Posted on 09/25/2015 5:03:30 AM PDT by Eric Pode of Croydon
Back in 2008, rather than fix mark-to-market accounting, Treasury Secretary Hank Paulson, Federal Reserve Board Chair Ben Bernanke, and other members of the financial market crisis team, chose to use a government-funded bazooka. A $700 billion bank bailout named The Troubled Asset Relief Program, or TARP.
President Bush, who authorized this approach, later explained it by saying he "abandoned free market principles to save the free market." That statement makes no sense. Either you believe in free markets, or you don't. Violating a free market means it's not free. More truthfully, the Bush team abandoned free markets because it was the politically expedient thing to do.
But, by doing this, Republican leadership undermined a sacrosanct belief of conservatism – markets are self-healing and government intervention creates unintended consequences. Abandoning this philosophy left voters literally adrift. Politics is just politics. The GOP ship has no anchor or rudder. Why vote for a philosophy if those who claim to support it do so only when it is convenient? The result: Donald Trump.
The subprime bubble was government failure, not free market failure. We knew back then, and we have the data now to prove that government had created the housing bubble. The Department of Housing and Urban Development (HUD) forced Fannie Mae and Freddie Mac to buy subprime loans. To fulfill government mandates, Fannie and Freddie "pushed" banks to make loans to low and moderate income families. This required accepting lower credit scores and smaller down-payments. And that's exactly what the private sector did; fill government orders.
Then, when these loans inevitably started to go bad, mark-to-market accounting forced banks to write down assets that were still viable, to illiquid, virtually non-existent market prices. On paper, this destroyed private bank capital, forcing them into the arms of the government. Hank Paulson knew this, but refused to change the rule. Instead, he used massive government intervention and justified it by saying the market would fail without it. He didn't believe in free markets.
What no one talks about is the fact that the S&P 500 fell an additional 40% after TARP was passed. The $700 billion didn't save the banks or the economy. In fact, the $700 billion was sucked up by mark-to-market losses, which would have continued indefinitely without a change in rules. Thank the Lord that this happened in March 2009 when Congress forced the Accounting Board to fix it. That's when the market and the economy bottomed, not when government flooded the system with money.
Nonetheless, the philosophical damage was done. Government grew, TARP was used to justify passage of Dodd-Frank financial regulation. But most importantly, it created a narrative that the private sector, and fat cat bankers, needed a government bailout. This was a huge political mistake that the GOP has yet to recover from.
The GOP created a "mosh pit" of beliefs that elevates personal desires, inconsistent thinking, an interventionist government, a mistrust of private institutions, fear of our own neighbors, and celebrity above consistent philosophy and trust in our fellow man. And they have governed like that ever since, refusing to use the power of the purse to stop Obamacare (even though they said that the healthcare law would destroy America) and refusing to use scandal at the VA to show how bad government run healthcare really is. Ending one-half the Sequester, and claiming it was conservative to do so, was also nonsense. Don't misunderstand, no one is going into the voting booth with TARP, itself, on their mind. What they know is that the GOP is just another political party who abandons philosophy for expediency.
And this has far reaching effects. If the GOP doesn't trust banks, why is President Obama wrong when he says we shouldn't trust private health insurers or power plants? If the GOP can't stand up and defend free markets and its supposed core principles, how can it ever stand up to political arguments from the left?
Unfortunately, this argument will fall on deaf ears to many because it seems so out of sync with the narrative that politicians of both sides want you to believe. The GOP will not admit it made a mistake with TARP, neither will those who supported it, like The Wall Street Journal Editorial Page. And the Democrats believe in big government and evil corporations, so they love this, just like they loved the Great Depression – Happy Days Are Here Again!
In the meantime, the establishment GOP, when it had complete control of government, grew the government. And, now, that it controls the Senate and the House, but does not have a super majority, it says, well, we need to play along so we can get a GOP president in the White House. Then they will cut the size of government. In other words, they have no real principles except a desire for power.
What they do have is lots of lung power for blasting Donald Trump. But isn't it interesting that they say he isn't a real conservative? Neither are they. I'm old enough to know a real conservative when I see one, and the current leadership is not conservative.
They are right that Donald Trump has no true guiding philosophical principles, at least none that are visible. "Making good deals" is not a principle, and it's not even a strategy, it's a tactic. On the Democrat side, Bernie Sanders is a socialist who doesn't trust the private sector. Senator Sanders is attracting crowds because of his principles, winning political points when he claims the GOP only cares about bailing out fat cats. He has a point. Donald Trump is attracting crowds with tough talk even if it's incoherent from a philosophical point of view, because the GOP and the President aren't tough.
Neither candidate can "fix" the economy, not with their current proposals. But, voters don't have a clear vision of what the US economy needs to be fixed, because the GOP pulled up the philosophical anchor. So, the next time the GOP claims Donald Trump isn't reflective of conservative values, they ought to look in the mirror. They created him. The only way out is for Paul Ryan, George Bush, The Wall Street Journal Editorial Page, Hank Paulson and every other GOP member that supported TARP to admit it was a mistake.
The way to beat Donald Trump is to attack the Establishment GOP, not cozy up to it. Even John Kasich seems to understand this. Trump is the result of a vacuum in principled leadership. A rudderless ship, or a ship with no anchor in a storm, creates fear. True leadership has an anchor, a rudder. It's time to elect a real conservative as president. Someone who can lead the American people back to a consistency of thought that supports free markets and fights against government growth. A true conservative GOP candidate will run against the establishment, pointing out its failure to hold any real philosophical ground. That will be the winning strategy come November 2016.
Exactly.
“I disagree with this statement entirely. It’s true that the subprime disaster was a factor in the real estate crash, but it was far from the biggest contributor.”
If you really think that is true you need to read the annual reports of the big banks in the period and zero in on the Community Reinvestment Act section in the notes where it spells out in detail what percentage of their loans went bad. It’s all there in black and white.
And then note that the geographic areas that were LEAST hit by write-offs where those areas that housed the upper middle and wealthy zip codes.
There’s a reason why the ground zero of the real estate blow up was Miami, the southwest coast of Florida, Las Vegas, Phoenix, etc. It was where the biggest concentration of Latin migration occurred, both legal and illegal.
Latins invest their capital in real estate, not equity markets. Pull aside a banker you know from that period and ask them a simple question: What percentage of your loan write-offs were from Latin borrowers and see if they are willing to answer that question.
Before the crash (I am in Boca) I was introduced to a Latin couple (I am in financial services) and during the discovery interview they told me they held SIX mortgaged properties even though they had only about $20,000 in cash in their bank account. When I asked them why they told me they wanted to rehab them and re-sell them. When I pointed out they didn’t have the resources to be able to do that they asked what they should do and I told them to sell three of the properties and when they actually sold a property after a rehab they could take on another one. I also warned them that real estate is a market and could very well fall in the future due to the rapid rise of the previous years.
Instead of listening to me they asked their Latin friends about the advice and was told by all of them that real estate always goes up and I didn’t know what I was talking about, and they did nothing.
Three years ago, out of the blue, they called me to ask to meet again. After telling me that I was right all along they asked for my help. They were still on the hook for the properties, having held them through the recession, and very underwater. I told them there was nothing I could do and told them they might as well bite the bullet and hand a few back to the banks.
By loosening credit standards at the bottom of the credit risk you obviously loosen them higher up and no one took advantage of this more than the real estate speculators of the middle class, who ended up leveraging equity in their own home with no money down purchases of other properties, which they thought they could flip. Remember the story of how David Einhorn made his reputation? His MAID bragged about the FIVE properties she owned, due to this strategy.
Your scenario did have affect but it was NOT the main reason. An honest banker will point to those ground zero locations and the rest is pretty easy to figure out. I’ve had bankers tell me that the Latin percentage of default was almost 50% of ALL the failures written off, because they put all their money into real estate.
Excellent observation! This race is going to be all about POPULISM, largely due to the TARP bailouts. It resulted in two huge political movements, the Tea Party and OWS. Polar opposites of the political spectrum, but in near full agreement on this issue.
In such a paradigm Trump may be the most Conservative candidate who can actually win. At least he is free of Beltway Republican Chamber of Commerce fingerprints.
I agree with that, but I contend there's a big difference between "perfect" and dangerous warning signs of innate liberal reflexes. You see, it's one thing to screw up an issue, it's another to instinctively come at problems from a big government POV. Ford moving to Mexico? Trump immediately goes IRS and big government to punish them - not attacking the EPA and the unions. China trade deficit? Trump goes government first, trade treaties, instead of rolling back government to make manufacturing more palatable here. Obama Care? Trump attacks not government first, but the insurance industry first.
I think we ignore these at a big peril to our Republic. I will not ignore them.
That essay is fantastic. I would expand its scope. TARP is just the proxy for the ideological battle that was won by the left. A laundry list of similar, in ideology, laws or actions could be added.
Again, perfectly legitimate and valid concerns. If Trump seems to employ a ‘big government’ approach, it is most likely due to his successful use of ‘big business’ tools to implement whatever his goals have been in the past, this is why it is vital to somehow, some way, get rock solid conservatives into the Trump inner circle. Like another famous New Yorker, Trump is as big a personality as the late Nelson Rockefeller, and I concede that some of Trump’s views would probably have been seen as compatible with those of Rockefeller.
If however, Trump is any student of history at all (he reportedly IS), he will avoid the political pitfalls that did in Rockefeller and he has moderated his views.
Yep. If the GOP establishment had stuck to honest and sound financial and governing principles, it wouldn’t be in the mess it is and neither would we. This was Bush’s greatest mistake - not getting involved in Iraq. It assured the Democrat Party and the Muslim now in the White Hut would gain total power.
I am not convinced that Trump believes this. If I did, I would support him without hesitation.
The Crony Capitalist banks and Wall Street are not the free market/main street.
They are the farthest thing from them.
At its core, the Federal Reserve is a wealth transfer mechanism. From the middle class/small business to the Government and Banks.
So the articles premise that the free market failed is false.
Food for thought. Can’t say that I disagree much with the author’s viewpoint.
I support Trump for many reasons, but the over-riding reason is he is unabashedly “America First” candidate, more than any candidate who has appeared on the scene since I became a US citizen in 1970.
Florida has also been a prime market for speculative real estate for as long as I can remember, but for different reasons. There are a disproportionate number of second homes there (including many owned by foreigners), which means people are more likely to bail on the mortgage when they are in financial distress.
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