Democrats & Liberals Archives

Earning Vs. Cheating

You don’t have to do anything right to make money. The most profitable venture is one where somebody gives you something, and you give them nothing. Given the rarity of spontaneous, altruistic, irrational giving in this society, that means most of the time, The most profitable approach to business possible is cheating. Of course, that’s the last thing we want businesses to actually do, whether we’re GOP or DEM.

In retrospect, of course, it was highly unwise for people to invest with Bernie Madoff. I mean, just say that phrase out loud: "Madoff with your money." It's a dead giveaway.

Yeah, if you're psychic. As an investor, what power did you have to investigate? What authority to subpeona? To put somebody undercover with Madoff and these other Billion Dollar Bandits? Seriously speaking, the only means by which a person has to make sure their investments are sound are the reports of people like Madoff and other private auditors, and the investigations of the government bodies. The private auditors, of late, have not been reliable watchdogs, to say the least.

I know, I know, some folks will say "the market punished them", as if the market were a Jehovah in the sky working ruin upon those who disobey the precepts of good business. But the market seems to have a problem, as a real God would not, in anticipating these things. And why not? The Market isn't some mystical being. It's power comes from the emergent characteristics of a bunch of people interacting economically. People who can be cheated. People who can be fooled. People who can be foolish, and following the herd of other people in the market, engage in unsustainable or unwise business decision. The imperfections of man do not all go away when they get together in groups. The market's state of affairs is evidence of the adaptation of all its members to the conditions at hand, as they can know them, as they can understand them, and as the conventional wisdom lends them the ability to judge them.

The market can encourage bad decisions, whether through ignorance, or any other fault.

Some believed, or just told people, that the market could replace regulations, replace enforcement, replace the middle and working classes defending their interests. Just let the people in charge of the various corporations in the markets do what they want. They thought that the market would prevent the cheating, or they thought that cheating and letting all the things happen like that was a necessary part of the market working the way it was supposed to. Or, perish the thought, some folks didn't care what the effects were, and found the cheating profitable. In the end, though, it lead to one conclusion, which folks should have been expecting from the start, despite the years of conventional wisdom, despite the years of excellent returns: that at some point, the collective market would outsmart itself, and the market would do what it tends to do under such circumstances: wave goodbye to a great deal of the value people thought was there.

Unfortunately, it did more than that, because the banks that outsmarted themselves are essential to our economic survival. Too big to fail. People like Phil Gramm helped them get that way. We let business get so big that their collapse would take huge parts of the market with them. The folks reponsible for our situation thought the natural outcome of the game was for players to be eliminated, but the truth is, you don't see baseball teams collectively executed for failing to get into the playoffs or win the world series. You don't see most Karate tournaments fought to the death, nor the dead bodies of football game losers strung up on the goalposts. Even in nature, competition for food and other resources is rarely final. Stable populations are maintained, so that the death of the top competitors doesn't mean the death of the species.

Acquiring other companies has long been a means for companies to grow without winning actual customers, for companies to gain innovtions without innovating themselves. It's also long been a trick of the traders on Wall Street to encourage acquisitions so that the credit rating of otherwise good companies drop, raising the rate of return on the now riskier debt the company owes.

We saw plenty of tricks like this with the CDO's and CDS's, using them to keep the housing market perpetually high through the laundering of risk from predatory loans made with the knowledge that the loans could not be paid off.

The mortgages were not the problem in the collapse, it was the financial instruments that kept the market from bringing about the correction those companies would have experience for their bad loans.

Some people like to blame the mortgage holders, wagging their finger at these people for THEIR greed an excess. There's one problem with that. You can't get a mortgage without a mortgage lender. The lender is the gatekeeper to these vaults of resources. Some would like to say that the law forced these lenders to lend where they shouldn't. That isn't true, and I believe I addressed the substantive reason why that's highly doubtful in a previous entry. In truth, it was good old fashion greed, and the sense these people had that they could get away with it.

The built up a bubble of value, built up a facade of earnings, and cheated their investors out of their money by continually producing financial reports that showed these mortgages as, if not profitable investments, then hedged investments. The bigger banks were willing co-conspirators in this game, as they have been before in other cases of fraud.

What's worse than cheating, you might ask? Depending on somebody's cheating to keep the economy afloat. Worse yet, one begins to hide the dark secrets just to avoid the reckoning, and direct fire at those who blow the whistle. The truth is, though these cases of deception, the longer the truth remains unknown, the longer the market operates believing the wealth is there, the banks are solvent and have the books straight, the greater the damage, especially when the deception is used to fuel growth.

Which, let's face it, is what was done. Mortgage seekers pretended (or relied on the assurances of others) that they could afford the mortgage in question. Mortgage brokers pretended (but rarely believed) that they weren't getting customers in over their heads. Then they pretended to everybody else that the credit was going to be paid off. The levels and layers of pretense beggar the imagination of even folks who know how these systems work.

The complexity ran away with itself, the way fictions do when they're employed as lies, and when lies become the currency of commerce. It had to get more complex to justify itself, to grow, just as a cancer is forced by its nature to metastasize. Now we're left to pick up the pieces.

Some believe that I favor stricter enforcement and regulation of markets because they think I'm some sort of closet socialist. Or they think that as a Liberal, I'm just itching to kill business just on principle. But in truth, the course of my life traces the failed experiment of financial deregulation from start to finish. The bond market collapse of 1987. The Savings and Loan Crisis at the end of the 80's and the beginning of the 90's. The DotCom Bust. The Enron Collapse. The Housing Market collapse. And now the Financial System collapse of 2008-2009, which damn near turned apocalyptic, and as it is has us in the worst economic shape since the Great Depression.

My sensibility is one rooted in what is actually quite a conservative and traditional sensiblity. Whenever somebody has trumpeted the virtues of the New Market, and the notion that the old rules are outdated, my instinctive response has been this: the rules that need to be in place, however new or old they may be, are the ones that help us distinguish the cheaters from the earners, those who deal fairly from those who merely trick us.

The economy is about more than money, more than the circulation of cash, though such symbolic flow is an important element of our schemes. It's about the orderly and appropriate distribution of goods and services. The plumber sets a high enough price for his services so that he or she can operate their business pay their employees, and make a tidy sum on top of that. The person going to work for a company does that as well, if only by being selective about which employer they accept a job from. If a company is too stingy, it might not find the workers it needs.

But it's not that simple. Our businesses, right or wrong, have exploited many loopholes trying to get around that requirement, many of them involve shipping in talent, or shipping out the job. Maybe the ease of doing that is good for the company, but is it good for the country? If we don't maintain certain industries here, don't we risk making ourselve dependent on potential enemies, or friends who might stay friends? We're already suffering the economic consequences of our inability to satisfy our energy needs domestically, as well as the other effects.

And let us have no doubt, if we fail to properly interact with the environment, we could suffer the consequences economically and socially. Global Warming is just one of many potential long term economic problems that could arise from environmental problems. At the very least, we must consider the economic consequences of the health problems, the blight, the attenuation and collapse of the resources we are dependent on, and do something to make sure that America doesn't simply waste and pollute its way towards economic collapse. Anybody who think that we can survive separately from the sustenance of natural resources truly doesn't understand basic economics. We can cheat each other, but if we try to cheat with mother nature, we'll only be taking food from our mouths, land from beneath our feet, and water from our parched throats, and then like many other great civilizations now passed, we will inflict on ourselves Tantalus's punishment, with memories of what we once had dangled by our memories out of reach.

In short, we have to stop treating the economy as if it's just a glorified piggy bank, that only the competitive and powerful get to take wealth from. We have to realize that our economic regulations and enforcements are part of how we keep order and ensure fair trade in our society and beyond it. We have to realize that America cannot function purely as the abstraction on the map that many corporations, homegrown and foreign treat it as. And we must realize that where other issues like the environment bear on economic issues, letting the environmental damage occur, or letting it continue, can and often does lead to disaster.

We have to realize, at long last, that no economy can fail to take care of the needs of its people in a sustainable relationship with the environment without failing at its basic function. America's economy must work for Americans in general, and it must work for the forseeable future, because the alternative is ruin.

We cannot cheat our way to ongoing prosperity. We must earn our economy's success. We see around us the consequences of an economy built on secrets and lies. We must cleanse our system of those illusions and delusions.

Posted by Stephen Daugherty at February 20, 2009 7:45 PM
Comment #275867

This weeks episode of Frontline, Inside The Meltdown, was excellent. No one was interested in heeding the warnings because everyone was making so much money. All of those who said they didn’t see it coming lied.

Rather than being a deterant to bad business practices, Enron became a model of how to.

This is the primary problem I have with liberals. They think they can make an economic system ready made for corruption work by regulating human behavior. It can’t be done. The next bunch of crooks, the next major crisis is down the road waiting for you.

Posted by: jlw at February 21, 2009 12:22 PM
Comment #275869

Stephen, your arguments make no sense.

I know, I know, some folks will say “the market punished them”, as if the market were a Jehovah in the sky working ruin upon those who disobey the precepts of good business.

Um, no. “Some people” will say what actually happened—why not count yourself among them? Madoff (and more recently Stanford) had their offices raided, their assets seized, and were marched off in handcuffs. The “market” doesn’t do stuff like that. The feds do. Presto: this is the regulation you’re pining for in action.

What they were doing was completely against the law and is no way an example of free market principles—quite the opposite. Would it have been nice to catch them earlier? Yes, which makes this an enforcement issue and not a regulatory one.

Mortgage seekers pretended (or relied on the assurances of others) that they could afford the mortgage in question. Mortgage brokers pretended (but rarely believed) that they weren’t getting customers in over their heads. Then they pretended to everybody else that the credit was going to be paid off. The levels and layers of pretense beggar the imagination of even folks who know how these systems work.

I know it might be gratifying to simply blame the lenders (and they certainly bear their share of the blame), but there is nothing “predatory” about giving somebody a loan they can’t repay.

If I give you a $100,000 knowing that you can never repay it, how am I preying on you?

No, the truth is that the lenders were forced to provide these loans because they didn’t want to be labeled racist, among other reasons, and suffer REGULATORY SANCTIONS at the hands of the government.

You seem to have never heard of the Community Reinvestmant Act which REQUIRED banks to make these loans that people couldn’t repay. This, my friend, is government regulation in action. And you want more of it—LOL! I suggest that you google the Community Reinvestment Act and educate yourself about why these loans were being made instead of indulging in knee-jerk anti-market socialist rhetoric.

What liberals fail to understand is that we’re NOT against having any regulations or enforcing them. A free market MUST be regulated according to the law. But don’t blame problems that were CAUSED by bad regulations on something called the “free market” and use it as a pretext to call for even more regulations.

Also, don’t keep ALWAYS making the mistake of assuming that if you can identify a problem that the solution to that problem is always the government.

Unless we put everybody in this country under 24 hour video surveillance and have every document and bank transaction subjected to review by a team of experts, people are going to be able to cheat. These people running ponzi schemes, for example, will not always be caught simply by regulations. After all, they are cheaters. They learn the system and manipulate it by creating fake documents with fake figures on it. How do you catch that every time before it happens? Eventually you can identify the problem, track it down, and punish the perpetrator, but you can not 100% guarantee that you will be able to PREVENT it from happening in the first place. Any system that could adequately prevent such things from ever happening would be a police state and a frozen economy. It would be like making sure your teenager never smokes pot by keeping him at home chained to the radiator.

Posted by: Loyal Opposition at February 21, 2009 1:20 PM
Comment #275872


This is one of the best articles by you that I hav gotten to read. Very nice job.

“The market can encourage bad decisions, whether through ignorance, or any other fault.”. It could not have been stated any better. I have seen many people make tremendously bad market decisions out of ignorance and would like to share one(as a disclaimer, I have made some myself). During the DotCom bubble, a coworker of mine was closing in on retirement age and health. Thinking that the market could only continue to increase, he took out a mortgage on his house and dumped it all into the market. He actually was up 10% in a short time and I continually warned him to get out. He did not. Within a matter of a year he went from financially set to ruined. Greed and ignorance of the markets are faults.

“The mortgages were not the problem in the collapse, it was the financial instruments that kept the market from bringing about the correction those companies would have experience for their bad loans.” I understand your arguement here, but from my IMHO if one were to perform a root cause analysis, then the issuance of high risk mortgages would be the cause of the problem. The resistance to a market correction is a multiplier of the results. Let me be very clear on my thoughts along these lines. If, as you say, the market not being allowed to adjust for the bad mortgages and therefore keeping the bubble inflated was the cause, or as I say a multiplier, then the market must be and eventually will correct. The government’s intervention will just delay the correction and, as you have demonstrated, the cost of artifically keeping the bubble inflated will be exponentially greater than taking the hit now.

Without risk, there can be no rewards. The higher the risk, the higher the reward and punnishment for failure. We cannot eliminate one and maintain the other. No company, bank or institution should ever be considered too big to fail as long as their failure was not a due to a deliberate attack. No sucess should be allowed to stand when it was achieved through cheating.

Posted by: submarinesforever at February 21, 2009 1:58 PM
Comment #275876

Loyal Opposition writes; “If I give you a $100,000 knowing that you can never repay it, how am I preying on you?”

Such a simple statement and such simple logic and reason. Well said LO.

I wonder if anyone has noticed that only one insurance company, as far as I know, has needed bailing out? Traditional insurance companies such as John Hancock, Mass Mutual, NY Life, Allianz and others are doing just fine and as an independent insurance agent and financial planner using insurance products I am proud as hell with our regulated industry.

Many have written on watchblog of the greedy and uncaring insurance companies. Not a single insured death has gone unpaid to the beneficiary. Not a single annuitant has failed to receive their contractually promised payment. Not a single long-term care policy holder has failed to receive benefits in accordance with their policy.

Insurance companies are well regulated by both federal and state agencies as are our banks. Why is it that one is doing just find and the other is in deep trouble?

One obvious difference is that so far, our regulators have not mandated that we assume risks that are not sound on an actuarial basis. Insurance companies continue to operate well on principles that have served the industry well since it’s conception centuries ago in England. Those insurance companies that were mismanaged, did a poor job of underwriting the risk, didn’t offer policies that people wanted, etc. failed and went out of business. Government didn’t step in and bail them out, but rather, helped other insurers to take them over thus protecting the policyholders.

Over the years there have been many attempts by government to enact legislation that would harm both the companies and policyholder, especially with regards to taxation, and these efforts have failed because the industry is strong and is supported by a structure that works to benefit both.

Posted by: Jim M at February 21, 2009 2:30 PM
Comment #275883

Any economic system is corruptible.

Theoretically, the Communists should have been incorruptible, but as Orwell’s famous phrase put it, some animals became more equal than others.

By intent or by accident, all economic systems end up putting control of more resources in some people’s hands than in other. That creates a gradient of power, and as those making sewer lines know, the crap tends to roll downhill rather than up.

You can, however, set up a system that has more checks and balances, more disclosure, more people acting out of simple and collective self-interest. That’s why the capitalist hybrid market economy is the worst system, except for all the others, to paraphrase Churchill’s description of Democracy.

I would say the defining difference between a corrupt society, and one that is more ethical is the emphasis on earning rewards rather than cheating to get them. We create a environment of selective pressures by our actions. When we put an emphasis on honesty, on hard work, on cleverness that increases the yield of hard work instead of bypassing it, when we select not for those who copy off the other person’s test, but those who don’t need to, Then we’ll have a more honest society. But if what we reward is selfish snatching of resources from others, then our system will be built on lies, and who can tell the most elaborate ones.

Define free market. No, really, define it. For the last generation, the folks who have been running this country, more often than not, subscribed to an ideology that saw regulation of markets as a short circuiting of the market’s self-correcting mechanisms. So from this point of view, investigating Madoff would be interference in the free market.

Same thing, of course, for any kind of investigation which could cause problems with the bottom line (under the cost/benefit model of regulation), for any regulation that might force better disclosure, force better accounting of exotic financial instruments, force banks and other institutions to leverage less.

This is where your definition of free market is important. by free, do you mean free of rules that interfere with how you can do business, or do you mean by free that prices are set for the most part by people haggling the prices out, either directly through negotiation or indirectly through choices made in regard to fixed rates and prices.

Which brings us back to your points you talk about it being a separate enforcement and regulatory issue? I belief its part of maintaining a free market that works. Up until somebody shows up at Bernie Madoff or Enron’s door with a warrant or subpeona, the ignorance within the market is what is setting the scene for people’s judgment. When it becomes more difficult to hide failures, you will see fewer people trying to hide them, and fewer people letting them happen, even among the dishonest.

Even if the disclosure is mainly among professionals, it helps for people to know, because those professionals might be your pension fund manager. Most serious problems only grow with time. The Republicans and those who supported their policies (which included Democrats in all honesty) let some pretty serious problem grow until they became more damaging, more difficult to recover from.

I know it might be gratifying to simply blame the lenders (and they certainly bear their share of the blame), but there is nothing “predatory” about giving somebody a loan they can’t repay. If I give you a $100,000 knowing that you can never repay it, how am I preying on you?

The lender’s choice is the necessary one. Approved? Denied? You bring up the CRA. I brought up my previous article ABOUT the actual extent and effect of the CRA’s requirements. It was even part of the title: only 1 out of 25 of the top lenders of the critical period were actually completely covered Most of the rest were only partially affected, if affected at all.

The CRA did not encourage more bad loans than average, but produced less. It wasn’t about giving people mortgages beyond what the banks thought they could afford. It was about preventing depository banks and mortgage lenders from discriminating against minority neighborhoods. To repeat for emphasis, the loans made possible by the act defaulted less often and were paid back at a better than average rate, even in the subprime market.

It’s interesting that some folks attack an entirely successful, economically helpful law here, one which has improved property values and allowed true home ownership, and used it as a scapegoat for an industry that was truly predatory, and barely regulated by the law to start with.

What makes a mortgage predatory is when the mortgage was set up to fail in a way that the average layman or a person desperate for a better life might overlook, might not be prepared to defend themselves against. Rate changes, trapdoor clauses, penalties and fees designed to endebt people rather than discourage non-compliance.

I know some would like to believe that these people, with the back of their hand held to their forehead, about to swoon, were saying, “Oh, the law requires us to make loans people won’t be able to pay back”, That was simply not the case. The Attorney’s Generals of virtually every state in the union, save one, saw predatory lending as a problem. The Bush Administration response? Side with the Lenders and federally pre-empt the cases up to a more lenient authority.

This is not about regulation for its own sake, but rather about whether we build the system to suit those gaming it or those who are doing something useful for people.

As for the rest? We don’t stop prosecuting murders, thefts, rapes, or other crimes because we can’t put surveillance on everybody, because some people get away with it. This is about enforcing the rule of law, and not being allergic to intervening against business.

I was saying more or less that the market would have corrected sooner, especially if the predatory lending was kept to a minimum by state or federal authorities.

This is not about eliminating risk, but about keeping people from hiding it when the risky asset is sold off. That way, you don’t have people looking at something that says “absolutely safe” only to find out that’s the credit rating company lying to you through its teeth so somebody can sell bad mortgage securities to you.

Risk will remain with us. But some behaviors aren’t at risk for causing trouble. They’re guaranteed to cause it, sooner or later. Do we let the bad consequences from such behavior repeat again and again, or do we outlaw certain practices that lack enough redeeming features to them?

The market must have enough room to manuever, to respond to economic situations. But we cannot expect to leave it unpoliced or insufficiently safeguarded by rules and have the results be any better than if we went without rules and laws in other areas of our society. The game must have rules to be played right.

Posted by: Stephen Daugherty at February 21, 2009 4:00 PM
Comment #275886

Jim M-
There are plenty of ways you can loan money where people think they can repay, but where the terms have been made so unfavorably that even a person with reasonable intent and ability to pay will have trouble keeping up.

Before the credit system burst, and the springs and gears started dangling out and bouncing around, the credit card companies regularly raised interest rates and tacked on fees for the least damn reason. They would move around the due dates on bills and mail out credit cards to people that even a person educated with a banana and an inner tube would know were credit problems. You know, students with no income, people who went into bankruptcy. As a matter of fact, going into bankruptcy almost ensured you’d be given an application.

And why would they do this? Because they can mark all the increases up as increases in future income. You and LO look at the system in such a simple, logical way, but the simple logic of the credit industry was to endebt people as much as possible. Whether people would ever actually pay the money was beside the point. Or at least it was. Did you hear a few months back about the credit card industry suddenly dropping people’s credit limits, cancelling cards, doing all this even to people who paid dependably and kept their balances straight?

That was the Credit Card industry’s logic catching up with it. Even if they wanted to mark up the new debt as profits, who would buy the debt? Because that’s the only way they could manage to give out so much money: sell the debt off to somebody else, who sells it down the line. Financial hot-potato.

That’s your logic, right there. The more they endebt you, the more debt they could sell to somebody else. Now, secondary debt markets are not a uniformly bad thing. But you can’t just let them rip and expect nobody to cheat.

As for this:

Many have written on watchblog of the greedy and uncaring insurance companies. Not a single insured death has gone unpaid to the beneficiary. Not a single annuitant has failed to receive their contractually promised payment. Not a single long-term care policy holder has failed to receive benefits in accordance with their policy.

I am the son of woman who once recalled a health insurance company trying to stop a spinal surgery halfway. I have watched my parents deal with insurance companies. Lawsuits against insurance companies are a matter of course. I’ll say this politely: I disagree with your assessment about how well they come through on their agreements.

More to the point, an insurance company, AIG, is one of the biggest economic failures of late, and the subject of one of the largest individual bailouts in American history. Is it alone? I don’t know, you tell me. I’ve taken a look at many insurance company stocks, and the common pattern seems to be that they all fell off a fricking cliff in stock value about October.

What would give investors cause in October to dump lots and lots of insurance company stock? Perhaps its the thought that AIG must have been doing something right, and these companies must have been doing it too. ;-)

Besides, if I may be so bold, is it not the case that the Gramm-Leach-Bliley act essentially allowed Banks an insurance companies to stick their noses in each other’s business? There’s no reason to believe your industry will remain a shining example of business wisdom, if it was that to begin with.

Posted by: Stephen Daugherty at February 21, 2009 7:10 PM
Comment #275888

Can someone in the insurance business remind me of something…my memory is a little foggy.

Several years ago, perhaps late eighties, Mexico was about to default on about eighty billion in bad debt. The owners of the bad debt was Norde Americano insurance companies. Those insurance companies went running to Uncle Sam for help. We, the American tax-payers, granted Mexico US backed loans to the tune of 81 Billion Dollars, so Mexico would not default on bad loans made to it by our very own insurance companies. Does any body remember the details of that fiasco?

Posted by: Marysdude at February 21, 2009 9:16 PM
Comment #275899

Market forces operate more broadly than the private market and so does cheating. Put very simply, a market is just a place (real or virtual) where people come together to make exchanges. Markets develop everywhere. This blog is a type of market. There are producers and consumers of information and we all trade. Some people’s opinions are more highly valued than others and if anyone consistently produces crap, people will stop paying attention. While there is some regulation in this marketplace, the biggest penalty is that people stop using the product.
You are right that some people will try to cheat. Some examples. In the blog market that means that writers will not do their homework, try to intimidate or just make up facts. In the financial world, we have people like Bernie Madoff. In the business world we have Enron. In the government world we have Freddie Mac or Fannie May. In the political world, we have Rod Blagojevich. Stopping these crooks required a combination of market forces and law enforcement. The market uncovered Madoff, Enron and the weakness in Freddie and Fannie and only after that did regulators step in with the law. The law caught Blagojevich and only later did the people around them become (or pretend) outrage.
People can make good decisions when they have access to information, when the results are reasonably close in time and place to the effects, and when the person making the decision is also going to be significantly affected by the outcome. And markets work well in those conditions because people can watch and control the crooks. That does not mean that everybody WILL make good decisions and that last part, affected by the outcomes, implies that it is necessary that people suffer for the bad decisions they make.
The moral hazard that government intervention produces is that it can take away the sting of bad decisions and lessen the benefits of good ones. When government gets big enough, a type of governmental entrepreneur develops. These guys game the system, including regulations. The crooks at ENRON were these kinds of guys, so were the people milking Fannie and Freddie. Even Bernie Madoff was able to get so far because of the moral hazard of regulation. Investors were less diligent because they over relied on the regulators to protect their investments.
We need regulation and the rule of law is one of the foundations of civilization. But we have to be careful to recognize the context in which all decisions are made. We make laws and regulations to operate in a human system. Humans are flawed. That includes those who make and administer the laws and regulation. We need to have all sorts of checks and balances. Regulations provide some of this. But most of it comes from the actions of people outside government who are looking after their own interests.

It is also necessary that the market provides a check and balance on government, because a lot of cheaters end up there too.

And remember this: private business can trick you out of your money; government can just make a law to take it. Private business can bribe or cajole you into doing their bidding; government can draft or arrest you.

Posted by: Christine at February 22, 2009 9:49 AM
Comment #275900

SD has done a yeomans job of debunking the right’s propaganda mill spin implicating CRAs in the colaspse. I would add that Britain is experiencing the same problems. Their downfall,although triggered by the US, was of their own making with an absurd run-up in real estate prices and lax regulation. The CRA had nothing to do with it as Britain is a forign country,believe it or not.
IMO the attempt to blame CRAs was not just a red herring, but a desparate throwback to racist paradigms in an effort to keep the Republican sheep in line. You should be insulted they think so little of you as to try it.

Posted by: bills at February 22, 2009 9:56 AM
Comment #275901

A thoughtful post. You might bear in mind that the private side has also done a fair share of coercion also. The plantations of the South,dependant on slavery, were private enterprises to site a most graphic example.We need to focus on what works. I am amazed that the high priest of free markets,St.Greenspan of the Recurring Bubble, is calling for nationalization of banks while BHO is trying to avoid direct government takovers. The devils in the details of course, but it is nice to see practicality trump idealogy for a change in terms of policy formation.

Posted by: bills at February 22, 2009 10:50 AM
Comment #275905

The Market did kill Madoff’s business, but only indirectly. He managed to keep his fraud quiet because he gave out returns that were modest enough not to signal that he was essentially handing investors other investor’s money. Madoff took advantage of, even engineered lax enforcement so that repeated claims of fraud would get nowhere.

Enron also wasn’t outed by the market, but by Journalists who suggested that Enron wasn’t what it was cracked up to be. the Market responded after the fact, and that response revealed further problems.

Fannie Mae and Freddie Mac were not at the core of the housing problem, they just got killed with everybody else when the credit markets sunk.

Still, there’s one thing that all these market responses have in common: they occured after the fact, after the damage had been done. What if Enron’s finances had been scrutinized more closely, it’s more exotic financial strategies forbidden to it? Enron might have done far better, not to mention the market. If Madoff’s fraud had been detected earlier, the damage there too might have been less, and less inconveniently timed. The business friendly approach has failed. It’s been not unlike the drinking buddy who helps you stay an alcoholic.

I’m not sure how we take the sting out of misbehavior by taking government sanction off the table. Enforcement and faith in enforcers is what we want. When people think that if they bring their suspicions to the authority that they’ll listen, they’ll do something if there’s something to to be done, then they’ll tell the authorities more. Our current system, where enforcement is discouraged, discourages whistleblowing in turn. Why take the risk if you don’t think the people you’re telling will believe you, or take action?

Folks will always game the laws. Even so, their behavior is shaped by it, inhibited. Perhaps Enron still happens with Regulation. But would the fraud have been as massive if hiding it was more difficult? We shouldn’t let the perfect be the enemy of the good.

You asked me to remember something, so I will ask you to remember something in turn: if Government asks something of us we don’t want to be asked, then we can always ask them to leave.

Thank you, though, for your thoughtfulness. We need reasonable people in these times.

Posted by: Stephen Daugherty at February 22, 2009 11:53 AM
Comment #275911

> If Madoff’s fraud had been detected earlier, the damage there too might have been less, and less inconveniently timed.
Posted by: Stephen Daugherty at February 22, 2009 11:53 AM


Good response, but remember it was not lack of early warning that put off Madoff’s arrest, there were several early reports of his Ponzi…they were just ignored by the folks who could have put a stop to it.

Posted by: Marysdude at February 22, 2009 1:10 PM
Comment #275913

Daugherty writes; “More to the point, an insurance company, AIG, is one of the biggest economic failures of late, and the subject of one of the largest individual bailouts in American history. Is it alone? I don’t know, you tell me. I’ve taken a look at many insurance company stocks, and the common pattern seems to be that they all fell off a fricking cliff in stock value about October.”

Gee…thanks for the heads-up about AIG. You didn’t read I stated “one” exception without naming the obvious. I mistakenly believed that everyone would understand…you apparently didn’t for reasons of your own. And yes, it is the only insurance company that has accepted federal funds even though offered to others, it was turned down. Other insurance companies didn’t need, or want, government money.

If you knew much about the insurance industry you would understand that; what AIG was doing in one part of their business hardly compares with what I referenced as traditional insurance. I would like to know what companies “fell off a fricking cliff in stock value about October”. And while you’re at it, please link it to some failure on their part rather than the fact that nearly all stocks dropped in value during that period.

Would the other readers on this blog rather own a thousand shares of BOA or Citibank or a thousand shares of NY Life, Hancock, Allianz, State Farm, etc. If not, why not?

Daugherty continues with; “There’s no reason to believe your industry will remain a shining example of business wisdom, if it was that to begin with.”

There is every reason to believe the insurance industry will continue to thrive and remain not only solvent, but profitable, with policies folks want and need. They will fail only if the greedy asshole politicians get their hands on this truly remarkable industry. Why is it that liberals can’t tolerate success unless such perceived success is done by government at taxpayer expense?

No doubt Daugherty and others would very pleased to see this industry fail so their liberal leaders could dig their claws deeper into one of the last huge industries that is well run. They dare not allow even one industry escape their socialist plans.

Posted by: Jim M at February 22, 2009 2:22 PM
Comment #275914

marysdude makes a good point; “…remember it was not lack of early warning that put off Madoff’s arrest, there were several early reports of his Ponzi…they were just ignored by the folks who could have put a stop to it.”

When regulators don’t regulate and laws aren’t enforced it hardly makes a case for creating more of both.

Posted by: Jim M at February 22, 2009 2:26 PM
Comment #275915

Slavery is an excellent example of the collusion of government and private coercion. Slavery was legal and supported by law and regulation of the time. When slaves escaped, the authorities hunted them down themselves or facilitated bounty hunters. The Dred Scott decision even imposed the defense of slavery on jurisdictions that didn’t support it. Southern leaders defended slavery with greater enthusiasm precisely when and because it was making less sense from the economic and social perspectives.


Madoff lost money as investors asked for their money back. Only after that did regulators get involved. Regulators should indeed have been involved way back in the middle of the 1990s or before. What Madoff did was illegal, then and now. That they were not indicates the challenges regulators face.

Re ENRON – journalists are part of the market mechanism. Most investors rely on the Wall Street Journal etc for information. You couldn’t make many investments if you had to personally check out each one. The market responds to publicly available information. But the sequence is that the market responded before the regulators.

My point re ENRON, however, was a different one. ENRON’s whole business model was based on regulation and creating arbitrage opportunities between and among the different types of regulations. Ken Lay and Jeffery Skilling were the kinds of regulation entrepreneurs I was talking about. ENRON didn’t produce much of anything nor really provide an independent service. They figured out how to game the political and regulatory system and it worked for them for a long time.

Freddie and Fannie provided backing for subprime mortgages the sparked the initial credit problems. They are examples of the most dangerous type of public/private collusion. They have private profits and public risks. The investors and the politicians enabling them win money and votes at the expense of the public. A plague on all their houses.

Talking about asking government to leave – we can ask, but they don’t always listen. America has been very successful because we have managed a good balance between government, business and society.We have to be careful not to tip that balance too far toward any of the players. In other words, conflict among them is eternal and we hope nobody ever win. Eternal vigilance is the price of liberty for all involved.

Right now I think we need more government intervention and I am glad to have President Obama, who seems to be trying to do what is right for all Americans. There will come a time when we need less government and a different leader will carry that out.

Leaders tend to repeat winning strategies of the past even after conditions have changed. The transition periods are always uncomfortable and most people cannot adapt. Usually, you have to get a new set of leaders.

But it works our for us. We are Americans and we always do the right thing … after trying everything else.

Posted by: Christine at February 22, 2009 2:45 PM
Comment #275924

Jim M-
Well, Hancock’s parent company’s trading at a quarter of it’s peak, at 10.52 today, where it once traded as high as 40.

New York Life is doing fine, retains a high bond rating. It’s not a publically traded company, though, but a mutual insurance company. It also apparently got out of the market before it became really bad.

Allianz is trading at 6.69, where it once traded at 20, earlier in the year.

State Farm is a mutual company, so like New York Life, it may have avoided problems.

Principal Financial Group dropped from about sixty to 10.52 in the space of a year.

Let me put this plainly for you: part of Gramm Leach Bliley’s effect was to make it possible for insurance, bonds, and stocks to be all sold out of the same company. That’s part of why AIG went out of business. I suspect it’s a difference of degree in certain behavior, rather than the fact that all these companies did the right thing.

It’s interesting that so many of the mutuals are still doing well, while so many of the companies that were publically traded have dropped considerably in value. We can’t say that industry-wide, insurance just suddenly became less profitable. What we can say, though, is that many of these companies ran more than just insurance operations. Allianz and Hancock both dealt in stocks.

Here’s Republican deregulation at work: the firewalls that once would have shielded your industry from the disasters on Wall Street are down.

Let me ask you a question: what does all this hysteria about liberals contribute to the discussion? I made the distinction about earning money with good reason. I’m not against people making money, but when they say they will do a thing to earn it, they ought to earn it. If they are an insurance company, they shouldn’t be constantly fighting to put their customers at a disadvantage. They should serve their financial interests, of course, but they don’t get to act like a racket, trying to find every excuse not to pay, or to underpay.

If they succeed, I’m happy for them. But only if they do the service they’re supposed to do, like they’re supposed to do it. Now I’m happy to let the market determine part of that, but if the customers can’t get a fair deal because of industry practices, the government should step in.

And even if they don’t, they should take seriously the possibility that folks in Washington might bring them in, if they don’t behave.

So you can talk about “socialist plans” and run screaming from the claws of the liberals. But I think Americans are tired of people maintaining the political tone of a kindergarten when what they want are adults dealing with the problems they can’t deal with themselves.

Posted by: Stephen Daugherty at February 22, 2009 6:15 PM
Comment #275926

Before we go any further, please consult this entry I wrote. At least read the first paragraph

Fannie and Freddie backed some of the bad mortgages, no doubt. That much is true. But they were being left in the dust by their competitors, and the more aggressive parties in going after people that couldn’t pay things back were the private lenders, in particular, the poorly regulated non-bank lenders, who held 24 out of the top 25 slots.

That out of the way, let me address why I don’t agree with your notion that the market deals well with its problems.

Essentially, it goes like this: The market keeps on showing up late, only once the secrets come out. The market often becomes an excuse to do things and let things be done, to hold off on enforcement, to not rock boats.

That’s why the market’s had to react first, and each time it’s been an economic disaster. We let the market encourage these companies and these entrepreneurs, and even worse let the special interests of the few shape regulation. but what if we could puncture these disasters in the making first, or even prevent them from every coming to pass?

We need there to be more friction, more resistance against this kind of misbehavior, to compete with the incentives that are always there to cheat.

The environments we’ve set up have done the opposite. Deregulated energy markets allowed energy traders to overinflate prices for gas and electricity, especially as they created artificial shortages. Deregulated financial markets encouraged traders to create ever more convoluted fugues of exotic financial instruments to magically create money through leverage, masking several negative economic trends. Deregulated labor markets let wages stagnate.

So on and so forth. We gave the competitive business folk the room to cheat, and they did.

In my mind, the incentives we give have to be for constructive purposes. The more we tolerate pockets of those who simply game the system without doing anything productive, the more we tolerate the circumstances that land us in these crashes when the lessons we once learned at our peril are relearned through bitter experience.

Posted by: Stephen Daugherty at February 22, 2009 7:05 PM
Comment #275940


I am just more cynical than many people. My friends on the right like to think that markets will take care of everything and that government is full of crooks and fools who just want to interfere with freedom. My friends on the left figure that the crooks and fools in business need to be controlled by the virtuous people in government.

I figure that people are all flawed. Lots of them are dishonest and even the honest people can often deceive themselves into thinking they are doing the right thing when they are doing the selfish thing. Government and business recruit from this same pool.

All human systems, in fact all natural systems too, tend toward excess. As Darwin says, natural is profligate … and so are humans. We push along until something stops us. Animals do it and so do we.

In other words, I don’t trust government and I don’t trust business because I know that power will eventually be abused. That is why the system you create should not concentrate permanent power anywhere and I am very suspicious of anyone who promises permanent prosperity.

Business people have done a lot of wrong in the past and will continue to do it in future. But government is where you can get the catastrophic concentrations of power. Political leaders like Hitler, Stalin or Mao are responsible for industrial scale murder. Politicians need to be checked as much as business people – more.
I remember the late 1970s, when gas prices were heavily regulated (prices were controlled), when trucking was heavily regulated (trucks had to do their return trips empty), when banking was heavily regulated (interest rates were capped), investment banking was tame and controlled by an old boys’ network, farmers were not allowed to sell certain products (like hops) w/o a Federal permit. The list goes on. Our postwar system worked for around twenty-five years and then it began to collapse in the 1970s. By 1980 it was clear that system crashed and burned. We managed to get double digit inflation AND double digit unemployment. We reformed and liberalized the old system. The new system worked for around twenty-five years. Now it is clear that system also needs reforms. We will reform it, but the game is never over. There is no finish line.

BTW – the article you reference in your article says that Fannie and Freddie eventually got more than 50% of the subprime mortgages That is enough to be culpable. It is not the only reason, but it is one of them. We will be looking at multiple causes for the economic downturn, because it is a systemic collapse.

I don’t get very excited. We got really worked up after 9/11 and made some bad decisions. Now we blame the leaders from those times. Now we are all worked up about the economy. We are clearly making hasty and ill considered choices. Time will tell which are good and bad. No matter what, we will blame the leaders of these times. The only way to avoid blame is not become a leader in the first place or die before the bills comes due.

Our country, with all its flaws and complaining, produces a good standard of living for almost everybody and gives us decent freedom and choices. I have heard predictions of our imminent collapse for the last 50 years, but we are still here. We should not expect perfection and we won’t be disappointed.

Posted by: Christine at February 22, 2009 9:22 PM
Comment #275941


F&F had little to do with the downturn. The mortgages they held were in large part good loans. The sub-primes they held were still of value, though reduced, but value none-the-less.

Any bank, broker, insurance company or finance house can take a punch…hell, they take losses all the time. That is part of the risk and is built in to the economy. F&F might have contributed to the initial blip, but did not cause the collapse. Something that serious had to be caused by something more serious than some bad mortgages.

AIG when it ‘insured’, without the funds to back the ‘insurance’ and Lehmans, et al, when they could not cover a few defaults were the real cause of the disaster, and the reason is they failed to present VALUE in those bundles of joy they were trading and lying about in their bookkeeping. Seven trillion dollars being traded on the strength of what F&F and other mortgage houses held…perhaps a trillion or so in real value bolstering seven trillion in bundled air…talk about Ponzi…wow!

Posted by: Marysdude at February 22, 2009 9:53 PM
Comment #275942

Stephen, it’s extremely deceptive to simply point out loans that Fannie and Freddie themselves held or were directly underwriting when they were buying up billions upon billions of these basically laundered private securities (which were not, by the way, based only on sub-prime loans).

Your original theory about how “predatory lending” was the motive of private lenders contains a kernel of truth, but it wasn’t the borrowers who were being preyed on here. How could it have been? Giving money to people who can’t repay you is not “preying” on them. If a private firm can hand off bad mortgage-backed securities to Fannie and Freddie however, then it was Fannie and Freddie they were preying on.

And here’s what you get with dumb instead of smart regulations—a profit motive for cheaters who now get to cheat using taxpayer dollars instead of their own.

The huge irony here is that regulations and government agencies quickly become the handmaidens to the very corruption and greed that the pro-regulation agitators pretend to deplore.

How are these recent bailouts any different, by the way? Keep telling people that their mistakes and failures will be underwritten by the government, and there’s no reason for them to stop failing. They know they’re playing with house money.

This previous entry of yours that you keep wanting people to read is far less substantial than the article it links to—which is itself thinly sourced, filled with foggy logic, and either intentionally or accidentally deceptive.

Anyone who wants an actual description of what happened which is backed up with hard data would be far better off reading this article.

What’s more, your previous entry (as well as your latest) conveniently avoids talking about any bad loaning practices except those which involved “sub prime loans.” Sub prime loans were only part of Fannie and Freddie’s involvement and exposure.

A lot of left wingers with agenda of extending government power into as much of our lives as possible try to frame this issue as a simplistic choice between smart, efficient government regulation and corrupt private enterprise.

But as with most things, simple ideological solutions and crude caricatures don’t offer genuine solutions or give an accurate account of why we are at the point we currently are.

Posted by: Loyal Opposition at February 22, 2009 10:09 PM
Comment #275944

Christine, I liked your last post a lot, but I’d quibble with one small part of it.

I am just more cynical than many people. My friends on the right like to think that markets will take care of everything and that government is full of crooks and fools who just want to interfere with freedom…

The contradiction you mention between your views and those of your friends on the right shouldn’t exist. I say “shouldn’t” instead of “doesn’t” because I don’t actually know your friends. As you describe them, however, they are not actually denizens of the right but odd pollyanish individuals the likes of which I’ve never known among the ranks of actual conservatives.

The “cynicism” you describe is absolutely essential to conservative thinking. I’d not call it cynicism however, so much as a lack of sentimentalism about human motivations (when it comes to devising large organizational schemes, at least—as individuals conservatives give way more to charity than liberals, even liberals with the same incomes).

If you recognize that the vast majority of people will usually behave according to their own perceived self-interests (whether they work in the private OR public sector), then you are inevitably on the road to economic conservatism.

Most people are greedy. The genius of conservatism lies in creating large societal structures which harness that greed to benefit humanity at large. The tragedy of leftism is that it decries the greed of the most successful while denying the greed of the less successful… which leads to developing systems that suck the life out of everybody.

Posted by: Loyal Opposition at February 22, 2009 11:06 PM
Comment #275951

I don’t think in terms of virtuous government controlling the fools and the crooks. I think in terms of government officials who get their butts kicked by voters if bad things happen too much on their watch.

I don’t trust government to see to our interests without feedback, without clear consequences for letting things screw up.

You’re right that there is no finish line. This will not end until we tire of having a government that answers to us, that is accountable to us.

On the subject of the GSE’s the important thing to keep in mind is the quality. Subprime isn’t new. Neither is the secondary mortgage market. Neither is the CSA or much of anything that the Republicans blamed in the stead of Wall Street.

Something new happened. Something was allowed during the last few years, that wasn’t allowed or encouraged before. So, if the GSE’s produced a lot of the recent, more unstable mortgages, and these helped trigger the mess, there should be a certain pattern to what happens. We should see them overloading on the mortgages. We do not. the private companies do We should see the share of the market and the originated loans, especially in the subprime class, grow larger. Instead, the vast majority of mortgages, as well as the subprime flavor, get originated and placed into the secondary market by the private lenders.

Yes, the GSE’s had half of the secondary market, when all was said and done. But that was down from about seventy to eighty percent beforehand.

Additionally, there’s a floor of sorts to how risky the loans are that the GSE’s can pick up. They weren’t even allowed to touch the worst of it.

Also, not all the Subprime mortgages, or even most went bad, just a significant enough portion that it caused trouble for different companies Simply holding loans, or even subprime loans is not enough. You got to be holding certain kinds. If you’re holding enough of these bad ones, then problems start arising.

Lastly, note how long it took for the GSE’s to get shoved into receivership. If they were the epicenter, you would have seen them hit immediately. Instead, it would be months before they bit the dust, and that would be about the time that everybody else’s credit starting going to crap.

The first lenders to go were Countrywide, Ameriquest, and other similar operations. It was their balance sheets that suddenly turned toxic, and from there it spread.

Posted by: Stephen Daugherty at February 23, 2009 1:06 AM
Comment #275953

Like I said to Christine, it’s the quality of the loans that mattered. In shops where nearly everything they sold was crap, the collapse of the lenders was quick. The GSE’s died from Asphyxiation, as the toxicity of the mortgage market and the securities that the private lenders issued algae-bloomed the market for additional secondary investment. When the GSE’s could no longer sell off new mortgages, their goose was cooked.

You keep on insisting “how is it predatory lending to give people a loan for more than they can repay?” But you neglect the factor of the secondary market. With the Secondary market, it becomes somebody else’s problem if the customer defaults. All the fees or interest rate hikes that come from that distress can be marked up as eventual profit before the debt is sold down the line. The whole point for everybody was to inflate the value of things in the market so their prices could be driven upwards, guaranteeing additional profits from those sales of mortgages.

Or put another way, what they really would get back was not nearly as important as what they could claim they’d get back when they sold it off and made it somebody else’s problem. That’s how predatory lending works. And though you can argue semantically that the lenders and the banks may have been preying on each other, most of these guys were making money doing this; most of the people getting mortgages weren’t making a dime. They were paying through the nose.

As far as the bailouts go, it was your people who insisted on softening up most of the safeguards and guarantees that would have made it more difficult to misuse the money. Unfortunately, you wanted to have your cake and eat it too. You’re too use to saying yes to business and too unused to saying yes to any solid restrictions or enforcement strategies.

This previous entry of yours that you keep wanting people to read is far less substantial than the article it links to—which is itself thinly sourced, filled with foggy logic, and either intentionally or accidentally deceptive.

Is it now. Too bad. I thought an article based almost directly on actual federal housing data would be a good source.

Your article doesn’t contradict what I said. Certainly, the capital those organizations put in was important, and it would have been better for the GSE’s and everybody else if regulations had been better on what they could buy and how.

But in the end, they weren’t the ones buying the worst of the mortgages, and it’s the lack of regulation with the non-bank lenders that allows them to vastly overinflate this bubble.

The problem here is that you’re not willing to see that side of the equation. Regulation to you is about loss of freedom. The market must be allowed to decide. You’re not realizing, the market was left to decide, in the two critical ways I’ve pointed out: the allowing of abusive practices, and the use of exotic derivates to sidestep the non-sustainable nature of most of the debts.

The distinction I made at the start of my entry is an important one. I expect that somebody is going to look at the ground rules and decide that they’re just going to cheat their way towards profit. But I believe that people can be conditioned by their environment and the sanction of authorities to better respect the economic rules of the road. If we let cheating become the most competitive choice, even the good will be drawn into it. If we throw obstacles in the way of those who try to do end-runs around ethical and moral principles here, we select against cheaters over time,

The Republicans take an approach that assumes something quite pollyanna-ish: that nobody hides things from the market, that bad things only happen to bad people, that given freedom and self-interest, people choose altruistically.

The Republicans have to realize that things simply doen’t happen that way. Human before is human now. People choose as they please.

Posted by: Stephen Daugherty at February 23, 2009 1:41 AM
Comment #275961

Bad oversight does not equate to bad regulation. The laws against murder are not bad laws just because few murders are solved. Regulation is key to a healthy economy…bad oversight can be taken care of as it is exposed.

Posted by: Marysdude at February 23, 2009 8:33 AM
Comment #275985

and just because few murders are solved doesn’t mean we need more laws against murder.

Posted by: dbs at February 23, 2009 12:47 PM
Comment #275992

Since GLB and Cheney/Bush took the teeth out of any oversight regulation as far as finance is concerned, some rules need to be reapplied…right now is chaos…hence the meltdown.

Posted by: Marysdude at February 23, 2009 1:38 PM
Comment #275996

seems the seeds may have been sown before bush ever took office.

Posted by: dbs at February 23, 2009 2:11 PM
Comment #276321

Bill Clinton signed GLB into law. He may have had little choice as his veto was sure to be overridden, but in my eyes he signed it much too willingly.

No matter who signed it, and no matter when it was signed, GLB is the reason AIG could grow too large to fail, and the reason Lehman’s etal, could act as casinos or street corner crap gamers with bundled debt, and the reason for credit default swaps…and…and…and a virtual lack of regulatory oversight that created seven trillion dollars of no-value trading, when there was only two trillion dollars of value offered. I don’t give a hoot if Gramm defends it or not…what would you expect him to do, come out and admit his culpability?

Posted by: Marysdude at February 27, 2009 9:29 AM
Comment #276615

Let’s see. Something for nothing. How about too much for not enough. Like Labor. Working too much for not enough wages. How do you think “they” get rich?

Posted by: Stephen Hines at March 2, 2009 8:53 PM
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