The world’s finance industry, led by that of the United States, bet the business on the proposition that real estate prices always go up. Seemed plausible at the time, but they lost the bet. Now the world’s taxpayers, led by those in the United States, have to pick up the pieces. But I’m old-fashioned, I actually believe in the benefits of both free markets and intelligent regulation. One of those benefits is accountability. So pick up the pieces all right, but the people who bet their businesses now have to lose their businesses; and with no compensation, because they’re losers. Putting them in jail is probably not cost-effective, but we taxpayer/voters could revisit that finding if we hear any whining. Otherwise capitalism doesn’t work and we’re looking for Plan B.
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Comment feed for ongoing:
From: Dave Levy (Sep 22 2008, at 01:57)
They didn't bet on the proposition that Real Estate always goes up; that would assume they cared about the people they loaned to. They loaned a shit load of money to people who couldn't afford to repay, and then sold the debt to someone else. In doing so they charged fees everytime something happened, and payed themselves bonus of the back of the fee earnings.
You're right, the regulators need more power, but they also need more will. The banking regulators need to see themselves as police, not a retirement home.
I agree with your comments about losers, the problem is that some of these businesses can't be allowed to fail, their liabilities are too pervasive.
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From: Ethan (Sep 22 2008, at 05:49)
I totally agree, and would include home"owners" who purchased beyond their means, whether to live in the house or try to make a buck on a home flip. The real estate market in the USA was severely overvalued and this fix the Treasury Department wants seems to be stabilizing over-valued assets.
I'm pretty sure those I know with responsible mortgages (large down payments, the ability to pay monthly) won't be getting any aid, which makes them the losers in this roll of the "free-market" die.
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From: Eric Meyer (Sep 22 2008, at 06:16)
Amen.
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From: robert (Sep 22 2008, at 06:49)
Simple except it ignores the Prime Directive of Capitalists (aided and abetted by more or less fascist governments [you should look up the etymology of the word, if the assertion upsets you]: socialize losses/costs and privatize profits.
It would also be a good time to (re-)read "The Shock Doctrine"; the American Right Wing has set that in motion, too.
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From: Mark (Sep 22 2008, at 07:02)
Silly old bear. We only believe in capitalism when we're winning. Do a search for "privative the profits, socialize the risk."
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From: Red in Richmond (Sep 22 2008, at 07:04)
Welcome to the U.S.S.A., folks... when the government is propping up your "free" market with your childrens' future and your taxes for the next 20 years, it's no longer capitalism... it's socialism and denial of such is obfuscationism.
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From: Rob Britton (Sep 22 2008, at 07:57)
While I agree with your sentiments, it makes me wonder what would happen if there wasn't a large bailout. While it may be because someone along the line is lining their pockets, the other extreme is that they are trying to avoid a banking collapse which could lead to a major depression. In the early 1930's when banks started going out of business, the gov't sat by and did nothing. Look what happened then, do we want that to happen again now?
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From: Jim Ancona (Sep 22 2008, at 11:19)
I agree with you Tim, as well Ethan's comment above. WRT the argument about the stability of the banking system in the wake of the losses, my son passed along this link where a University of Chicago business school professor suggests an alternative approach, forced conversion of debt to equity:
http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf [PDF link]
Jim
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From: Mark (Sep 22 2008, at 11:23)
If "capitalism" is meant to denote "free market economy," then the current financial crisis is not a crisis of capitalism. It is a crisis of the mixed economy, what could be called fascist (if by _that_, one means "private ownership, government control").
In a free market, one without the FHA and Fannie Mae and Freddie Mac and other government efforts to create a "subprime" mortgage market, all those folks out there who bought houses they can't afford, wouldn't have. They wouldn't have been able to afford them, and no lender would have given them the money. Why did they, then? Because politicians decided that it was "too hard" for lower income folks to get loans, and they did everything they could to make it "easier."
It became so easy, in fact, that millions of people bought homes with variable rate mortgages and very little down. And so many bought, that housing prices soared--as they will in any market where demand skyrockets. Then, when rates went up and they couldn't afford their loans, those millions of subprime borrowers couldn't even sell their houses to get out of their upside down loans. Hence, the defaults and the worthless paper. And none of this would have happened in a free market.
Blame the politicians, certainly. Blame the mixed economy "businesspeople" who were sucked into a market corrupted by government intervention where, indeed, it was all private gain and public risk.
Just don't blame capitalism. Because capitalism has nothing to do with it.
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From: Al (Sep 22 2008, at 12:59)
Some of the institutions who have suffered did not at all bet that real estate prices would always go up, in fact quite the opposite. But their function as "market makers" (or "providers of liquidity") required them to put together and sell what people wanted to buy, and that meant, like it or not, they were exposed to those products.
(A moral that experts understand all too well in their own fields, but seem blind to when thinking about things they are not expert in: anything that seems simple almost certainly is not so.)
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From: Wade from Iowa (Sep 22 2008, at 17:05)
If I buy a lottery ticket and lose, do I get to play again with someone else's money?
Should the rule change just because I bought several billion lottery tickets at once?
The song goes "Some gotta win, some gotta lose, GoodTime Charlie's gotta get some green for his blues"? Doesn't scan, sorry.
I feel sorry for friends who have lost lots of money on real esate. They're my friends. But their being my friends doesn't mean they should expect me....much less 300 million or so strangers... to bail them out for their bad decisions.
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From: John (Sep 22 2008, at 18:26)
I've had it wrong all along. We've been saving, living well within our means, and not taking on debt (outside a mortgage). I think they call it "being responsible". I know, that's so "old school" these days. So, what am I going to get for this? A big fat tax bill down the road to pay for this fiasco, pay for the golden parachutes the company "leadership" will be getting, and assist irresponsible homeowners and house flippers so they can keep the houses they can't afford. What a crock.
The US is on its way to a $1 TRILLION dollar DEFICIT. Anyone else want to feed at the trough?! Hurry, 'cause I can hear the chickens coming home to roost.
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From: Roy Schestowitz (Sep 23 2008, at 01:43)
If it implodes, we can at least hope for a saner system (patents, standards... http://online.wsj.com/article/SB122211669212064331.html?mod=rss_whats_news_us_business )
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From: robert (Sep 23 2008, at 05:02)
@Mark, et al:
To be picky, because it's important, fascism (as defined by Mussolini) wasn't about "government control" of "private ownership". Rather it was about government support/protection of private capital(ists). Control remained private.
As to your tale: mostly wrong. There is ample evidence (read Cringley) that the "unpayable" mortgages happened thus:
Lender: here's what "we" need for the numbers to get you the loan.
Chump: but......
Lender: do you want the house.
Chump: but.....
Lender: take it or leave it.
Chump: well....... ok.
It was NOT the case of Chumps walking in with, figurative, guns holding up the banks. It was the banks, not only ignoring due diligence (which they are legally obliged to do), but actively fabricating. To get the fees, of course.
Note that there are two kinds of ARM (and nothing to do with subprime, per se): prime rate tied, and contractural. It is the latter that has caused the problem. And these were recently invented by the BANKS, not the Chumps, to get the fees.
So, yes, it is rapacious capitalists who did this.
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From: robert (Sep 23 2008, at 08:26)
Finally, (modulo flame-baiting), this is a very good precise of the NPR episode of "This American Life", which explains why the financial system did the dirty stuff it did. The Demand Side, kind of like explaining the Drug Problem by blaming the Users.
http://realist-idealist.com/2008/07/23/understanding-the-giant-pool-of-money/
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From: Roger (Sep 23 2008, at 20:07)
" ...but the people who bet their businesses now have to lose their businesses; and with no compensation, because they’re losers."
Uh - it is too late. The scions of Wall Street have already walked away with billions of dollars over the past several years. Giant bonuses, inflated salaries, fancy stock options, etc. etc. All from speculation using other people's money. Yeah, those still hanging around these firms have basically lost their golden goose. But it is the American taxpayer that has been screwed again and is left holding the bag of toxic debt (a la Ronald Reagan's Savings and Loan scandal - only several orders of magnitude worse).
George Bush is going to go down in history as the reincarnated Calvin Colidge - "the business of America is business" - typical Republican overconfidence of deregulation in the American economy. Have ironically pathetic that the Bush administration is now reduced to advocating the biggest federal socialization of formerly private assets in American history. Maybe Russia and Cuba aren't such bad guys after all ...
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From: robert (Sep 24 2008, at 09:29)
@all
socialism: the State bails out individuals (medicine, housing, etc.)
fascism: the State bails out corporations (buys up bad debt, no bid contracts, support of monopolies, etc.)
Be careful how you use epithets; you could be painting the right bad guys with the wrong brush.
This proposed bailout is pure fascism, not socialism.
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From: len (Sep 25 2008, at 11:00)
I've never seen an election with the entertainment value of this one. At least, not this side of the Normandy coast.
Meanwhile, congratulations to the Chinese Space Agency on their successful launch this morning!
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