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How Did This Happen? (The economic mess)
American Thinker ^
| March 01, 2009
| Randall Hoven
Posted on 03/01/2009 12:55:40 AM PST by neverdem
We are in financial and economic trouble. And by "we", I mean just about everybody, from the US to Iceland and Latvia. Isn't it worth, say, ten minutes to try to figure out how this happened? That is, while we throw virgins into volcanoes and go into debt at a rate of about one trillion dollars every two months in frantic attempts to save ourselves, shouldn't we also try to figure out what's really going on?
Since I don't have a PhD in economics, I won't convince Rep. Pete Stark
(D-CA) of anything . But I think it worth a try to employ something called "critical thinking" to the situation.
We are often told this whole thing started with US housing. US house prices dropped and default rates rose. Now who would this hurt? It would hurt institutions that lend money to people who buy houses.
But funny thing: for the most part, the direct lenders were not the institutions that got into trouble. Savings and loans, except for IndyMac, have been surviving. So have most commercial banks. Who had all the trouble? AIG and Lehman Brothers were investment firms. They didn't lend money for homes directly; they invested in mortgage-backed derivatives - things like Credit Default Swaps. The most troubled banks were investment banks with global reach, not your local savings & loan.
Without my PhD in economics, I don't know how CDSs or other mortgage-backed derivatives work, at least in the sense of knowing what they are worth. But apparently, no one else did either, including PhD's in economics throughout the globe.
Everyone bought them. The big US investment firms like AIG did. European investment banks did. Too much of Iceland's and Latvia's money was in mortgage-backed derivatives, apparently. And the whole time, these institutions were getting just great bond ratings. So the banks themselves didn't know their investments were close to worthless. Neither did the people who rate the risks on those banks. Nor the investors in those banks. Nor the regulators of those banks in any country.
You might want to blame George W. Bush for this. I might want to blame Bill Clinton or Barney Frank. But how did anyone in the US cause a global financial meltdown, Iceland to go bankrupt and Latvia's government to resign? There is a limit to even Barney Frank's ability to do evil.
Not to mention, housing prices didn't drop that much. Look at the Office of Federal Housing Enterprise Oversight's quarterly index
. Housing prices peaked in the 3rd
quarter of 2007. When IndyMac went bust in March 2008, OFHEO's housing index was down just 0.35% from that peak. When Lehman Brothers went bust in September 2008, the index was down 1.94%. Just how fragile are these mortgage-backed derivatives? Housing prices edge down 2%, and your whole institution goes broke?
Even by the end of 2008, well after recessions began around the globe, the index had come down just 4.63% from its 2007 peak.
How did a drop of a percent or two in US home prices cause whole countries in Europe to go bankrupt?
Actually, how do we know the bad thing spread from the US to the rest of the world, and not vice versa? I invite you to look at the data
. If you do, you will find that Europe's economic decline started before, and is deeper than, the US's.
Look at the 2nd quarter of 2008, for example. In that quarter, the US economy grew 0.7%. Yet the economies of France, Germany, Italy and Japan all shrank by 0.3% to 0.9%. In fact, the average for the Euro area was an economic shrinkage of 0.2%.
Those European economies that shrank in the 2nd quarter also shrank in the 3rd. By that time, so did the US's economy - but by just 0.1%. The Euro area's average shrinkage was twice that. The economies of Germany, Italy, Japan and the United Kingdom shrank five to six times as fast.
By the 4th quarter, the US economy was unambiguously shrinking. (You might recall that the 4th quarter of 2008, starting October 1, was kicked off with the $850B bailout, passed by the Senate on October 1 and signed into law October 3.) But still, the US shrinkage was 1.0%. The shrinkage in Europe was 1.5%.
(Update: The 4th
quarter GDP growth in the US was revised
Friday, Feb. 27, to a shrinkage of 6.2% annualized, or 1.5% for the quarter -- up from the previous estimate of 1.0%. So this latest revision puts the US on par with Europe, assuming Europe's data was not revised recently as well.)
Over all of 2008, the US GDP shrank 0.2% (0.7% with latest revised data). But Europe's shrank 1.1%.
Now let's say you have two people sick with fever, and you are trying to figure out which one spread the virus to the other. I would look for the one who got sicker sooner. In this case, Europe got sicker sooner. Not conclusive, but if you seek merely a keen grasp of the obvious, it sure doesn't look like the global economic decline was due to the US.
I don't think this is Bush's fault. I also don't think it's Barney Frank's fault. I think even looking for the blame in some part of the US, whether its housing market, some mysterious lack of regulation or some politician, is a red herring. If this situation is "inherited," I'd say we inherited it from Europe.
Given that no one involved, from the US to Iceland, Latvia or Europe generally, has been a bastion of "laissez-faire" capitalism, I think we can also dismiss blaming capitalism or free-markets for this one.
I wish I could answer what did cause the meltdown, but I can't. But here is the key: nobody can.
It is facile for Democrats to blame Republicans (who have not been in control of Congress since 2006, when unemployment was 4.4%). While this argument is facile, it is also flaccid. If you'll notice, the Democrats never quite say exactly what Bush did to make this happen.
(There is a good case that Democrats, Barney Frank in particular, caused the housing bubble and burst, and the Fannie/Freddie failures in particular. But I still fail to see how that relatively minor failure in one sector of the US economy led to a global financial meltdown.)
Did Bush spend too much? Or too little? If he spent too much, why are Democrats spending even more, by absurdly humungous amounts? If he spent too little, why do they criticize his deficits, while quadrupling the deficit from 2008 to 2009 themselves? And don't blame it on tax cuts. Federal revenues were above the pre-Bush average as recently as 2006 and 2007
If something wasn't regulated, what
wasn't regulated? Because Sarbanes-Oxley, the cure-all to financial shenanigans, was signed into law by President Bush, largely to prevent another Enron, which happened on Bill Clinton's watch. Bush and McCain tried to get Fannie and Freddie more
regulated, but were thwarted
by Barney Frank, Chris Dodd and Barack Obama. You want to blame Gramm-Leach-Bliley and what it did to Glass-Steagall? That passed in the Senate by a vote of 90-8 and was signed into law by President Clinton
Whatever this Dark Matter of missing regulation was, how did all of Europe and the entire planet also happen to miss it?
I don't think this is something we can analyze from home. We need some real forensic accounting of Lehman Brothers' books, AIG's books, Iceland's books, etc.. How did hundreds of billions of dollars disappear overnight? How did a 2% drop in houses impact mortgage-backed derivatives to the point of making them worthless? How did bond raters so totally miss the risks in these investments?
While no one has the answers to any of these obvious questions, few are even asking them. Yet almost everyone is ready to take some kind of action. Action that involves absurdly huge amounts of other people's money.
One approach to handling total uncertainty is to start trying different things and see how they turn out. So OK, let's try something different. Then shouldn't that something be truly different?
It is a lie to act like what we had been trying up to now is laissez-faire capitalism or a free market. If deficit spending stimulated an economy, President Bush stimulated our economy his last seven years straight. If regulation fixed things, the 80,000 or so pages of regulations already on the books (30 times more than the middle of the New Deal), including Sarbanes-Oxley, should have worked. If increased government spending, especially on education and health care helped, Bush helped a lot more than his predecessor
Yet that lie is exactly President Obama's logic: Bush went overboard with a free market, and since that didn't work, we must try the opposite -- socialism, good and hard and quick. Please tell me people don't really believe this Looking Glass logic.
What has really been happening is the equivalent of bleeding patients. The best doctors in the country bled George Washington to death in 1799. He started out with a cold or flu, so they bled him. When he got worse, they bled him more. The best doctors around turned a minor flu into a death sentence for the Father of Our Country by adamantly insisting they had a cure that was instead a curse. If that isn't the metaphor for today's global political economy, I don't know what is.
President Obama is doing more of the same: bleeding us even faster than Bush did.
"What I won't do is return to the failed theories of the last eight years that got us into this fix in the first place." President Obama as reported by the Kansas City Star
If you want to try something truly different, try a free market. That would be progressive.
TOPICS: Business/Economy; Crime/Corruption; Editorial; Politics/Elections
KEYWORDS: creditcrisis; economiccrisis; economy; financialcrisis; gwb; obama
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posted on 03/01/2009 12:55:40 AM PST
posted on 03/01/2009 1:07:24 AM PST
posted on 03/01/2009 1:08:08 AM PST
"There is a limit to even Barney Frank's ability to do evil."
posted on 03/01/2009 1:24:08 AM PST
(Don't blame me. I voted for Sarah.)
posted on 03/01/2009 1:40:10 AM PST
(To be stupid, and selfish, and to have good health are the three requirements for happiness.)
this thinking is in line with a theory I have about the 3 root causes of poverty
1. government control/oppression
2. lack of production
3. lack of resources
I believe the present crisis is caused by the first two. which also happen to be symptoms of socialism
posted on 03/01/2009 1:54:18 AM PST
by KTM rider
(keep thy powder dry, gird thy loins, and brace for the winds of change)
While he reaches the right conclusion (let's try capitalism) how he arrives there (we have a lot of socialism so let's try something else) isn't particularly convincing. If this is the best opponents of socialism are going to be able to do, then we're unlikely to make much headway convincing the average guy to vote our way.
Fortunately, it really isn't that tough to understand what happened and why it wasn't capitalism, but governmental intrusions into the free market, that brought about the mess.
Meltdown does a great job of explaining what happened and why, as well as how to fix it so that it doesn't happen again.
posted on 03/01/2009 2:23:11 AM PST
(Become a free market capitalist. Accept no substitutes.)
People confused debt with equity and this confusion was global.
posted on 03/01/2009 2:36:26 AM PST
(Trust unto God and He shall direct your path)
A couple small corrections needed here.
AIG is in trouble mainly because it wrote insurance policies on mortgage derivatives and mortgage securities. In good times, that's like minting your own money. In bad times, well, no need to explain that.
Q4 GDP for America was revised down from minus 3.8% to minus 6.2%. The annualized rates in Japan, Germany, France, England, and Italy are all worse than the USA.
Fannie Mae and Freddie Mac have a combined loss of $1 trillion. Their losses come almost exclusively from actual mortgages, not from derivatives. Fannie and Freddie hold about two thirds of all bad USA mortgages.
Although home prices nationally have fallen in the 5%-10% range, the prices on sub-prime homes that have gone into foreclosure have fallen in the 20%-30% range. Between 2004-2007, about 25% of all new mortgages were sub-prime, so that is a very big deal.
The author does make one very good point.
How did all this happen?
I read about this crisis in detail, every day, and I still don't understand it.
It seems to me if the US Treasury had stepped forward early in the crisis and promised to purchase every bad mortgage at face value, the crisis would have ended instantly.
If the mortgage is guaranteed, there can be no insurance loss, and there can be no confusion about the value of the derivatives.
The total loss would have been in the range of $1.5 trillion.
In retrospect, $1.5 trillion would have been a bargain.
Oversight (adversarial oversight) is a verb, not a noun.
posted on 03/01/2009 3:11:17 AM PST
Oversee is a verb. Oversight is a noun.
posted on 03/01/2009 3:14:22 AM PST
To: neverdem; All
posted on 03/01/2009 3:33:48 AM PST
(Until I see a REAL C.O.L.B. BC, he's just "PRES__ENT" Obama = Without "ID")
On a personal level, here's what happened to me: thank God I had the fortitude two years ago to tell a mortgage broker to shove his offer of a $270K mortgage approval on a second home up his tail pipe. My wife was furious with me, but I kept shaking my head, saying "I don't care if we've been 'approved'. Where the Hell is the money going to come from?" Also, people in my age brackett have no business gambling (investing) their life savings no matter how sweet the deal. The name of the game was "House Flipping." Buy a second home (investment). Hold for a few months. Sell for quick profit. Well, we all know what happened to that bubble, don't we? Predatory lending? No. Human greed. Mine. Despite being assailed by family and friends for not taking advantage, striking when the opportunity presented itself, I managed to tell the greedy side of me to sit down and shaddup. I'm certainly no financial genius. And, when it comes to being frugal, well let's just say my house is a leper colony, and I'm the one with the most fingers. It's simply that the arrangement didn't pass the smell test with me. So...I drive a 12-year old Ford Escort with 118K miles on it. Runs like a Swiss watch. We can still pay our bills, put food on the table, and keep a roof over our heads. So far, so good. Now, will somebody please explain why I have to foot the bill for the other guy's severe lapse in judgment?
posted on 03/01/2009 4:16:24 AM PST
(Will Work for Ammo)
To: KTM rider
4. over spending by congress
posted on 03/01/2009 4:20:54 AM PST
ummm... don’t you mean, Bawney Fwank?
It is a lie to act like what we had been trying up to now is laissez-faire capitalism or a free market. If deficit spending stimulated an economy, President Bush stimulated our economy his last seven years straight. If regulation fixed things, the 80,000 or so pages of regulations already on the books (30 times more than the middle of the New Deal), including Sarbanes-Oxley, should have worked. If increased government spending, especially on education and health care helped, Bush helped a lot more than his predecessor.
W gets nailed, just as he should.
posted on 03/01/2009 5:19:56 AM PST
(The issue of whether cheap labor makes America great should have been settled by the Civil War.)
I agree for the most part - $1.5 trillion does look like a bargain now.
What happened is that these mortgages were “sold” repeatedly - worthless mortgages, made oftentimes to people who had no realistic chance of repaying these loans, but nobody cared as everyone was making money on the deals. Then the music stopped and the game of musical chairs came to an end. Whoever was left holding the bag became liable for the debt.
The only rational I can come up with (besides total corruption, greed or worse) is that the industry as a whole thought that if there were massive defaults, it wouldn’t matter, as the housing prices would continue to increase and they would still have the value of the “assets”.
posted on 03/01/2009 5:46:24 AM PST
("The demagogue is one who preaches doctrines he knows to be untrue to men he knows to be idiots.")
The cause of the economic crisis has been traced to MSNBC’s.....Rachel MadCow.
posted on 03/01/2009 5:51:46 AM PST
(...House a TOTAL Loss.....)
You mean like forcing banks to make loans to people who never could have paid them back. And $4 a gal. gas. Then when people started saying “Drill, Drill Now” the internal polls must have looked real bad. So by Sept. 18 the Money Lenders Pulled their money out of the US to help the Election of their Mo-si-a!
"Now, will somebody please explain why I have to foot the bill for the other guy's severe lapse in judgment?"
Just being a straight, White male is good enough reason.
posted on 03/01/2009 6:33:58 AM PST
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