's "Homeownership Challenge" that they issued to lenders as they sought to build the Ownership Society? The idea there was that if enough people moved into homes that they owned vs. rented, and they knew that they had the Republicans to thank for having become homeowners, this would help to cement the imaginary Permanent Republican Majority. Of course, to get all of these people to "own" homes, they had to do some creative lending.

http://poljunk.gloriousnoise.com/2008/01/the_great_ownership_society_or_the_savin.php

And here we are...

And let's not forget the point of this post, which was to highlight the hypocrisy of Republican "outrage" over bonuses when they blocked any efforts to ensure they were not paid in the first place.

Now they'll be forced to choose between their newly adopted populace outrage and their stance on taxation as congress considers specifically taxing these payments at 100% as a means for recouping.

Here's the score as of today:
House Passes Bill To Tax AIG Bonuses, 328-93

Did anybody else catch el Rushbo defending the AIG Executive bonuses?

Man...Rush must really hate the GOP.

Prediction: I think Geithner will be the fall guy for all this. I don't see him surviving much longer.

Chris Dodd might be next as well.

What do you guys think?

You might well be right, Tim. I was thinking the same thing.

Any idea who a replacement might be?

Krugman

Can't resist to chime in on all of this. It's very similar to an in-depth conversation i had i with a friend leading up to the elections. I wish I could just cut and paste the entire exchange between my pal and me from emails (simply because i'm lazy), but i'll edit it down for everyones convenience. My apologies for the lengthy post.

For disclosure, i see myself as socially liberal and fiscally conservative. some would say that could be seen as libertarian, but i jut can support that anarcy-lite that i believe would exist under a true libertarian state.

First i feel compelled to address the fannie/freddie fully responsible myth...

In 1938 a Democratic Administration under Franklin Roosevelt ushered in it's existence as part of the New Deal, establishing it's charter by assigning it the responsibility to assist local banks with federal funding to facilitate housing for low- and moderate-income families in under served areas since private lenders were unable to do so after the Great Depression. For the first 30 years Fannie Mae was run much like thrift operation, but with strong regulation and oversight.

Fannie Mae's purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers. Up til recently these limits for securitized loans were $417K, beyond that you would have to go to Jumbo Securitization, which would go beyond the top limit, but would have to be investment grade loan. With deregulation came private label securitization, high loan to value positions brought upon by negatively amortizing teaser rate loans and option arms, and a business environment with a heard mentality for market share competition versus risk management.

It's not as easy as left and right. Both parties have benefited and gained from their positions with all of the companies at the center of the crisis. They should ALL be taken to task for their actions and their records.

The impetus of even further backing by Fannie and Freddie of bank loans to a wider base of homeowners was spurred on by George Bush with his administration's American Homeownership Challenge. I'm not blaming the Bush Administration, just pointing out that both parties were involved in the push for an ownership society. I believe that at the time was of the American Homeownership Challenge that Congress had a Republican edge, Senate had a Democratic edge, and the President was Republican

Personal financial responsibility is a crossroads where many parties meet. All parties involved in the purchase and negotiation of the financial instruments are responsible. From the person acquiring the mortgage, to the realtor negotiating and establishing the price of the commodity (and selling the idea of future price of this commodity), to the mortgage lender representing the bank that is financing the mortgage, to the entities backing the mortgage, to the institutions buying the mortgage backed securities.

Poor oversight and regulation of the financial systems does allow for institutions to take a position beyond that which their equity can support.

I cannot lay total blame wholly on the individual purchasing the home, just as I can't lay complete blame on the financial institutions that ended up holding toxic securities. Though, I can sure as hell weigh responsibility based on the knowledge base of the people negotiating these financial instruments along the way.

The democrats didn't make the loans. The republicans didn't make the loans.

The democrats championed strengthening home ownership by middle and working class.

The republicans championed less regulation of financial institutions to help expand the economy.

Corporate banks made risky loans and traded risky securities. Some corporations outsourced jobs to foreign countries and other Corporations hired illegal immigrant workers. Some Americans made poorly informed decisions and took on too much house than they could afford in the long run. Some well informed Americans took on investment properties to flip and make a profit, but found themselves exposed to too much risk.

The last decade was one that found everyone championing excess and consumption. Look at the whole pop culture held up in iconic roles - Vapid, self-involved, no talent celebriteis. Look at the speculation in the market as many took on great exposure to risk to try to build their position even more. The entire decade was one of great toxic activity across the board. From individuals to corporations. The zeitgeist of society was more, more, more.

All share in the responsibility.

As a homeowner, I don't need any assistance with my mortgage because I was prudent in purchasing and negotiating my loan. This all to the dismay to my mortgage lender, who really pushed the idea of a zero down mortgage or taking on an arm, or the realtor who asked a few times if I would like to sell my place and get another since I had earned enough to take on a greater amount of debt, or to the people around me that questioned why I stayed in my small two bedroom condo while the rest of the people they knew were flipping and buying houses. I'm covered. I still have positive equity growth in my home in terms of dollars (though, probably not when adjusted for the decrease in the value of the dollar- ouch), but I'm locked into a low 30 year mortgage that is set to weather the storm of a recession. One that I knew was eventually going to come if there was a housing bubble. So, my mortgage is now equivalent to rents for similar properties in my area. Though, all I have to do is live up to my debt.

So, again it's a question if I did listen to the advise of predatory lenders with loose capital and aggressive real estate agents seeking to push property based on speculation, would I be wholly responsible by myself?

I'm not a fan of a nanny state. Though, a measure of regulation and oversight in all areas can be positive to the health of an economy over a long period of time.

Let's not kid ourselves, we haven't been in a truly free-market society since the FED was created. And the FED's best interests lay with the financial interests in society.

And now about the community reinvestment act under both Carter and Clinton...

To site the CRA is at best a little overreaching, at worst remarkably disingenuous. How does a law from 31 years ago that allows for parity in lending directly the root cause of the current situation we find ourselves in? As many Republicans like to point out, Democrats, through the CRA, forced banks and savings institutions -- then, far more heavily regulated than today -- to make loans to poor, often uncreditworthy minority borrowers. Let's dissect this statement. Yes, the CRA's intent was to bring parity into lending practices in regions where neighboring communities could be passed over for reason of banks targeting wealthier regions. There is nowhere in the original CRA provisions that provides for banks to be forced to lend to unqualified borrowers. Second, banks and savings institutions were far more heavily regulated back then. I agree with his point there. Since the repeal of the Glass Stegall Act there has definitely been an erosion of regulatory oversight.

Here are some interesting points to think about when you're using the CRA and the further actions under the Clinton administration to blame for the rocky economy.

- The CRA didn't force lenders to make riskier loans than they would have otherwise. It simply required that they take each applicant on his or her own merits, and give people in poorer neighborhoods the same fair chance at a mortgage that everybody else in town was getting. It's about parity. In other words, the CRA requires banks to lend to working-class families, farmers in rural community and people of color, but only when those people have been deemed as creditworthy as anyone else. To highlight that it is strictly targeted at minorities is false.

- The CRA did not start the housing bubble. The CRA only applies to FDIC member banks and thrifts. Originally when the CRA was originated these financial institutions were responsible for the majority of the country mortgage lending. Since then there has been an explosion of finance companies that entered into the mortgage market that did not take deposits and thus were not backed by the FDIC and not under their oversight. Under deregulation these entities set their own lending standards and took on greater amount of risk. Companies like Countrywide took on a huge amount of risk and focused on promoting non-conforming loans that are too big to sell to Fannie Mae. Nearly all of the loans Countrywide makes are sold into the secondary market, in the form of mortgage-backed security. The Federal Reserve has noted that non-CRA lenders are twice as likely as CRA lenders to issue sub-prime loans to vulnerable borrowers. Also the Fed has reported that CRA lenders have about the same low rate of foreclosure as other traditional mortgages.

- The revisions to the CRA in 1995 under Clinton only made changes to how a bank's CRA compliance is evaluated. It had nothing to do with mortgage securitization.

The rise of securitzation, low interest rate policy by the Federal Reserve, homeowner greed, non-FDIC covered financial institutions creating risky mortgage loans with teaser rate adjustable mortgages and options arms, speculation by real estate developers who built up the supply of housing, and short-term mentality by Wall Street were all at the core of getting to where were at. The responsibility is shared across all of us.

All of these factors lead to a credit bubble and housing bubble. With risky financial loans that were negatively amortizing there was a tipping point where the loan to value of certain real estate was negative. Those people who took on mortgages with these exploding arms with zero down financing started walking away from their homes. Again, the majority of these types of loans were made by financial institutions, not backed by the FDIC and operating in an environment with little regulation and oversight, that were fighting for profit gain not by making prudent loans, but by expanding their market share by making risky loans to borrowers, then seeking to dump these mortgages on the secondary market through securitization. Freddie and Fannie got in trouble by investing in mortgage-backed securities by these other financial institutions that were not backed by the FDIC during a period of deregulation. Not by CRA banks that are backed by the FDIC.

Here is an interesting overview of the credit crisis by a professor of finance at the Wharton School of Business, Susan Watcher. I found it incredibly informative and unbiased.

http://www.youtube.com/watch?v=bekI7nllecI&eurl=http://knowledge.wharton.upenn.edu/article.cfm?articleid=1993

Here is a roundtable discussion by three finance professors from the Wharton School of Business focusing on the financial crunch in the global market.

http://www.youtube.com/watch?v=ay_fhAGf8NQ&feature=user

And now let's get to what I see as one of the largest proponents of all of the mess. Was it really Clinton and the Deomocrats? Not really...

Can you name a specific date and the name of the legislation that was passed under Clinton with the "Democrat Congress" that directly led to all this?. I'll make it easier on you, since the Democrats only held the House and the Senate up until the mid-term election of 1994. Up until late 1994 he would have been able to push through that legislation easily with a Democratic majority. So, that would place the Republicans fully in control of both houses through the rest of the Clinton administration and on point to check his administration's initiatives. So, the window would have to be fully under a 23 month period. That period seems like a lifetime, so it should be pretty easy to find something in there that would support your argument. I mean, that's 5 months longer than Sarah Palin was Governor of Alaska racking up all that executive experience by standing up to Big Oil and Defending America against the Red Scare from her front porch.

It's amazing how much damage 23 months of Democratic influence in the Executive and Legislative branches of government could cause. I mean, The Republicans had the senate and the house for 12 years after those 23 months. Hell, they totally had things square and check once Bush got in for 6 of those 12 years and still they couldn't right the boat that was set adrift in those 23 months.

So, what was the legislation that led to the environment that eventually led to where we're at?

Gramm-Leach-Bliley Financial Services Modernization Act (Public Law 106-102 passed November 12, 1999 by the 106th Congress).

Oh yeah, Republicans had majority outside of the executive branch.

Look it up. Read about how it helped deregulate a lot of the financial industry. Though, I'm not just going to put it on Lindsay Gramm and the rest of the Republicans. If you look at both parties voting records, they were all to blame for having this thing go through.

Congress’ vote margin on Gramm-Leach-Bliley was not close, with 450 of the members of both chambers voting for it and only 64 voting against. The measure had bipartisan support. And small wonder…Financial sector interests gave more than $86 billion to members of Congress in the three-year run up to the November 1999 vote on the bill. Those members who supported the bill received about $180,000 in cash on average from financial sources over those three years. Those members who opposed the bill received about half that amount on average.

There was little difference in the money collected by Republicans who supported the bill and those who opposed it; the 255 GOP supporters collected an average of $179,175, while the opponents in their ranks-and there were only five of them-collected $171,890. On the Democratic side, however, there was a wide gulf, as the graph indicates. The 195 Democrats who supported the Financial Services Modernization Act had received an average of $179,920 in the two years and 10 months leading up to its passage, while the 59 Democrats who opposed it received just $83,475.

Though, I will say as always... Both parties were to blame. BOTH.

So, there isn't exactly one smoking gun to quickly point to and lay blame. There isn't one party, one piece of legislation, one corporate entity, nor one class of people.

It's a confluence of events and actions that brought us into this. And it's going to take all groups coming together to get us out of it.

I'm a big fan of Capitalism. It's been brought to crisis and survived while other forms have collapsed under similar crisis. Most successful forms have capitalism survive under liberal democracies. We'll get through this as we have other downturns. It just takes some time and perspective to sort through what the cause and effect was and move toward a solution.

Right now we're working in crisis mode. Time to chill out and stop asking for everyone's heads. Both sides of the aisle have to buck up and think about the country first and ideology second. The dems have stepped up and did some interesting things that I wouldn't expect. The Republicans have done less so and have mostly postured and positioned to try to get footing for the mid-term elections.

I don't think Dodd or Geithner should take the fall.

While I believe it's in incredibly poor taste for those at AIG to take bonuses, it's a contract they had with a private industry (though, heavily backed by the US government). If i were in their position, I would have not taken the bonus and deferred for future financial stake in AIG since I would believe in what I was doing. I don't necessarily like Government taxing to recoup the bonuses. It's meddlesome. And really, the percentage dollar amount in relation to the actions by the Fed and the Treasury are really nothing in the big picture.

Also, those in glass houses... Cantor has really talked a big game this week against Geithner and Dodd. Didn't he vote for all this? Didn't the wealth management firm his wife works for receive over $250 million?