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OpenMarket: Banking and Finance

  • Deregulation Wasn't to Blame for Financial Crisis

    October 7, 2008 11:16 AM

    Even the reliably-liberal BBC says that deregulation wasn't the cause of the financial crisis.   Other liberal journalists like Washington Post columnist Sebastian Mallaby have made the same point.

    The government-sponsored mortgage giants Fannie Mae and Freddie Mac played a big role in spawning the mortgage crisis.  Lawmakers like Barney Frank blocked crucial reforms that might have reined them in.  Now, Frank is trying to change the subject, claiming that critics of Fannie and Freddie are, you guessed it, racist.  (Fannie Mae also engaged in fraud and political bullying).

  • The Bailout will cost 20% of the entire current budget

    October 6, 2008 2:08 PM

    My Calculations:

    The 2007 federal outlays from fiscal year 2007 were 2.73 trillion.

    The 700 billion is to be allocated before Dec 31, 2009 (or Oct 3, 2010 with the extension).

    Taking the 15 months until Dec 2009, and multiplying 15 divided by 12 by 2.73 trillion (because of the Continuing Resolution) would be 3.4125 trillion. Then taking 700 billion divided by 3.4125 trillion is 20 percent.

    Why is the market tanking?  Wall Street knows what this will do to our economy.

  • Lehman Bros hearing -- Rep. Maloney blames deregulation, ignores her own role as Fannie's enabler

    October 6, 2008 1:15 PM

    At the hearing being held today by the House Oversight and Government Reform Committee, in which former Lehman Brothers CEO Dick Fuld is now testifying, an earlier panel attempted to look at the causes of Lehman's collapse and the broader credit cirisis. And this gave an opportunity to committee members to ride their various hobby horses.

    Rep. Carolyn Maloney's horse and "whipping boy" was deregulation. She blamed the entire crisis on deregulation, and specifically the repeal of the Depression-era Glass-Steagall law that separated commercial and investment banking. The repeal was done through the Gramm-Leach-Bliley Act, which Maloney neglected to say was passed on an overwhelmingly bipartisan vote and signed by President Bill Clinton in 1999. Clinton, in fact, recently defended the law, saying it didn't contribute much to the current crisis, and has even alleviated it by allowing banks to save failing brokerages. (Clinton is right, as a Wall Street Journal editorial points out).

    But if Maloney wants to know a more proximate cause of the systemic risk from bad mortgages, she should look no further than her own attacks on Competitive Enterprise Institute President Fred Smith when he testified before the House Financial Services Committee in 2000. Maloney was one of many lawmakers who enabled Fannie Mae and Freddie Mac to take excessive risks by ridiculing longtime critics of he government-sponsored enterprises (GSEs) such as Smith. As Smith recalled in a recent op-ed in Investor's Business Daily, Maloney poo-poohed his argument that Fannie and Freddie's government privileges could result in a bailout.

  • All of the bailouts are expected to $1.8 trillion and we get "green credits" and IRS fun!

    October 4, 2008 3:22 PM

    Thanks to Declan McCullagh for his article that highlights the non-financial portions of the bailout.

    Particularly useful is his chart (with information from Reuters) that shows that all the various bailouts of this year will cost $1.8 trillion.

    Here are some useful comparisons: the GDP of the UK is $2.1 trillion.

    The GDP of Australia is $646 billion.

    I wonder if it makes more sense to rent Australia for a couple of years?

  • Market down on bailout -- Don't compound damage with overregulation of 'Main Street'

    October 3, 2008 5:29 PM

    Today -- five days after a courageous independent vote against Treasury Secretary Hank Paulson's $700 billion bailout for Wall Street -- the U.S. House of Representatives disappointingly approved the same basic measure. Many of the bill's other "sweeteners", such as earmarks and a regressive increase in deposit insurance for upper income bank customers --will also cost taxpayer hundreds of billions of dollars.

    All this week I and my colleagues have pointed out ways this bailout could, in addition to being costly, be counterproductive for the economy. Wall Street may have been feeling this "buyers' remorse" today as the Dow Jones Industrial Average pared back ealier gains to end the day down by 150 points. As Yahoo Finance noted, "financial stocks, which had traded sharply higher on the promise the bill would be passed, fell after the House vote on profit-taking and as the market focused on the tough road that still lies ahead for the U.S. economy."

    As I had noted previously, despite the scare tactics from Paulson to Pelosi of economic Armageddon if no bailout was passed, the volatility of the past few weeks was in siginifcant part due to fear about what goverment was going to do as well as fear of market conditions.

  • CEI President Issues Statement on the Bailout

    October 3, 2008 11:34 AM

    Statement of Fred L. Smith, Jr., President of CEI:

    The bailout bill that passed the Senate is no improvement over the bill the House rightly rejected on Monday.  Representatives should stick to their guns and reject the bill for the following reasons:

  • Bailout Bill Grows More Bloated, Ignoring Alternatives

    October 3, 2008 11:17 AM

    There are alternative approaches to the bailout that would cost taxpayers less.  But instead, Congress is expanding the bailout bill to stuff it with more pork and put more burdens on the already overstretched FDIC

    Economics professor Russell Roberts explains how the government spawned the mortgage bubble in the Wall Street Journal.

    The bailout will cause inflation and the risk of future bubbles.  And it may not do enough to unfreeze credit markets as former Bush Treasury Secretary Paul O'Neill has warned.  A bad omen for the bailout is that the European Central Bank's bailout strategy of flooding money markets with billions of Euros is not working.  The government can't fix what it doesn't understand.

  • Kling hits secondary market -- misses benefits

    October 3, 2008 11:01 AM

    Arnold Kling hits the creation of the secondary market for mortgage loans as the major factor -- 50 percent — causing the current financial crisis. As Kling wrote:

    In hindsight, I think that the crisis was caused by
    a) creation of the secondary mortgage market (50 percent)
    b) low down payment mortgages (30 percent)
    c) the "suits vs. geeks" divide (15 percent)
    d) other (5 percent)

    The more I think about the secondary mortgage market, the less I like it. Any widespread benefits, such as lower mortgage interest rates, are microscopic. On the other hand, several times (not just recently), the market has been used to create or enhance regulatory loopholes that undermined the safety of the financial system as a whole.

    I am surprised that Kling so lightly dismisses the benefits as “microscopic” of one of the most positive innovations in the mortgage market.  Just think about it.  Financial institutions — primarily savings and loans -- prior to the creation of the secondary market, took in short-term deposits and made long-term, fixed-rate loans (30 years).  Until the early 1980s, Regulation Q set the limit on the interest rates that could be paid on deposits.

  • Bailout Bill Gets More Expensive and Dangerous

    October 3, 2008 10:37 AM

    The politically dangerous $700 billion financial system bailout bill is getting even more expensive as supporters load it up with pork to get wavering Congressmen to switch their vote and support it.  (It passed the Senate overwhelmingly on Thursday, but was narrowly defeated in the House on Monday). 

    In addition, the bailout bill has been expanded to make the FDIC insure deposits up to $250,000, rather than the current $100,000.  This is a bad idea, since the overstretched FDIC barely has enough resources to cover the first $100,000.  The Wall Street Journal today explains just how costly and risky it is to increase the FDIC limit, and predicts that it will "encourage riskier lending behavior."   

    Also in the Wall Street Journal, economics professor Russell Roberts explains how government regulators stoked the mortgage bubble, which now has imploded into a financial crisis.

    The bailout bill itself may lead to inflation and future bubbles.  And it may not do much to unfreeze credit markets, as the failure of European bank bailout measures shows, and as former Bush Treasury Secretary Paul O'Neill has warned.

  • Duplicating Bailout efforts

    October 3, 2008 9:11 AM

    ACORN is speaking against it—maybe it will actually help! This past summer Congress passed “Hope for Homeowners” which took effect Monday. Distressed borrowers can now refinance into 30-year fixed mortgages with the backing of FHA. According to the Boston Globe,

    To be eligible, the borrower's home must be the primary residence; the mortgage must have originated on or before Jan. 1, 2008; and as of March 2008, an applicant's mortgage payment must account for more than 31 percent of gross monthly income….The mortgage servicer must be willing to take a loss and write down the loan - insured by the Federal Housing Administration - to 90 percent of the home's current appraised value. If the home is sold, the homeowner must agree to share any appreciation with the FHA and the refinancing lender. The program, authorized by the Economic and Housing Recovery Act of 2008, will be in effect through Sept. 30, 2011.

    And yet, the used car salesmen on the Hill don't want to let Hope for Homeowners or the changes to Mark to Market accounting have their effect. Instead, Pelosi is asking Blue Dogs to take one for the team and hope that defaulting on their “PayGo” promise won't have the same result as “No New Taxes” did.


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