Tag Archives: bailouts

The Bailouts Benefited Everyone, Not Just Bankers

From NYT: Bernie Sanders: To Rein In Wall Street, Fix the Fed

WALL STREET is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates.

When the fed bailed out the banks, they, in essence, bailed out the most productive people. By throwing Wall St. a lifeline, the fed and congress sequestered the problem parts of the economy, allowing the healthier parts such as Web 2.0, retail, Silicon Valley, e-commerce, venture capitalism, and biotech to thrive instead of being dragged down by the ailing banking sector. That is something few understand – they think it was just bankers who got bailed out, but pretty much every productive person benefited at least indirectly from the bailout, which by 2011 finally turned a profit despite all the predictions in 2008-2009 of its failure.

Everyone wants to blame capitalism and Wall St., but pity the loser homeowner who thought it was a good idea to buy a 6,000 square-foot McMansion on $40,000 income with zero down.

Financial regulation is doomed to fail because you cannot regulate stupidity, but that doesn’t mean everyone has to suffer for the mistakes and stupidity of some, which is why bailouts have become an unavoidable part of modern capitalism. It’s like choosing the lesser of two evils: risk moral hazard or risk things getting worse?

Sanders also ignores how bank balance sheets are the healthiest they have ever been and that non-performing loans are at record lows, suggesting that banks have reformed their lending practices:

Credit scores for mortgage originations are rising:

Subprime lending has also collapsed, and mortgage debt is back to it’s long-run trend after a bubble in 2003-2008.

If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

While taxes did rise in 2013, it was not out of economic necessity, but rather due to gridlock and Obama’s refusal to compromise by cutting certain programs (for example, raising the Medicare eligibility and slowing increases in Social Security costs by reducing cost-of-living adjustments). The bailouts turned a profit by 2011, and by 2014 the treasury reported profits of $15 billion on TARP. Can the same be said for welfare programs like disability, Obamacare, free emergency room treatment, social security, and food stamps. I think not. Although some welfare is probably necessary to avoid disruption, it’s disingenuous for liberals to pretend to be looking out for taxpayers, yet simultaneously advocating policy that greatly adds to the deficit and produces negative long-term economic value. Welfare liberalism is reverse Darwinism: throwing more money at the losers of society while at the same time punishing the successful with higher taxes and more regulation. And then they wonder why the economy isn’t growing fast enough or not enough jobs are being created.

Liberals like Sanders think they are ‘saving’ mainstreet, looking out for our ‘best interests’ by attacking the fed, when in reality they advocate policy that would destroy wealth and punish the most successful and productive.

Related: Don’t Blame the Fed – Blame Stupid People, Liberalism, Democracy

Obama Should Give His Nobel Prize to Bernanke

If Obama can get a Nobel Prize for doing nothing (and then later being a lousy president), maybe Bernanke deserves one for merely saving the economy in 2008?

Full employment without inflation is in sight. The central bank did its job. What about everyone else?

Agree, the central bank did a good job by stemming the bleeding. The consumer did its job by consuming. And Silicon Valley did a good job by innovating. But Obama? No. Obama’s presidency has been marred by great failures: foreign policy (Syria, Iraq, and Afghanistan), the economy (cash for clunkers, the Dodd Drank bill which predictably did nothing, and a failed trillion-dollar stimulus that didn’t create jobs, and more), domestic issues (siding with looters and against the police in the Treyvon Martin and Michael Brown deaths, blaming the ‘gun lobby’ and the NRA for shootings), and healthcare (Obamacare, which will greatly add to the deficit in upcoming years at little benefit).

Even Reuters, which tends to be impartial, can’t help but to notice the abject failure of Obama’s Middle East policy:

In Syria, U.S.-trained rebels surrender supplies and ammunition to al Qaeda-linked insurgents. In Iraq, the battle by American-backed government forces against Islamic State is at a stalemate. In Afghanistan, the Taliban seize a provincial capital for the first time since their ouster in 2001.

The administration is also weighing a proposal to scale back its failed $580 million program to train Syrian rebels to battle Islamic State, U.S. officials said.

The Obama doctrine has floundered partly due to weak national governance in Iraq and Afghanistan, and the failure of moderate Syrian opposition groups to overcome their rivalries.

Putin, in taking the initiative in Syria and Iraq, is making Obama look like a bigger wimp than otherwise thought possible.

Even liberals will admit Obama failed, for not being liberal enough, but a failure nonetheless. The overall consensus by economists is that Obama’s policies contributed little, if any, to the post-2008 recovery. It was Bernanke and Geithner (the Competent Duo) who did all the heavy lifting, with Obama taking all the credit similar to how he took credit for the killing of Bin Laden despite the fact all the important intelligence work was done by the prior administration, and that Bill Clinton ignored intelligence warnings about Osama. Had Bush been given another four years, not only would the stock market have surged, but the economic recovery would have been stronger because there would have been no Obamacare or budget impasses.

Does anyone honestly see a light at the end of this tunnel of prosperity, or are we delusional to believe it’s a freight train heading right at us? The 2nd (or was it 3rd? Whatev) LONGEST Bull market in US HISTORY just occurred….F”N history!! And it’s going to keep going, thanks to consumer spending, low interest rates, exports, rich foreign consumers, and the economic and scientific contributions of high-IQ people both in America and all over the world.

Profits, earnings, and stock prices keep making new highs:

Higgs boson today, Grand Unified Theory of Everything tomorrow? All over the world, from Silicon Valley to Manhattan, from Caltech to MIT, smart, high-IQ people are innovating, creating wealth for themselves and the broader economy.

(the ADS/CFT correspondence showing how quantum effects are on a lower dimensional boundary than relativistic/gravitational ones)

Bernanke, in saving the day in 2008, threw a lifeline for smart people, mitigating the mistakes made by dumb people so that the healthier parts of the economy (web 2.0, technology, retail) could thrive without being weighed-down by the ailing sectors (housing, financial).

The bailouts are interesting because it’s an application of pragmatism and consequentialism, both pillars of ‘grey enlightenment’ – the bailouts being an example of policy that is unpopular and anti-populist but a success. The system may occasionally suck, but it works. Things do get better, and those who hold their stocks amid the panic can reap substantial gains. Typically, there is no problem that can’t be easily remedied by super efficacious policy in congress and global central bank coordination, although the growing entitlement spending problem could be a concern down the road. Congress deserves a round of applause for saving the financial system in 2008 and not impeding in the subsequent economic & stock market boom with excess regulation and activism. Bernanke deserves a Nobel Prize for defying all the critics and enacting what may be the most successful monetary (or any policy for that matter) policy in the recent history of the United States, even more so than the lionized former fed chairman Paul Volcker who in the early 80′s caused the market to crash and the economy to enter a severe recession by unnecessarily raising interest rates too quickly.

Part 1. Misconceptions About the 2008 Financial Crisis

The subject of the The 2008 banks bailouts (TARP), which understandably angered both Republicans and Democrats, a pertinent case study in pragmatism, in which other otherwise inviolable free market was temporary suspended for the ‘greater good’ of the economy, but ultimately, in spite of great criticism, the bailouts proved to be a success, or at the very least a Pyrrhic victory. Sometimes, as in the example of TARP, the most effective policy is the one that no one likes, sort of like bad tasting medicine that you want to spit out, and this compromise between short-term sacrifice and pain and long-term success underscores the trio of rationalism, utilitarianism, and pragmatism – in contrast to traditional left/right policy that seeks immediate gratification even if such policies prove useless and wasteful in the long-run. Part two will discuss TARP and its aftermath in further detail.

Although its been seven years since the ratification of TARP, many misconceptions about the program, as well as the 2008 financial crisis, remain, which I discuss in detail in an earlier article, Defending Finance: Why Bankers and Economists Are Not to Blame for the Crisis.

Economists are generally better at fixing crisis than predicting or preventing them. The fact 99% of economists failed to predict the crisis doesn’t render the profession useless or economic policy ineffective. If an oncologist cannot actually prevent someone from getting cancer, or predict when someone will get cancer, does that mean oncology is a useless profession? Doctors can create risk profiles, but this alone cannot predict who will get sick and when.

Homeowners share some of the responsibility in terms of reckless borrowing and not reading the fine print. Did anyone really think it was a good idea buying a 6,000 square-foot mc-mansion on a $40,000/year income? It’s simple common sense, and people who are lacking in it should and do pay the price.

Institutions and wealthy individuals who bought mortgage backed securities, often in search of extra yield, like homeowners, bear personal responsibility for their own bad decisions, poor risk management, and poor market timing. Just because Goldman or whoever sold these products doesn’t mean they were guilty. Is an ETF provider guilty because their ETF falls in value? No, the ETF is created to meet a market demand for the underlying asset, and the ETF creator, as per the prospectus, has no culpability whether the product succeeds or fails.

As I explain in the article linked above, contrary to popular belief, people did go to jail for mortgage fraud. From the WSJ:

In the three years since the crisis peaked in October 2008, the Justice Department has filed financial-fraud cases against 14,843 defendants, according to the letter to Mr. Grassley. Over that time, it said, more than 1,100 people have been sentenced to prison for mortgage fraud.

The letter names 17 CEOs and other senior corporate officers convicted of significant financial crimes. Most of the 17 committed frauds that weren’t directly related to the financial crisis. They include Allen Stanford, convicted in March of running a Ponzi scheme; Raj Rajaratnam, jailed last year for insider trading; and Zevi Wolmark, who pleaded guilty this year to bid-rigging in the municipal-finance market. Courtney Dupree, convicted last year of a $21 million bank fraud, makes the Justice Department’s list.

The left keeps ignoring these details, parroting the same line that no one went to jail for mortgage fraud.

But then why were so few, if any, executives punished? One reason is that it’s very difficult to actually build a high-profile criminal case. Unlike TV and movie crime dramas that are settled in under an hour, government cases take years to build, and even longer in court, exhausting hundreds of millions of dollars and tens of thousands of man-hours. In light of this, defendants will often agree to pay a fine and admit no wrongdoing, even when gilt seems obvious.

As explained by NyBooks, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?, one reason for the lack of high-profile convictions is because prosecutors are targeting firms rather than individuals; second, since 911, for the FBI fraud has taken a backseat to counter-terrorism; third, that the SEC is going after Ponzi schemes, which are much easier to prove criminal intent than, say, investigating the sale of complicated mortgage-backed securities; and, finally, individuals and firms that bought mortgage backed securities are considered ‘savvy’ investors, as opposed to naive ‘mom and pop’ investors.

Another possibility is that no fraud was actually committed, but rather the system collapsed due to ‘good intentions’ in increasing home ownership, which later went horribly wrong. The crisis also involved mistakes in risk management by firms, and mistakes are not illegal. The sudden failure of the housing market, as well as many financial institutions, was a multi-sigma event that firms were not only unprepared for, but could not have possibly foreseen. Few foresaw that securities which were marked ‘AAA’ would become worthless in less than a year.

The same liberals who want the banks to fail and Wall St. to burn fail to realize that it was their polices that contributed to the mess in the first place. The Clinton administration, as well as various other liberal pressure groups, were complicit in inflating the housing market by forcing lenders to create risky loans to meet quotas. From Wikipedia, Government policies and the subprime mortgage crisis:

The Department of Housing and Urban Development (HUD) loosened mortgage restrictions in the mid-1990s so first-time buyers could qualify for loans that they could never get before.[131] In 1995, the GSE began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.[132]

The Housing and Community Development Act of 1992 established an affordable housing loan purchase mandate for Fannie Mae and Freddie Mac, and that mandate was to be regulated by HUD. Initially, the 1992 legislation required that 30 percent or more of Fannie’s and Freddie’s loan purchases be related to affordable housing. However, HUD was given the power to set future requirements. In 1995 HUD mandated that 40 percent of Fannie and Freddie’s loan purchases would have to support affordable housing. In 1996, HUD directed Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.

“The National Homeownership Strategy: Partners in the American Dream”, was compiled in 1995 by Henry Cisneros, President Clinton’s HUD Secretary. This 100-page document represented the viewpoints of HUD, Fannie Mae, Freddie Mac, leaders of the housing industry, various banks, numerous activist organizations such as ACORN and La Raza, and representatives from several state and local governments.”

Thus, in the year 2000, HUD Secretary Andrew Cuomo increased to 50 percent the percentage of low-income mortgages that the government-sponsored entities known as Fannie Mae and Freddie Mac were required to purchase, helping to create the conditions that resulted in over half of all mortgages being subprime at the time the housing market began to collapse in 2007.

Since the government, particularly under the Clinton administration, played such an important role in the crisis, criminal proceedings would be tantamount to the government being its own plaintiff and defendant. Do you think Eric Holder would go after one of his own? Fat chance.

The left wants fordable housing and high-paying job for everyone – provided that companies and individuals are not allowed to make too much money. And it’s always Republicans’ fault when things go wrong.