87 replies to this topic

[rwac]

Is any market phenomenon monocausal? It seems like you're spewing tired pamphlet dogma here.

I admit, this is kinda at the tail end of my knowledge.

[Rational Madman]

Speaking of people that predicted the collapse.

http://www.youtube.com/watch?v=2I0QN-FYkpw

http://www.youtube.com/watch?v=jj8rMwdQf6k

http://www.youtube.com/watch?v=zM23TZxzOw8

So many economists rang the alarm bells, but I don't think anybody truly and accurately predicted what happened. To the notable few that rode to Concord:

Nassem Taleb
Kenneth Rogoff
Nouriel Roubini
Stephen Roach
Mark Zandi
Raghuram Rajan
Vince Cable
Peter Schiff (But I hate him so much that I'm reluctant to give him any credit)

[Rational Madman]

Is any market phenomenon monocausal? It seems like you're spewing tired pamphlet dogma here.

I admit, this is kinda at the tail end of my knowledge.

Sorry, I shouldn't have been so harsh. To be honest, though, there was a time where I had views somewhat resembling yours.

[Rational Madman]

You are being entirely logical, but your premises are incorrect. Federal policies that encourage home ownership, which have been in effect for decades had almost no part in the cause of the implosion. This is precisely the kind of widespread disinformation that I've been talking about in this thread. There are thousands of people with megaphones of various sizes, and they are all repeating this story. It's not correct.

The problems started with those policies. Those very policies inflated the bubble and ran up the housing market, making housing less affordable. However, opinions vary on whether the CRA somehow catalyzed the subprime crisis, and the popping of the bubble.

I had the same discussion with RighteousReason a while back, this post encapsulates it. If anyone really wants to know the source of the credit crisis, this report is the best I have ever encountered. It deals with the real issues, which includes some arcane finance, but it's done in a way that is interesting and understandable to the layman. A transcript is available, but the audio is a lot better. I have been reading Barry Ritholtz for years. He is a Wall Street guy who does financial research and manages money. He lives and dies on the basis of actual reality. Not only that, he called the disaster before it happened. He was a few years early, but he was right. Barry has a standing offer of $100,000.00 to anyone who can demonstrate that the CRA was a major cause of the crisis. Barry is a good example of a guy with expertise. He knows what he's talking about. Guys like Limbaugh and Beck and a hundred others are demagogues who are more than happy to repeat a nice neat (but incorrect) little narrative that resonates with the wildly popular "government is not the solution, government is the problem" belief. The vast majority of them no doubt believe it themselves. They aren't lying; they are mistaken. That's why they are so persuasive.

I think it is incredibly important that we understand the real causes of the crisis, so we can make sure it doesn't happen again. That's why it's important that we don't blame it on the wrong reasons.

There really isn't an authoritative source on the crisis, and there never is with any crisis. So I like to pool the wisdom from several accounts. Sorkin's Too Big to Fail is probably the most readable, even if it deals more with the response to the storm.

[cathological]

Peter Schiff (But I hate him so much that I'm reluctant to give him any credit)

Why do you hate him? And I honestly am interested in your criticisms (and anyone else's) of his positions and your views on the economy. So for my part I won't start an argument that will get in the way of that. I also follow a handful of other economists and would be interested in looking at any economists you follow.

Edited by cathological, 07 November 2010 - 07:27 AM.

[rwac]

I think it is incredibly important that we understand the real causes of the crisis, so we can make sure it doesn't happen again. That's why it's important that we don't blame it on the wrong reasons.

If you listen to the podcast you linked to, they mention that the people bundling the mortgages, and those creating CDOs were all assuming that the housing market would keep appreciating. There's probably a reason why real estate was constantly appreciating back then, but I don't know what it is.

As the song goes:"The place you should study isn't the bust
It's the boom that should make you feel leery, that's the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy"

[Rational Madman]

Peter Schiff (But I hate him so much that I'm reluctant to give him any credit)

Why do you hate him? And I honestly am interested in your criticisms (and anyone else's) of his positions and your views on the economy. So for my part I won't start an argument that will get in the way of that. I also follow a handful of other economists and would be interested in looking at any economists you follow.

Well, to make a long answer short, I subscribe to many of the findings of Keynes and his successors, which creates a conflict, because Schiff is a ____________(seriously, go wild folks).

[Rational Madman]

I think it is incredibly important that we understand the real causes of the crisis, so we can make sure it doesn't happen again. That's why it's important that we don't blame it on the wrong reasons.

If you listen to the podcast you linked to, they mention that the people bundling the mortgages, and those creating CDOs were all assuming that the housing market would keep appreciating. There's probably a reason why real estate was constantly appreciating back then, but I don't know what it is.

As the song goes:"The place you should study isn't the bust
It's the boom that should make you feel leery, that's the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy"

The absence of complete incompetence at the Federal Reserve is a good reason why asset prices kept appreciating, but it's also because national political economies made adaptations to handling the impact of the business cycle---they spent a lot more for one; I know, the horror, the horror. Also, it was believed that a price decline would have to be correlated with an economic depression of a scope similar to the Great Depression, which economists and quantitative analysts judged correctly to be very unlikely.

[cathological]

I think it is incredibly important that we understand the real causes of the crisis, so we can make sure it doesn't happen again. That's why it's important that we don't blame it on the wrong reasons.

If you listen to the podcast you linked to, they mention that the people bundling the mortgages, and those creating CDOs were all assuming that the housing market would keep appreciating. There's probably a reason why real estate was constantly appreciating back then, but I don't know what it is.

As the song goes:"The place you should study isn't the bust
It's the boom that should make you feel leery, that's the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy"

Or they all knew that the Federal National Mortgage Association (Fannie Mae) would buy them all no matter what.

[Rational Madman]

I think it is incredibly important that we understand the real causes of the crisis, so we can make sure it doesn't happen again. That's why it's important that we don't blame it on the wrong reasons.

If you listen to the podcast you linked to, they mention that the people bundling the mortgages, and those creating CDOs were all assuming that the housing market would keep appreciating. There's probably a reason why real estate was constantly appreciating back then, but I don't know what it is.

As the song goes:"The place you should study isn't the bust
It's the boom that should make you feel leery, that's the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy"

Or they all knew that the Federal National Mortgage Association (Fannie Mae) would buy them all no matter what.

Yes, because we have so much reason to trust the private sector to perform this service. Wait, what exactly is the private sector's market share right now? Anyway, Fannie Mae et. al. still had diverse portfolios (but not enough), and were attracted largely by the high yield promise of spinning off sub-prime debt---which was a very lucrative practice for a while.

Edited by Rol82, 07 November 2010 - 10:16 AM.

[rwac]

The absence of complete incompetence at the Federal Reserve is a good reason why asset prices kept appreciating, but it's also because national political economies made adaptations to handling the impact of the business cycle---they spent a lot more for one; I know, the horror, the horror. Also, it was believed that a price decline would have to be correlated with an economic depression of a scope similar to the Great Depression, which economists and quantitative analysts judged correctly to be very unlikely.

Hmmm, no. Price declines are necessary. Housing prices can't indefinitely appreciate, compared to income.
Or do you think that housing should get less and less affordable over time.
There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

[niner]

I think it is incredibly important that we understand the real causes of the crisis, so we can make sure it doesn't happen again. That's why it's important that we don't blame it on the wrong reasons.

If you listen to the podcast you linked to, they mention that the people bundling the mortgages, and those creating CDOs were all assuming that the housing market would keep appreciating. There's probably a reason why real estate was constantly appreciating back then, but I don't know what it is.

Or they all knew that the Federal National Mortgage Association (Fannie Mae) would buy them all no matter what.

No, the GSEs (Fannie and Freddie) would not buy mortgages "no matter what". They have always had credit quality requirements. Those requirements loosened after the fact in response to the rest of the securitization market, and while unfortunate, it wasn't causative, it was reactive. Did this have negative consequences? Of course, but to say it was causative puts the cart before the horse. It made things worse, ultimately, but it didn't start them.

[niner]

There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

This time, there were a number of large (Too Big To Fail) private institutions that got leveraged WAY over their heads using unregulated and market-opaque Credit Default Swaps. The huge demand for mortgage-backed bonds (created by the Fed's loose monetary policy) created a huge demand for mortgages. So huge, in fact, that mortgage issuers started writing absolute garbage, because they knew that Wall Street would buy them. This never happened before, since some aspects of it used to be illegal. Phil Gramm wrote legislation that spawned the tools of the magical bonds, and Bill Clinton signed it, probably encouraged by Robert Rubin, who rode the crowded superhighway from Goldman Sachs to Treasury. Bush, acting through the Office of the Comptroller of the Currency, actively prevented State Attorneys General from going after the guys writing predatory mortgage loans.

This was no ordinary price decline, and it didn't happen naturally.

Edit: Actually, the price decline was just a bubble-pop, that much was natural. What was unnatural was the large volume of market-opaque financial instruments that hinged on the mortgages on those homes, the degree of leverage, and the horrible quality of the loans that were written only because of the insatiable demand from Wall Street.

Edited by niner, 08 November 2010 - 03:02 AM.

[cathological]

There is plenty of blame to go around. Both in the government and on wall street. You have to admit people in the government like Alan Greenspan and Barney Frank were a part of the problem. It takes two to tango.

[niner]

There is plenty of blame to go around. Both in the government and on wall street. You have to admit people in the government like Alan Greenspan and Barney Frank were a part of the problem. It takes two to tango.

I've been trying to keep partisanship out of it, but tell me, what was Barney Frank's role in the crisis? Are you equating it to Greenspan's?

[cathological]

There is plenty of blame to go around. Both in the government and on wall street. You have to admit people in the government like Alan Greenspan and Barney Frank were a part of the problem. It takes two to tango.

I've been trying to keep partisanship out of it, but tell me, what was Barney Frank's role in the crisis? Are you equating it to Greenspan's?

Barney Frank is the chairman of the House Financial Services Committee which oversees the entire financial services industry, including the securities, insurance, banking, and housing industries.

From wikipedia:

" In 2003, while the ranking Democrat on the Financial Services Committee, Frank opposed a Bush administration proposal, in response to accounting scandals, for transferring oversight of Fannie Mae and Freddie Mac from Congress and the Department of Housing and Urban Development to a new agency that would be created within the Treasury Department. The proposal, supported by the head of Fannie Mae, reflected the administration's belief that Congress "neither has the tools, nor the stature" for adequate oversight. Frank stated, "These two entities...are not facing any kind of financial crisis.... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."[59] In 2003, Frank also stated what has been called his "famous dice roll":[60] "I do not want the same kind of focus on safety and soundness [in the regulation of Fannie Mae and Freddie Mac] that we have in the Office of the Comptroller of the Currency and the Office of Thrift Supervision. I want to roll the dice a little bit more in this situation towards subsidised housing."[61] "


Here's a video that compares how Barney Frank was taking credit for the housing situation in the good times and denying responsibility for it in the bad:

http://www.youtube.com/watch?v=GRVIeCYAJFk


Here's some interesting ones:

http://www.youtube.com/watch?v=6CgJq8OYEl0

http://www.youtube.com/watch?v=2UZ9l_AxKjA

[cathological]

You may be buying into the politicians revisionist history.

Edited by cathological, 08 November 2010 - 08:04 AM.

[PWAIN]

This thread was really interesting but it seems to have gone way off track. Can we keep the discussion about the cause of the GFC in a separate thread. This one is about China and how the US will deal with China in the future.

Hilary Clinton is currently in Australia discussing military ties and bases and such, something that was usually not a priority for the US in the past. Of course this puts Australia in a precarious position. We are not big enough to take on any major power so we have to rely on alliances. Up until now we relied on the UK and then later on the US for our protection. Problem is that when you can see a change in the balance of power happening what do you do.

If we embrace the US and either get rebuffed (or sacrificed) or the US effectively gets dwarfed, we may be regretting not getting into bed with China. On the other hand, Chinas human rights and values are not a particularly good match for us. For now it looks like we are going to try to convince both sides that we love them and hope our allegiance is not tested anytime soon.

How the US deals with Chinas rise is going to be the most important thing that they have ever done. I suspect the best outcome is for a smooth handover of the batten, much like what happened between the UK and US at the turn of the last century. Given that even conservative estimates show that China WILL eclipse the US economically in a few years time, it seems that preparation would be wise. The first and biggest hurdle is going to be coming to terms with not being the unchallenged world leader. This is both on an individual and a national level.

If the US will not lay ball, then the possibility of war gets frighteningly real. China is unlikely to accept anything except full acceptance of her new position as world leader. If this doesn't happen, they will begin to assert themselves and things will get unpleasant very quickly. China has not shown itself to be willing to back down.

What makes people in the US not as worried about this as I think they should be?

[niner]

http://www.youtube.com/watch?v=hxMInSfanqg

You may be buying into the politicians revisionist history.

If the GSEs caused the crisis, you might be right. However, they were more victim than cause. I absolutely agree that they should have been on a shorter leash, given their Too Big To Fail status, but that applies even more strongly to the Wall Street firms that played a much much larger, and truly causative role in the mess. Have you listened to this very good piece of financial reporting? I know I keep harping on this, but every American who votes or talks about the credit crisis on the internet ought to listen to it. We should all be starting our arguments from correct facts and a sound understanding of what is a complex situation, as well as one that is very prone to ideological manipulation.

[Rational Madman]

There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

This time, there were a number of large (Too Big To Fail) private institutions that got leveraged WAY over their heads using unregulated and market-opaque Credit Default Swaps. The huge demand for mortgage-backed bonds (created by the Fed's loose monetary policy) created a huge demand for mortgages. So huge, in fact, that mortgage issuers started writing absolute garbage, because they knew that Wall Street would buy them. This never happened before, since some aspects of it used to be illegal. Phil Gramm wrote legislation that spawned the tools of the magical bonds, and Bill Clinton signed it, probably encouraged by Robert Rubin, who rode the crowded superhighway from Goldman Sachs to Treasury. Bush, acting through the Office of the Comptroller of the Currency, actively prevented State Attorneys General from going after the guys writing predatory mortgage loans.

This was no ordinary price decline, and it didn't happen naturally.

Edit: Actually, the price decline was just a bubble-pop, that much was natural. What was unnatural was the large volume of market-opaque financial instruments that hinged on the mortgages on those homes, the degree of leverage, and the horrible quality of the loans that were written only because of the insatiable demand from Wall Street.

Remember, household debt reached 130%, so it wasn't just the evil corporations and executives that caused the ensuing mayhem. While the leverage ratios in the United States mattered, the ratios were at least twice as bad in Europe. For a commercial bank, we had an average of 26 to 1, and for a securities trader, 33 to 1. For investment banks, I forget the ratio, but it was somewhere between the aforementioned. In Europe by contrast, the ratios were mostly between 100 to 300 percent larger---look at the situation with the German Hypo Real Estate for context, which had a leverage ratio of 112 to 1. And because household debt was relatively smaller---with notable exceptions of Spain, Ireland, the Baltics, and Great Britain---this contrasting quality was critical to making private sector losses in the United States worse.

Edited by Rol82, 11 November 2010 - 06:14 PM.

[niner]

There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

This time, there were a number of large (Too Big To Fail) private institutions that got leveraged WAY over their heads using unregulated and market-opaque Credit Default Swaps. The huge demand for mortgage-backed bonds (created by the Fed's loose monetary policy) created a huge demand for mortgages. So huge, in fact, that mortgage issuers started writing absolute garbage, because they knew that Wall Street would buy them. This never happened before, since some aspects of it used to be illegal. Phil Gramm wrote legislation that spawned the tools of the magical bonds, and Bill Clinton signed it, probably encouraged by Robert Rubin, who rode the crowded superhighway from Goldman Sachs to Treasury. Bush, acting through the Office of the Comptroller of the Currency, actively prevented State Attorneys General from going after the guys writing predatory mortgage loans.

This was no ordinary price decline, and it didn't happen naturally.

Edit: Actually, the price decline was just a bubble-pop, that much was natural. What was unnatural was the large volume of market-opaque financial instruments that hinged on the mortgages on those homes, the degree of leverage, and the horrible quality of the loans that were written only because of the insatiable demand from Wall Street.

Remember, household debt reached 130%, so it wasn't just the evil corporations and executives that caused the ensuing mayhem.

There have been a lot of people claiming that the "real cause" of the crisis was people borrowing more than they could afford. On one level that is correct, but it is highly misleading, to the point of being a red herring. If a predatory lender tells you that you can have a half million dollar loan, and he doesn't care that you don't have income, a job, or assets ("NInJA Loan"), and it looks as though you can buy a house, flip it in a year, and make fifty or a hundred grand, what's a financially naive guy going to do? Too often, he took the loan, the mortgage lender took his commission, and somewhere down the line, the world's economy almost blew up. In this scenario, there are a lot of people who deserve blame. Lawmakers, Regulators, Ratings agencies, Mortgage lenders, Securitizers, CDS writers... somewhere near the bottom of the list is the sucker who believed the Loan Hustler's pitch. The financially naive sucker bears some blame, but how much? The bankers are the ones who are supposed to be able to recognize an imprudent loan when they see it.

[Rational Madman]

There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

This time, there were a number of large (Too Big To Fail) private institutions that got leveraged WAY over their heads using unregulated and market-opaque Credit Default Swaps. The huge demand for mortgage-backed bonds (created by the Fed's loose monetary policy) created a huge demand for mortgages. So huge, in fact, that mortgage issuers started writing absolute garbage, because they knew that Wall Street would buy them. This never happened before, since some aspects of it used to be illegal. Phil Gramm wrote legislation that spawned the tools of the magical bonds, and Bill Clinton signed it, probably encouraged by Robert Rubin, who rode the crowded superhighway from Goldman Sachs to Treasury. Bush, acting through the Office of the Comptroller of the Currency, actively prevented State Attorneys General from going after the guys writing predatory mortgage loans.

This was no ordinary price decline, and it didn't happen naturally.

Edit: Actually, the price decline was just a bubble-pop, that much was natural. What was unnatural was the large volume of market-opaque financial instruments that hinged on the mortgages on those homes, the degree of leverage, and the horrible quality of the loans that were written only because of the insatiable demand from Wall Street.

Remember, household debt reached 130%, so it wasn't just the evil corporations and executives that caused the ensuing mayhem.

There have been a lot of people claiming that the "real cause" of the crisis was people borrowing more than they could afford. On one level that is correct, but it is highly misleading, to the point of being a red herring. If a predatory lender tells you that you can have a half million dollar loan, and he doesn't care that you don't have income, a job, or assets ("NInJA Loan"), and it looks as though you can buy a house, flip it in a year, and make fifty or a hundred grand, what's a financially naive guy going to do? Too often, he took the loan, the mortgage lender took his commission, and somewhere down the line, the world's economy almost blew up. In this scenario, there are a lot of people who deserve blame. Lawmakers, Regulators, Ratings agencies, Mortgage lenders, Securitizers, CDS writers... somewhere near the bottom of the list is the sucker who believed the Loan Hustler's pitch. The financially naive sucker bears some blame, but how much? The bankers are the ones who are supposed to be able to recognize an imprudent loan when they see it.

I was not claiming that the level of household debt was the real cause of the recession, because as you're probably already aware, I'm not very fond of monocausality. But the lethal combination of high levels of private and corporate debt helps to explain the relative difference in losses---between Europe and the United States. Because since the leverage ratios of their financial institutions were considerably worse, and thrived in the same liberal regulatory environment, one would expect their losses to be much steeper if your thesis was indeed correct. But except in Spain, the Baltics, Great Britain, and Ireland, this wasn't the case, since healthier household debt and savings rates in other member states acted as cushions. In my alternative explanation, the average indebted household should not assume much of the blame. Rather, the ostensibly savvy investors of ample means should take an equitable portion of the blame---or the top centile that owned approximately 85% of the market, and had the capacity to discern fresh and rotten fruit. But when the fire started by this minority leads to a collapse in credit markets, household debt does start to matter, because both forces contributed to a steep decline in aggregate demand---which required federal intervention---and continues to act as a major obstacle to our economic recovery. Because there is the dilemma of thriftier households perpetuating low levels of aggregate demand, and the imperative of encouraging indebted households to sustain their spending until structural changes can be engineered, our economy remains depressingly stagnant.

Edited by Rol82, 11 November 2010 - 06:35 AM.

[Rational Madman]

The absence of complete incompetence at the Federal Reserve is a good reason why asset prices kept appreciating, but it's also because national political economies made adaptations to handling the impact of the business cycle---they spent a lot more for one; I know, the horror, the horror. Also, it was believed that a price decline would have to be correlated with an economic depression of a scope similar to the Great Depression, which economists and quantitative analysts judged correctly to be very unlikely.

Hmmm, no. Price declines are necessary. Housing prices can't indefinitely appreciate, compared to income.
Or do you think that housing should get less and less affordable over time.
There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

Well, I was attempting to explain the failure of analysts to predict the size or likelihood of the decline in residential real estate prices. As for housing declines, there have been only regional declines in prices, not a national decline---which hasn't happened since The Great Depression. To correct the market, there needs to be a far reaching campaign to either mandate or incentivize the renegotiation of mortgage terms---so issuer and holder losses will be minimal. We're doing this already to a certain extent, but a much larger amount of federal resources is required to make the program work, because we're contending with trillions of debt. Otherwise, you invite price declines that may cripple local economies and the fiscal situations of their governments. Or at least maintain the status quo, which is also not tenable.

[Rational Madman]

This thread was really interesting but it seems to have gone way off track. Can we keep the discussion about the cause of the GFC in a separate thread. This one is about China and how the US will deal with China in the future.

Hilary Clinton is currently in Australia discussing military ties and bases and such, something that was usually not a priority for the US in the past. Of course this puts Australia in a precarious position. We are not big enough to take on any major power so we have to rely on alliances. Up until now we relied on the UK and then later on the US for our protection. Problem is that when you can see a change in the balance of power happening what do you do.

If we embrace the US and either get rebuffed (or sacrificed) or the US effectively gets dwarfed, we may be regretting not getting into bed with China. On the other hand, Chinas human rights and values are not a particularly good match for us. For now it looks like we are going to try to convince both sides that we love them and hope our allegiance is not tested anytime soon.

How the US deals with Chinas rise is going to be the most important thing that they have ever done. I suspect the best outcome is for a smooth handover of the batten, much like what happened between the UK and US at the turn of the last century. Given that even conservative estimates show that China WILL eclipse the US economically in a few years time, it seems that preparation would be wise. The first and biggest hurdle is going to be coming to terms with not being the unchallenged world leader. This is both on an individual and a national level.

If the US will not lay ball, then the possibility of war gets frighteningly real. China is unlikely to accept anything except full acceptance of her new position as world leader. If this doesn't happen, they will begin to assert themselves and things will get unpleasant very quickly. China has not shown itself to be willing to back down.

What makes people in the US not as worried about this as I think they should be?

In a possible military conflict with China, it's doubtful that the other members of the ANZAC alliance would be of much help, because of their reduced military capacity and geographic locations. Rather, the maintenance of military ties is meant more to increase the sense of security of their populations, and to make use of their comparative advantages---special forces---in ongoing and future military conflicts. So I wouldn't worry about future entanglement, because there are insufficient grounds for the United States to demand or expect a sizable military commitment from Australia in the event of a military conflict with China---which would probably be waged unilaterally anyway. By embracing Australia, we're attempting to isolate China, raise the costs of its undesired behavior, and compel a modification of its posture. China doesn't have the capacity or inclination to militarily threaten Australia, so I wouldn't be concerned, but you should be concerned about the possible costs of aligning with the United States---since your trade relationship with China is more significant. But I doubt China will retaliate in a meaningful way, since it needs your exports more than you need increased market access, and because no sane Australian leader would completely compromise the bilateral relationship with China---even Howard didn't go that far.

For regional allies, the United States is more keenly interested in Vietnam, South Korea, Japan, India, the Philippines, Indonesia, Singapore, Malaysia, and Thailand---all of whom have more compelling differences with China, and would be of much greater use in the event of a military conflict---or power struggle. What we're witnessing is not the ominous signs of future warfare, but healthy shifts in the balance of power---which rather, acts as a strong disincentive for future military conflict.


The United States faces no prospect of being dwarfed, and for reasons I only began outlining above, China is in a far more precarious situation. Human rights matter, but what position is Australia in to influence the behavior of China, and what are the costs versus the benefits of taking a moral stand on internal Chinese matters? You're better off pursuing a dual track of deepening ties with the United States and China, and carefully using these ties as leverage with both states.

Assuming China maintains its average of nearly 10 percent of annual growth, it would take about 30 years for it to surpass us in aggregate output, and that assumes everything goes according to plan, which it probably won't. As for the prospect of war, the only realistic scenario would be a Chinese invasion of Taiwan. But this, and any other serious military conflict is not foreseeable, because China is unlikely to accept the inevitable costs that would come with a pariah status---mostly economic. It might become more bellicose, or become involved in very limited military engagements, but nothing sustained. Invading Taiwan would be a logistical nightmare that would face fierce resistance, even if the United States decides to remain neutral. Presently, its armed forces lack the professionalism, experience, and capacity to launch such an invasion. Their best hope is aerial bombardment, but as the literature suggests, the cost of concession would have to be low for a target state to yield to coercion through air strikes, and for Taiwan, sacrificing sovereignty on China's terms would be a very high cost. Of course, if the global economy suffered a global depression that was especially cruel to China, its preferences may be altered, but the military obstacles would remain the same. If we so desired, we could neuter its Navy while only suffering minimal losses, and eliminate its strategic nuclear forces in less than 30 minutes---while only inflicting less than a million casualties, and because they have to fuel their ICBMs, long before they could launch a retaliatory response. We would only run into trouble if we attempted a ground invasion, but such has almost no chance of happening. So in sum, don't be overly fearful of China, because beneath its frightening superficial appearance, it's much weaker than it wants anyone to know.

Edited by Rol82, 11 November 2010 - 05:45 PM.

[Rational Madman]

There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

This time, there were a number of large (Too Big To Fail) private institutions that got leveraged WAY over their heads using unregulated and market-opaque Credit Default Swaps. The huge demand for mortgage-backed bonds (created by the Fed's loose monetary policy) created a huge demand for mortgages. So huge, in fact, that mortgage issuers started writing absolute garbage, because they knew that Wall Street would buy them. This never happened before, since some aspects of it used to be illegal. Phil Gramm wrote legislation that spawned the tools of the magical bonds, and Bill Clinton signed it, probably encouraged by Robert Rubin, who rode the crowded superhighway from Goldman Sachs to Treasury. Bush, acting through the Office of the Comptroller of the Currency, actively prevented State Attorneys General from going after the guys writing predatory mortgage loans.

This was no ordinary price decline, and it didn't happen naturally.

Edit: Actually, the price decline was just a bubble-pop, that much was natural. What was unnatural was the large volume of market-opaque financial instruments that hinged on the mortgages on those homes, the degree of leverage, and the horrible quality of the loans that were written only because of the insatiable demand from Wall Street.

Yes, Goldman Sachs employees sometimes find their way to Washington, but with the exceptions of Henry Paulson, Robert Rubin, and Jon Corzine, not many senior executives have rose to positions of considerable influence---mostly just staff and mid to high level positions in government agencies. But even in these limited cases of former executives ascending to positions of great political prominence, has the professional background of former executives influenced their treatment of their former employer? There was nothing exceptionally unethical about Rubin or Corzine's tenure, although the former attempted to use his connections to influence federal treatment of the Citigroup client Enron---but only when he was Chairman of Citigroup. The case of Paulson is a bit different, but forcing Goldman to accept a government investment wasn't exactly requested by Blankfein, and the generous treatment of credit derivative contracts with AIG wasn't limited to just Goldman, but several financial institutions----even Deutsche Bank. So a distinction between acting in the interest of systemic risk management, and solely on Goldman's behalf must be made. As I see it, the only possible areas of ethical concern might be the level of crisis time communication with Goldman executives, and Paulson's relative treatment of Lehman Brothers. In the latter case, if Paulson's treatment was deliberately unfair, I think such a position most likely stemmed from a personality conflict, because there was a long standing animus between Paulson and Fuld---which might have influenced Paulson's treatment. But his concern over creating moral hazards---which disappeared as the crisis thickened---and the lack of statutory authority for action, are also valid reasons for his approach. As for the level of communication with Goldman executives during the crisis, it's not uncommon for the public sector to coordinate policy with industry leaders, and Goldman is undoubtedly that---and would be in accordance with previous precedents---like the mop up of the Long Term Capital Management mess in 1998. So I don't see anything in Paulson's tenure really worthy of termination, or a Congressional Committee hearing on ethics.

Edited by Rol82, 11 November 2010 - 12:44 PM.

[Rational Madman]

There is plenty of blame to go around. Both in the government and on wall street. You have to admit people in the government like Alan Greenspan and Barney Frank were a part of the problem. It takes two to tango.

I've been trying to keep partisanship out of it, but tell me, what was Barney Frank's role in the crisis? Are you equating it to Greenspan's?

Barney Frank is the chairman of the House Financial Services Committee which oversees the entire financial services industry, including the securities, insurance, banking, and housing industries.

From wikipedia:

" In 2003, while the ranking Democrat on the Financial Services Committee, Frank opposed a Bush administration proposal, in response to accounting scandals, for transferring oversight of Fannie Mae and Freddie Mac from Congress and the Department of Housing and Urban Development to a new agency that would be created within the Treasury Department. The proposal, supported by the head of Fannie Mae, reflected the administration's belief that Congress "neither has the tools, nor the stature" for adequate oversight. Frank stated, "These two entities...are not facing any kind of financial crisis.... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."[59] In 2003, Frank also stated what has been called his "famous dice roll":[60] "I do not want the same kind of focus on safety and soundness [in the regulation of Fannie Mae and Freddie Mac] that we have in the Office of the Comptroller of the Currency and the Office of Thrift Supervision. I want to roll the dice a little bit more in this situation towards subsidised housing."[61] "


Here's a video that compares how Barney Frank was taking credit for the housing situation in the good times and denying responsibility for it in the bad:

http://www.youtube.com/watch?v=GRVIeCYAJFk


Here's some interesting ones:

http://www.youtube.com/watch?v=6CgJq8OYEl0

http://www.youtube.com/watch?v=2UZ9l_AxKjA

Here's some sage advice, stop watching so much f**king cable news, it's bad for the brain.

[rwac]

Well, I was attempting to explain the failure of analysts to predict the size or likelihood of the decline in residential real estate prices. As for housing declines, there have been only regional declines in prices, not a national decline---which hasn't happened since The Great Depression. To correct the market, there needs to be a far reaching campaign to either mandate or incentivize the renegotiation of mortgage terms---so issuer and holder losses will be minimal. We're doing this already to a certain extent, but a much larger amount of federal resources is required to make the program work, because we're contending with trillions of debt. Otherwise, you invite price declines that may cripple local economies and the fiscal situations of their governments. Or at least maintain the status quo, which is also not tenable.

Do you really think renegotiation will hold off the bubble-pop indefinitely ? I suppose deflating the dollar ("QE2") would do the job, but it would cause lots of inflation and probably start a trade war with China.

Attached Files

•  case-shiller-history-of-home-values.jpg   59.14KB   9 downloads

[Athanasios]

http://www.theepocht...ent/view/45709/

Cooking oil, liquor, and instant noodles have increased 10 to 20
percent. “We can’t change the price tags fast enough!” said a
purchasing staffer in a Beijing supermarket.

“Take cooking oil for example, we get three or four notices a day to
increase the price,” the staffer said to Hong Kong’s Apple Daily.

For consumers facing worsening inflation, an average family has to
increase its budget by at least an equivalent of about a hundred U.S.
dollars each month. A housewife who cooks three meals a day quickly
feels the pressure.

One such victim of inflation is Liang from Guangzhou who has to cook
for a family of six. Just last year, her family could eat heartily for
1,200 yuan (US$180) a month. This year she needs to spend 2,200 yuan
(US$330) per month to maintain the same quality of meals.

[Rational Madman]

Well, I was attempting to explain the failure of analysts to predict the size or likelihood of the decline in residential real estate prices. As for housing declines, there have been only regional declines in prices, not a national decline---which hasn't happened since The Great Depression. To correct the market, there needs to be a far reaching campaign to either mandate or incentivize the renegotiation of mortgage terms---so issuer and holder losses will be minimal. We're doing this already to a certain extent, but a much larger amount of federal resources is required to make the program work, because we're contending with trillions of debt. Otherwise, you invite price declines that may cripple local economies and the fiscal situations of their governments. Or at least maintain the status quo, which is also not tenable.

Do you really think renegotiation will hold off the bubble-pop indefinitely ? I suppose deflating the dollar ("QE2") would do the job, but it would cause lots of inflation and probably start a trade war with China.

Well, the bubble has already popped, or how else would you describe a 30% decline? And thanks for the chart, which helped to correct false notions about the historical behavior of prices. We often forget that we suffered two depressions this century, there was the Great Depression of course, and the depression following the First World War, where the Case-Shiller Index demonstrates a continuation of a pretty steep decline in prices. I always thought that the Case-Shiller Index showed the greatest decline in the Great Depression, but maybe I'm mistaking it with another index---since there are several, and some use data from a lot more than 20 cities. With Case-Shiller, I'm most familiar with the data from the last 15 years, and embarrassingly, I forgot about the early 90s bust. Interestingly, though, many of the risk assessment models used input data from only the last 20 years, which partially explains the catastrophic failure of risk management divisions. But it's also important to remember that historical declines in real estate prices are rarely evenly distributed, and almost always, are concentrated in key markets. In the present housing bubble, some of the greatest declines have been seen in New York, California, Florida, Nevada, Arizona, and Colorado markets for instance. Historically, the average housing bubble usually leads to a 36% drop in prices before stabilizing, but the question is, does our current housing bubble fit the historical norm? I would say that the imbalance between supply and demand might lead to another 20% drop, so federal action is urgently needed---because present efforts are woefully inadequate.

As for the wisdom of renegotiating contracts, I do think it's the best approach, but before I elaborate further, I want to search for some papers to support my subsequent entry on the subject, so that I can upload them. And deflating the dollar might help with market correction, but I think such is a horribly mercantalist policy that mostly leads to only short term economic gains, because as you noted, our trading partners will either retaliate, or stiffen their positions. I would like the dollar to remain as the premier reserve currency, and since it represents about 60% of all Central Bank holdings, its status will likely remain intact---but I still don't want to threaten its position, and its valuable role in financial stability. However, I do think the renminbi should appreciate, and not because I think it's the single largest cause of the trade deficit, and likely to solve all of our economic problems. But rather, because I believe in free floating currencies, and I think it's needed for making the requisite structural changes in China's national economy, and the broader global economy. Anyway, our trade deficit has already dropped by nearly 50%, but even that's not enough for the nativist-protectionist bloc of psychotics. We seriously need to look beyond zero-sum thinking when it comes to trade analysis, because the alternatives aren't pretty.

Edited by Rol82, 13 November 2010 - 02:29 AM.

[Rational Madman]

There have been housing declines before, just as there have been stock market crashes, without triggering a depression.

This time, there were a number of large (Too Big To Fail) private institutions that got leveraged WAY over their heads using unregulated and market-opaque Credit Default Swaps. The huge demand for mortgage-backed bonds (created by the Fed's loose monetary policy) created a huge demand for mortgages. So huge, in fact, that mortgage issuers started writing absolute garbage, because they knew that Wall Street would buy them. This never happened before, since some aspects of it used to be illegal. Phil Gramm wrote legislation that spawned the tools of the magical bonds, and Bill Clinton signed it, probably encouraged by Robert Rubin, who rode the crowded superhighway from Goldman Sachs to Treasury. Bush, acting through the Office of the Comptroller of the Currency, actively prevented State Attorneys General from going after the guys writing predatory mortgage loans.

This was no ordinary price decline, and it didn't happen naturally.

Edit: Actually, the price decline was just a bubble-pop, that much was natural. What was unnatural was the large volume of market-opaque financial instruments that hinged on the mortgages on those homes, the degree of leverage, and the horrible quality of the loans that were written only because of the insatiable demand from Wall Street.

Yes, Goldman Sachs employees sometimes find their way to Washington, but with the exceptions of Henry Paulson, Robert Rubin, and Jon Corzine, not many senior executives have rose to positions of considerable influence---mostly just staff and mid to high level positions in government agencies. But even in these limited cases of former executives ascending to positions of great political prominence, has the professional background of former executives influenced their treatment of their former employer? There was nothing exceptionally unethical about Rubin or Corzine's tenure, although the former attempted to use his connections to influence federal treatment of the Citigroup client Enron---but only when he was Chairman of Citigroup. The case of Paulson is a bit different, but forcing Goldman to accept a government investment wasn't exactly requested by Blankfein, and the generous treatment of credit derivative contracts with AIG wasn't limited to just Goldman, but several financial institutions----even Deutsche Bank. So a distinction between acting in the interest of systemic risk management, and solely on Goldman's behalf must be made. As I see it, the only possible areas of ethical concern might be the level of crisis time communication with Goldman executives, and Paulson's relative treatment of Lehman Brothers. In the latter case, if Paulson's treatment was deliberately unfair, I think such a position most likely stemmed from a personality conflict, because there was a long standing animus between Paulson and Fuld---which might have influenced Paulson's treatment. But his concern over creating moral hazards---which disappeared as the crisis thickened---and the lack of statutory authority for action, are also valid reasons for his approach. As for the level of communication with Goldman executives during the crisis, it's not uncommon for the public sector to coordinate policy with industry leaders, and Goldman is undoubtedly that---and would be in accordance with previous precedents---like the mop up of the Long Term Capital Management mess in 1998. So I don't see anything in Paulson's tenure really worthy of termination, or a Congressional Committee hearing on ethics.

Oh, I forgot about Friedman at the New York Federal Reserve. In this case, I'll agree that he made some pretty serious ethical errors. And then there's also Geithner's chief of staff, Mark something, but he hasn't exactly made headlines.

Edited by Rol82, 12 November 2010 - 01:05 AM.