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financial crisis Archive

Sunday

25

August 2013

0

COMMENTS

Holder Rattles the Sabers

Written by , Posted in Economics & the Economy, The Courts, Criminal Justice & Tort

Tough talk from the nation’s top legal obstructionist:

Attorney General Eric Holder on Tuesday put Wall Street on notice with a vague threat, saying that the Justice Department may be gearing up for civil or criminal prosecutions against those responsible for the 2008 financial meltdown.

“My message is, anybody who’s inflicted damage on our financial markets should not be of the belief that they are out of the woods because of the passage of time,” Holder said in an interview with The Wall Street Journal.

Holder didn’t expound on the nature of the charges or whom the DOJ might have in its crosshairs.

If Eric Holder both actually meant what he said and understood who is properly to blame, the DC governing class would be running for the hills. But they’re not. The politicians that repeatedly voted for bad policies or propped up Fannie and Freddie get a pass. The bubble-inducing Fed gets a pass. But if you’re some middling banker in New York, watch out! I have to imagine that as the criminal cabal occupying the White House becomes increasingly exposed for repeated, persistent resistance to any legal or constitutional controls, they’ll be seeking scapegoats and distractions. Eric Holder may have just tipped his hand in terms of who those scapegoats are likely to be.

Tuesday

10

May 2011

0

COMMENTS

Here We Go Again

Written by , Posted in Identity Politics, The Courts, Criminal Justice & Tort

I’ve noted before that we learned absolutely nothing from the causes of the 2008 financial market collapse. Clearly, that remains true:

Two lawsuits accusing Wells Fargo of discriminatory lending practices have been allowed to move forward, a victory for plaintiffs that have accused the bank of steering African-Americans toward predatory loans.

…Judge Anderson’s ruling came two weeks after Judge J. Frederick Motz, of Federal District Court in Maryland denied Wells Fargo’s attempt to dismiss a similar lawsuit brought by the mayor and city council of Baltimore. Two previous versions of that lawsuit, claiming reverse redlining, in which the bank steered African-Americans toward more predatory loans, had been dismissed by the court.

But this time, Judge Motz said city officials had narrowed the allegations enough to show a plausible link between Well Fargo’s actions and its impact on the city. The issue, he said, was whether “the city has plausibly alleged that the properties in question would not have become vacant but for the allegedly improper loans made by Wells Fargo.”

Redlining, we were told, was a horrible practice whereby banks refused to offer services to areas because of their racial make-up, rather than for simple financial or business reasons. These dubious accusations were frequently used as a cudgel to force banks to service loans to unqualified applicants, or face shakedowns and lawsuits should they refuse. This ill-conceived pursuit of ‘racial justice’ through home loans was one of the many market distortions contributing to the financial crisis.

Now the boogeyman is reverse redlining, where banks supposedly give worse rates or higher charges to minority borrowers. But once again, these charges ignore the economic realities that drive the determination of lending rates. As the New York Federal Reserve has demonstrated, the studies alleging reverse redlining are pure bunk:

Did lenders target minorities with higher-cost loans, relative to their white counterparts? Consumer advocates have long trumpeted this as fact, using studies commissioned by their own staff and publicly-available data via the Home Mortgage Disclosure Act to allege that banks routinely and deliberately offered disparate terms to minority borrowers. And legislators have taken these findings at face value, no questions asked.

The … problem is often the data itself: HMDA data is notoriously incomplete, meaning that conclusions based on analysis of that particular data often can be missing critical key credit indicators that might otherwise explain disparities that seem to be reported in previous studies.<

The NY Fed study is groundbreaking particularly because it uses a hybrid data set that isn’t reliant on just the HDMA data; the first such study to do so. The researchers matched approximately 70 percent of loan-level data in a database provided by First American LoanPerformance to unique mortgage data in the HDMA. Doing so was “extensive work,” Andrew Haughwout, Christopher Mayer, and Joseph Tracy — co-authors of the study — note in review.

The study, it turns out, actually showed more favorable rates for minority borrowers:

In contrast to previous findings, our results show that if anything, minority borrwers get slightly favorable terms, although the size of these effects are quite small. Black and Hispanic borrowers pay very slightly lower initial mortgage rates than other borrowers — about 2.5 basis points (0.0025 percent) compared with a mean initial mortgage rate of 7.3 percent. Black and Hispanic borrowers also have slightly lower margins (about 1.7 to 5 basis points, or 0.0017 to 0.005 percent) compared to a mean margin of 5.9 percent. Asian borrowers pay slightly higher initial rates and reset margins (about 3 basis points). We find no appreciable differences in lending terms by the gender of the borrower. These results control for the mortgage risk characteristics and neighborhood composition. While many of these differences are statistically significant, they are economically insignificant.

A second important finding is that 2/28 mortgages were cheaper in Zip Codes with a higher percentage of Asian, black and Hispanic residents, as well as in counties with higher unemployment rates, once we control for the individual risk characteristics of the borrower.

While there’s perfectly valid reasons to criticize lending practice generally, and loose lending standards (for whatever reason you may think they developed) there is no real evidence sustaining the hypothesis that such practices worked along racial lines. But don’t expect these facts to stop the racial grievance mongers from once again causing market distortions with their abuse of the law in the name of identity politics.

Update: Speaking of not learning lessons, the Obama administration is taking the tried and true approach to ruining the housing market and is now “cracking down” on redlining.

Sunday

6

February 2011

0

COMMENTS

TARP Pays Off

Written by , Posted in Economics & the Economy

The special inspector general for the TARP program says that it makes future government bailouts more likely:

The financial rescue fund known as TARP has actually the increased the likelihood of more bank bailouts in the future, Neil Barofsky, the program’s special inspector general, told CNBC Wednesday.

“As long as the market perceives that the government is going to be a backstop…(it will) encourage more and more risk-taking and put us right back where we were in late 2008,” said Barofsky.

When government bails out businesses that took big risks that didn’t pan out, it is encouraging yet more risk taking than otherwise would occur.  This is known as moral hazard, and it played a part in causing the financial crisis in the first place.

It’s painful to watch people in power learn absolutely nothing from the disasters they create.

Saturday

15

January 2011

0

COMMENTS

A Lesson in Unintended Consequences

Written by , Posted in Government Meddling

I’m all for the scientific pursuit of knowledge. I have degrees in two very different scientific fields, I value the scientific method, and I firmly believe that knowledge is power (or as I learned from watching G.I Joe cartoons while growing up , “Knowing is half the battle”). I say all this to make clear that this shouldn’t be taken as a knock on science or the particular scientists involved in this story. Rather, I present this news item as an example of the dangers of unintended consequences:

Some scientists studying penguins may be inadvertently harming them with the metal bands they use to keep track of the tuxedo-clad seabirds, a new study says.

The survival rate of King penguins with metal bands on their flippers was 44 percent lower than those without bands and banded birds produced far fewer chicks, according to new research published Wednesday in the journal Nature.

The theory is that the metal bands — either aluminum or stainless steel — increase drag on the penguins when they swim, making them work harder, the study’s authors said.

Author Yvon Le Maho of the University of Strasbourg in France, said the banded penguins looked haggard, appearing older than their actual age.

Consequently, studies that use banded penguins — including ones about the effects of global warming on the seabirds — may be inaccurate, mixing up other changes in penguin life with the effects from banding, said Le Maho and colleague Claire Saraux.

Now imagine that the scientists are government and we are the penguins. Such unintended consequences are not at all uncommon from government policy. It’s not usually so bad as drastically increasing mortality rates, but unintended consequences abound whenever government do-gooders get a design in their eyes for how to improve society.

In the case of the penguins, I’m sure this new finding will be incorporated into future studies, with new study techniques being developed and implemented so that future beings aren’t condemned to death. That’s the difference between science and government. Scientists learn (eventually); government’s don’t. We know that government imposed minimum wages hurt the very people they are said to help, but still they remain, and are constantly increased. We know that government meddling in the housing market contributed to the economic collapse, yet the very same policies continue today.

We need a government that is aware of the likelihood and dangers of unintended consequences from sweeping legislation that drastically increases the role of government in society. It’s not that one expects the exact problems to be foreseen in every case (they are, after all, unintended), but a general awareness of the danger government can inflict on society through its meddling would result in far fewer destructive policies ever seeing the light of day. We penguins request just that little bit of additional consideration for our well-being.

Monday

28

June 2010

0

COMMENTS

Faith In Government Regulators Is Misplaced

Written by , Posted in Economics & the Economy, Free Markets

Shakespeare would likely describe the latest major legislation winding its way through Congress as a piece of legislation crafted by idiots, full of sound and fury, signifying nothing.  Rather than address the systemic distortions created by prior government policies, and which caused the financial meltdown, policy makers are now “[putting] a lot of faith in the watchful eye of regulators to prevent another financial crisis,” according to the Washington Post.

Nearly two years after tremors on Wall Street set off a historic economic downturn, congressional leaders greenlighted a bill early Friday that would leave the financial industry largely intact but facing a more powerful network of regulators who could impose limits on risky activities.

The final bill took shape after a 20-hour marathon negotiation between House and Senate leaders seeking to reconcile their separate versions. The legislation puts a lot of faith in the watchful eye of regulators to prevent another financial crisis. New agencies would police consumer lending, the invention of financial products and the trading of exotic securities known as derivatives. Bank supervisors would have the power to seize large, troubled financial firms whose collapse could threaten the entire system. The bill calls for banks to hold more money in reserve to weather economic storms but leaves the details to regulators.

…”We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression,” Obama said at the White House, adding that the bill “represents 90 percent of what I proposed when I took up this fight . . . We’ve all seen what happens when there is inadequate oversight and insufficient transparency on Wall Street.”

Essentially, Congress has decided that all we need is yet more overpaid bureaucrats.  No reform of Fannie and Freddie.  No efforts to stop politicians from continuing to force banks to issue risky loans so that they can point to expanding home-ownership under their watch.  Instead, we get harmful price controls on debit cards, which has nothing to do with the cause of the 2008 recession.

Even the crafters of the bill aren’t really buying their own stance that more government will help.  In one of those rare moments where a politician accidentally let’s the truth slip out, Senator Dodd admitted, “No one will know until this is actually in place how it works.”

Belief in big government really is all about faith.

Wednesday

14

April 2010

0

COMMENTS

Regulatory Contradiction

Written by , Posted in Economics & the Economy, Government Meddling, The Nanny State & A Regulated Society

Obama steps up campaign for financial overhaul, putting pressure on GOP:

Just before a meeting with Democrats and Republicans to discuss the legislation, President Barack Obama said it needs to be passed in order to prevent another financial “meltdown.”

He warned that not passing the bill could put the economy in peril.

“All of us recognize that we cannot have a circumstance in which a meltdown in the financial sector once again puts the entire economy in peril,” Obama said. “And that if there’s one lesson that we’ve learned it’s that an unfettered market where people are taking huge risks and expecting taxpayers to bail them out when things to sour is simply not acceptable.’’

First of all, Obama contradicted himself.  A “market where people are taking huge risks and expecting taxpayers to bail them out when things turn sour” is not unfettered.  Nevermind that the one we have is obviously not unfettered, but even his simplistic description of it makes that a logical impossibility.  Implied and explicit guarantees by government are a market distortion.  Government interference already exists under such circumstances.

If we remove the President’s gratuitous use of “unfettered” here, then he’s actually saying something semi-intelligent.  We clearly do not want a system where government is encouraging people to take greater risk than they otherwise would by guaranteeing their loses with taxpayer dollars.  But that’s exactly what government did, and is one of the primary causes of the financial crisis.  The correct response to this situation is not to say that “we need to stop people from taking risks!”  The correct response is to end all government bailouts and make clear that there is no such guarantee.

Monday

1

February 2010

0

COMMENTS

Auditor: TARP Failing

Written by , Posted in General/Misc.

It’s not doing what they claimed it would do:

The 700-billion-dollar US government effort to rescue the financial system has failed to meet key goals such as sparking lending and curbing risky activities by banks, a special auditor said Sunday.

The special inspector general for the Troubled Asset Relief Program said in a report to Congress that it is too soon to measure the overall success of the program passed at the height of the financial crisis in October 2008.

The quarterly report said that because of TARP, “there are clear signs that aspects of the financial system are far more stable than they were at the height of the crisis in the fall of 2008.”

Talk about a low bar.  Doing nothing would have accomplished that, and at 100% less the cost!

Sunday

27

December 2009

1

COMMENTS

Fannie And Freddie Have A Very Merry Christmas

Written by , Posted in Economics & the Economy

The outrageous story of the week is Obama’s decision to try and sneak this by during Christmas:

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.

The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama’s current term.

Merry Christmas, and have a Happy New Year of watching government continue to do all the same idiotic meddling that destroyed our housing and financial markets.

Monday

7

December 2009

2

COMMENTS

Dispelling The “Capitalism Failed” Myth

Written by , Posted in Economics & the Economy, Government Meddling

This won’t be the first time the subject has been discussed on this blog, but the determination of many to paint last year’s financial implosion as a failure of capitalism requires diligence and constant restatement of the truth. The truth is exactly what Steven Horwitz and Peter Boettke bring in their new report, “The House that Uncle Same Built: The Untold Story of the Great Recession of 2008,” published by the Foundation for Economic Education.

From the introduction:

The theme of “The House that Uncle Sam Built: The Untold Story of the Great Recession of 2008” is that government policy, not a failure of free markets, caused the economic trauma we have been experiencing. We do not live in a free market. We live in a mixed economy. The mixture varies by industry. Technology is primarily free. Financial Services is primarily government. It is not surprising that the most government regulated and controlled segment of the economy, financial services, experienced the biggest problems. These problems were created by actions by the Federal Reserve combined with government housing policy (especially the government-sponsored enterprises – Freddie Mac and Fannie Mae). Misguided government interference in the market is the real culprit in laying the foundation for the Great Recession.

The entire essay is available as a pdf here.

Hat-tip: The Locker Room

Thursday

16

July 2009

0

COMMENTS

Paulson Unapologetic About Bully Tactics

Written by , Posted in Government Meddling

Just so that we remember the central planning began under Bush.

Former Treasury Secretary Henry Paulson says he was justified last year in suggesting that Bank of America Corp.’s chief executive could lose his job if the bank backed out on plans to buy troubled Merrill Lynch.

…In prepared testimony, Paulson said he told Bank of America CEO Kenneth Lewis last year that reneging on his promise to purchase Merrill would show a “colossal lack of judgment.”

Paulson said that “under such circumstances,” the Federal Reserve would be justified in removing management at the bank.

Rep. Issa nails it:

Rep. Darrell Issa, the top Republican on the House Oversight and Government Reform Committee, said Paulson’s testimony makes clear that the government became too involved and misused its power.

“It is a threat to the foundations of our free society when government officials, acting in the midst of a crisis, use dire predictions of imminent disaster to justify their encroachment on our individual liberty and the rule of law,” said Issa.