We are soon to learn there is no Pie under the Meringue.

The idea that "markets" have been at work in the mortgage crisis is hilarious. It is "socialism" that got us into this mess in the first place. If the government had not forced these institutions to make loans to people everyone knew were bad risks in order not to look "racist" or "sexist" there would be no "crisis."

John Fairplay said: "If the government had not forced these institutions to make loans to people everyone knew were bad risks in order not to look "racist" or "sexist" there would be no "crisis..."

That's really funny and sad of you. Having worked at a large credit issuer I can tell you that the government was skeptical and watchful of any attempt to plumb the 'subprime' waters... they watched credit models like a hawk, and any indication you were targeting certain segments of the population (non-whites, females, etc) was cause to shut you down. Credit modeling wasn't meant to look at those criteria.

Mind you this was just before Bush put his guys in charge of regulating lending practices... they 'socialized' it alright, if by 'socializing' you mean 'opening things up to preditory lending'... so please stop repeating the ignorant crap Hannity shoves down your throat.

The only way out of our financial morass is to let the chips fall where they may.
If a bunch of Wall Street banks collapse and financial institutions crumble - who cares?? That's "capitalism" and "free markets", right? We'll pick up the pieces and carry on. We've survived worse.

Ever hear of the New Deal? That's why our economy survived.

Ever hear of the New Deal? That's why our economy survived.

at least that's what we all learned in the public schools....

Thomas Wolfe writing in the 1930s:

"I believe that we are lost here in America, but I believe we shall be found……I think the true discovery of our spirit, of our people, of our mighty and immortal land is yet to come. I think the true discovery of our own democracy is still before us……

I think the enemy is here before us, too…….I think the enemy is here before us with a thousand faces, but I, we, know that all his faces wear one mask. I think the enemy is single selfishness and compulsive greed. I think the enemy is blind, but has the brutal power of his blind grab…….

I think the enemy deceives us with false words and lying phrases, saying:

“See, I am one of you—I am one of your children, your son, your brother, and your friend. Behold how sleek and fat I have become—and all because I am just one of you, and your friend. Behold how rich and powerful I am—and all because I am one of you—shaped in your way of life, of thinking, of accomplishment..……Am I not just one of you?….Am I not the living image of what each of you may hope to be, would wish to be, would desire for his own son? Would you destroy the glorious incarnation of your own heroic self? If you do, then," says Enemy, “you destroy yourselves—you kill the thing that is most gloriously American, and in so killing, kill yourselves.”

He lies! And now we know he lies!. He is not gloriously, or in any other way, ourselves. He is not our friend, our son, our brother. And he is not American! For, although he has a thousand familiar and convenient faces, his own true face is old as Hell.

Look about you and see what he has done."

Economics is hard stuff. :)

Saying the "invisible hand" of the free market will take care of everything is so much simpler than actually thinking. Of course, the same folks who claim to let the "invisible hand" take care of everything actually pass all kinds of anti-free-market legislative exceptions to benefit their political contributors.

But there will never be 72 pnt headlines or hour-long exposes of the politicians who deregulated the Savings and Loan industry back in the 80s or the energy futures industry and the sub-prime loan industry in the late 90s.

Idiots like Phil Gramm (McCain's chief economic advisor up til a month ago) will never have to pay a price for their role in letting ENRON defraud Americans of billions... because they'll always be able to claim that they had nooooo ideaaaaaa that deregulating the energy futures industry, or the S&L industry, or the sub-prime loan industry would end the way it did. And Senator Gramm played a key role in deregulating all three. But since economics is hard, nobody called him to account after any of them. Even tho he and his wife took millions from all three industries.

IMO, We need to force the media industry to stop misusing public airways to babble about the sex lives of drug-addled pop stars and start reporting news... More of this, for example.

If we really had a "free market" (we're actually a mixed market system), these banks would fail. The only people bailed out would be those with FDIC deposits up to $100,000. Old money Wall Street types would see their fortunes destroyed. People's 401K and IRA accounts would be devastated, but new banks and players would step into the market. Pareto's "cycle of elites" would begin anew, but in the interim the middle class would regain lost power and hopefully learn enough to not lose vigilence next time around.

Greider is exactly right, what we have now is socialism for the super rich. The bipartisan puppet-show that repealed Glass-Steagal also passed the Telecom Act of '96 and permitted the reconsolidation of Big Oil. Conglomerates bought up major media and thus gained control of what the average person knows. Politicians can thus be destroyed if they don't follow the Billionaires' Republic of America game plan. Privatized, electronic voting will take care of the rest.

What this is really about is sustaining the existing ruling class. Our political nobles in Congress get to keep their place at the table so long as they do.

Tragies often open the door to opportunists. Here, Greider has pitched the kind of aggressive socialist/populist agenda that demagogues like Chavez and Mugabe have been promoting all along.

The ideas generally range from bad to worse. I don't really see what good nationalizing Fannie Mae or the other GSEs will do. They weren't dabbling in the subprime sector, but if we want to treat them like a private enterprise, then lets go all the way and not leave any gray areas.

Politicizing the Federal Reserve is a much worse idea. Greider wraps his critique in the language of "accountability", with a populist flair that suggests that more democracy will solve its problems. The failure in this logic is that unless citizen/voters are better informed, more democracy will only make a hash of economic policy, as it has in so many other areas. Economists are sometimes wrong about economic issues, but not nearly as consistently wrong as politicians.

Easily the worst idea is imposing usury laws. These laws are usually just quasi-moral instruments with no economic basis whatsoever. Placing caps on interest rates will, of course, result in a rationing of credit, and at a time when this is exactly what we don't want.

The one suggestion of Greider's that I actually agree with is abandoning the notion of firms that are "too large to fail". There is no single firm in the US or elsewhere that can credibly make this claim. If they are so large, then they need to be allowed the possibility of failure so that they can be reinvented as smaller, more nimble and more well-managed firms.

1. Phil Graham is not an "idiot". He was a well-published professor of economics at Texas A and M prior to his political career. In my college econ classes at U of Oregon back in the '70s, we read his work (along with lots of other people). Just because you disagree with someone, that doesn't make him an "idiot".
2. It's interesting how the writer of the main piece Jack quotes from seems to imply that the current messes are somehow an indictment of markets. In all of these cases, government action in the past distorted the market, and government action now will unfortunately likely distort it further. The beauty of the market isn't that it always produces a result everyone likes, but that it does reflect the best distribution of information about how resources should be allocated, because willing buyers and willing sellers act in their own self-interest in an uncoerced environment and bear the risk of failure and the rewards of success. Freedom loving people should always be wary of attempts to "control" markets, because that opens up opportunities for the rich or powerful to tilt the playing field, and substitutes the limited (or often wrong) information available to gasbag politicians that produces bad legislation and sweet deals for contributors to the often messy but always "fair" result of free competition. There will always be a fight between those who want free markets and those who believe that political leaders should allocate our resources and means of production, but my sympathy is always with those working for more economic freedom, not less.

I don't know what Kool-aid you folks have been drinking, but implying that the government created this subprime mess is absurd.

Maybe someday (I doubt it), we'll get past the simplistic and projectionist 'free markets vs. socialism' argument, which doesn't at all encapsulate the mess we've found ourselves in today. The very people in power who espouse 'free market' wonders are most often the ones harnessing and manipulating it behind the scenes, sometimes on others behalf. Haven't we learned this yet? If not, why? The evidence has been right in front of our face... like, FOREVER.

There is no free market. There will never be a free market. Where there's money to be had, someone will be there to work the system, which unfortunately requires some regulation. Our code of laws understands it's in man's nature to take from others, which is why there are laws forbidding it.

The government didn't 'create' the subprime mess... the recent administration only opened the gates wider for it to happen.

Todd H, the federal government created Fannie Mae in 1938. It's purpose was to create a secondary market for mortages, making it easier for people to get home loans (which was the government's policy). There is a decent summary of FNMA in Wikipedia. See http://en.wikipedia.org/wiki/Fannie_mae
I think it's "absurd" of you to say it's "absurd" of us to imply that the government was a very active participant in creating the subprime mess.

Lack of oversight and regulation allowed 100% loan to value ratios in a rapidly appreciating market. Armed with an appraisal, those with questionable credit were qualified without documentation of income sufficient to make the payments. If this aint lax regulation as a co-conspirator, I don't know what is. On the other hand private loan companies did not have to make the risky loans, instead they chose to jump on the greed wagon. Let the whining continue.

If FNMA hadn't been there to buy crap loans, lenders wouldn't have made crap loans. The fact that people are greedy shouldn't come as a news flash.

Oof! What a choice:

Banks - Getting greedy and taking on highirisk debt for higher return and then asking for govt guaranteed loans

Govt - Spending on every BS pet project in the world and neglecting to take care of basic services (schools, roads, energy policies, etc.) while spending themselves into bankruptcies.

Great time to be a taxpayer!

I'm very well aware the origins of Fan and Fred. Both these agencies and banks in general fought regulatory attempts to prevent secruitizations of loans, predatory lending practices, etc. The fact that governemnt decided to let these institutions do as they please was a much bigger problem then something the feds actually did. So yes, I think it is absurd to blame the feds for this mess and please keep drinking your kool aide.

My apologies to Bob, who is a fan of exactitude in language. I can appreciate that.

Ex-Senator Phil Gramm is not an 'idiot'. He's just a guy who played a major role in deregulating the S&Ls, the energy futures markets and the sub-prime loans market... and who, along with his wife, received millions in political contributions and more direct quid pro quo (such as high-paying jobs on ENRON's board and as a lobbyist for one of the biggest players in the sub-prime industry).

'Idiot' doesn't adequately describe a guy who did all that and who did it while loudly proclaiming that he was "well-published professor of economics" so his fellow Senators should listen to him. And who had the inside track on the job of Treasury Secretary up 'til a month ago.

'Hypocrite', maybe? 'Arrogant and unable to learn from his mistakes'? 'Greedy, arrogant and hypocritical, perhaps? :)

Well at least you admit he's not an idiot.

The present federal bankruptcy laws are fully capable of being applied to a petition by the private Fannie Mae and Freddie Mac. (NYSE symbol FNM and FRE, respectively.) The last time I checked I could not find the U.S. Congress on the list of places to file such a petition.

I don't think anyone, in their right mind, today sees the bubbled home prices as inherently representative of wealth rather than just pixy dust. FNM and FRE have no shareholder value. But that is common knowledge. This shareholder value, however, is not the real issue now.

The issue is the list of creditors that have a piece of paper from FNM and FRE that purports to offer some guarantee of value for some other fancy pieces of paper . . . purportedly further backed by collateral. These creditors, lienholders, are not "depositors" as defined by the FDIC, and are thus not eligible for government cover to a maximum (nominally) of $100,000.

In a bankruptcy petition the entire list of creditors would have to assert their claim to the assets that FNM and FRE would submit to court. The list -- perhaps most importantly -- would be open to the public, and so to the fight amongst themselves. (I want to see this fight, in open court. And I believe I have a right to insist that it be resolved by the judiciary. It certainly involves contracts clause issues.)

A pendent issue, from a judicial and jurisdictional perspective rather than political, would be the FDIC's and Federal Reserve's own soundness and capitalization determinations as to these bankruptcy creditors (not guaranteed depositors mind you). If the FNM and FRE guarantees are worthless, as per a final judicial determination in a bankruptcy court, then none of the creditors could simultaneously pretend that the papers that purport to represent value have any remaining value and would have to be removed from their own list their assets.

A bankruptcy petition by FNM and FRE must be viewed as distinct from the FDIC guarantee to "depositors" of covered financial institutions. It is one yardstick to assess the change resulting from the bailout bill.

The cost of the recent bailout bill might be higher than the cost to cover, up to and no more than, $100,000 of guaranteed deposits that any natural person has in any covered financial institution. This $100,000 limit should be viewed as a hard limit for that natural person regardless of whether depositors have distributed their savings among different financial institutions or among various describable types of accounts so as to game the nominal guarantee. (There was a failed effort post-S&L bailout to tie the cover for deposits to a person's SS number, and make it a per person guarantee across the entire banking system; rather than per depositor per institution.)

If the FDIC itself has limited funds (as it does now), at least before congress supplies some new money, to cover depositors then an initial step should be to apply a per natural person limit of $100,000, preliminarily, or fraction thereof, until congress actually appropriates new money to give to the FDIC to cover more depositors.

The above argument offers two specific action plans, which I believe are ideologically/religiously neutral.

If a fool wants to lend 400 grand on a 160 grand home then I won't stand in their way -- so long as it is not guaranteed by government. The free market would call them a fool, because they would soon be broke.

Looking back --

Congress could have modified the bankruptcy law by increasing the look back period, from date of filing, for deals/payments that a judge can void. It was generally understood by most economists, sometime between late-2005 through spring-2006, that the house price bubble was about to burst. The shape of the recent bailout bill was certainly formed back then, and required a bit of prepositioning of Wall Street's portfolios/positions/hedges so as to take best advantage of it (and cut one's own losses):

OFHEO says in its recent report that while the volume of single-family mortgatges securitized in 2007 fell by 8% to $1.9 tn, as the number of single family mortgages originated declined, "Fannie Mae's and Freddie Mac's combined share of MBS [mortgage-backed securities] issuance rose substantially to 61.6% from 46.7% in 2006."

Indeed, OFHEO says Fannie and Freddie “increased their MBS issuance by nearly one-third in 2007 as competition" from Wall Street “virtually ceased in the second half of the year," though OFHEO says the two started to curtail their purchases of securities backed by shoddy loans. Too little too late.

Now teetering atop Fannie's and Freddie's painfully razor thin $54 bn in net worth is a pyramid of $5.3 tn in debt that is nearly half the size of the US gross domestic product. The two have much higher leverage ratios than banks or hedge funds [. . .]

source: Fox News Blog

I suppose that if someone (i.e., Wall Street) swindles Fannie Mae before it becomes subject to oversight by the Federal Reserve (such as by the recent bailout bill) then conduct that would clearly constitute a federal crime under in 18 USC 1014 would be sort-of excused because of the prohibition on passage of expost facto laws. Such a prohibition, as to criminal law, would not attach to the modification of the bankruptcy law (to increase the look-back period), which itself could be characterized as "procedural" rather than "substantive," as is so often applied so as to deny an in-fact-bankrupt-citizen the opportunity to discharge a debt against some corporate entity (or against government itself). I am all in favor of uniformity of treatment, and certainly against superior rights for any artificial entities over natural persons.

If there was any "implicit" guarantee, then let the criminal sanction noted in 18 USC 1014 (to defraud government) also be implicitly recognized, as there is clearly sufficient scienter (knowledge of wrongfulness of one's conduct) by the folks that stand to benefit from their lobbying of congress to cover their losses (after the fact), through the functional equivalent of strolling into bankruptcy court and delivering a government check for the benefit of the creditors.

Tactically -- from the most ardent Socialist's perspective -- let's not overlook the fact that even as home prices rose by way of easy money that home owner equity has recently fallen from 60 per cent to 30 percent. The so-called home owners (through debt) have already become what I have called Glorified Renters and have nothing more to lose from a steep price correction (or at least less to lose than The Man). Be wary of Snake-Oil-Socialists, for they will unwittingly -- and predictably -- carry the propaganda of the rich-non-idiots to the masses.

TKrueg,

Those who espouse a philosophy of economic liberalization and can walk the walk don't need to "work the system". You obviously seem to be conflating this philosophy with the Bush Administration.

If that's what you meant, you should have come out and said it. As for the notion that there is no 'free' market, I disagree, but I'll indulge you for the moment. Calls for regulation after events like the housing slump and precisely the break that those who are looking to "work the system" are looking for. There is an entire strain of economic theory devoted to the notion of firms as demanders of regulation.

I'm also not sure where you got the notion that one party in this case was taking from another. Both parties to the lending agreement voluntarily participated. Both played fast and loose and both are (more or less) getting punished, with the exception of JP Morgan. This is a tragically stupid move on the part of the federal government, but it could be easily compounded by following the advice of critics like Greider.