A T-Shirt or something, please

"But to get a really spectacular meltdown like we're in the middle of now, for that you need government."

Just to point out the obvious, but this is pure conjecture.

Bush was all about his friends making (more)millions, and following the orders of his higher ups, including Cheney, to lower their taxes, privatize social security and the war in Iraq, putting a save-marriage-from-the-homos amendment in the Constitution, and leaving a reverse Teddy Roosevelt legacy of turning over the environmentally sensitive national lands to developers to make a quick profit. The faster you can make your millions and retire to Tuscany, or to southern France to sip wine the better. Because all can agree with Lord Keynes that in the long run we're all dead.

Charlie,

Sort of. But there is evidence for the conjecture. Government's role in the housing market played a role in the housing bubble. How big? That remains to be proven. But I think without the Fed, the reduction in capital gains tax in 1997, the pressure on Fannie and Freddie, the housing price bubble wouldn't have been close to what it was. Without the bubble or with a much smaller one, the CDO market never takes off and never collapses.

Trumpit,

But Bush raised taxes. He lowered rates, but he raised the share of the economy going to government. And the share of income tax coming from the top 1% hit an all-time high in the latest numbers--40%. He never privatized social security. Alas. That constitutional amendment never happened. As for the environment, I'd like some data please.

"But I think without the Fed, the reduction in capital gains tax in 1997, the pressure on Fannie and Freddie, the housing price bubble wouldn't have been close to what it was. Without the bubble or with a much smaller one, the CDO market never takes off and never collapses."

Sure you do, but you're also incredibly biased towards blaming government for any and all problems. The fact is you don't know why there was a housing bubble or if there would be one without similar regulation. Certainly, your conjecture doesn't explain why Europe and Asia had similar housing bubbles.

Even more difficult is trying to put your series of conjectures into a coherent model of how the world works. It's very hard to reconcile markets working very well and a bubble forming in real estate. Regardless, of what governments were doing, private individuals were paying lots of money for risky assets that were way overvalued. That is quite troubling for the implicit model you are using that tells you private markets can't have spectacular meltdowns on their own. Please, present a reasonable implicit model that explains this crisis but where private markets can't have "spectacular meltdowns." It would be very helpful to understand your assumptions.

Charlie

"And the share of income tax coming from the top 1% hit an all-time high in the latest numbers--40%."

Why do you always quote this? I never understand the point you are making. This is a measure of inequality not the tax code. Obviously, in a time when the wealth gains of the top 1% increase dramatically compared to the rest of the population (and the top .1% even more dramatically) they will pay a higher percentage of total expenditures even if rates go down.

Charlie

Freetheworld has a nice index that measures such things as how much of the economy is looped back to the government, and such.

But getting facts across to the average Joe is nearly impossible.

I watch no television on my own time, and a few weeks ago while sitting in the barber's chair, they had the TV news on - one of the national shows.

Now I get all of my information from print, web and radio. I knew the small details of the broader stories they were reporting on, but it was done in such a vague, run and gun fashion. It's no wonder that the average American who thinks they're up on issues is still largely in the dark as to what is really happening in our economy or other areas.

Can't do the folk song, but I do have t-shirts planned though probably in a more graphics orientated format. It's tough dealing with a sound-bite driven society.

Russ, what have capital gains taxes to do with it? Was all that extra investment dough just fuel for the fire? Would you raise the tax?

"Without the bubble or with a much smaller one, the CDO market never takes off and never collapses."

Ditto. From my understanding of the bundling of CDO's, there is zero transparency -- and that's what killed the market. Trading in CDO's, I'm trading on a share of a corporation which owns a bundle of mortgages. Possibly, I'm trading on a share of a corporation which owns bundles of mortgages and shares of other corporations which own other bundles.

None of these bundles are identifiable in the sense that your local S&L can give you the addresses of all the mortgages they hold.

So -- I'm sitting here in Tempe, AZ where property prices haven't changed much. Are these the type of mortgages held in the CDO? Nobody can say. Are they Las Vegas mortgages that took a 35% hit? Are they Bay Area mortgages that may have taken a 50% beating? Are they properties that may have been appreciating? Nobody can or will say. Is it any wonder a market disappeared?

The local S&L's are doing fine. Since they have the addresses of what they own, mark to market is not an issue. The market may be down, but there is a market when there's some transparency in what you're selling.

I've never understood people who buy into these schemes. There may be a good argument in favor of CDS's -- but they were the seal of approval that led investors to treat CDO's as currency. There was zero risk analysis.

I also think there's too little mention of the fact that none of the people who were creating these instruments were adversaries. They were all betting on the same horse. In a normal insurance policy, there are two sides -- such as in a life policy, as the insurer is betting I'll live, I'm betting I'll die (while hoping I don't). That's a good arrangement. That's transparent. With CDS's, both parties were betting on appreciating value (if they weren't, most of the defaulted mortgages I've seen would never have been made).

Without CDS's the CDO market never takes off.

Why didn't the government simply go back to the free market -- tell investors that if they unbundled these assets they would allow them to put any nonperforming assets into the rental market with a 3 year accelerated depreciation? That wouldn't have cost them a dime -- and it would have unwound this mess in a heartbeat.

I may be naive -- but I understand the meaning of a share of stock, I understand the meaning of an ounce of gold, and I understand the meaning of a corporate bond. I don't understand the meaning of a bundle of assets spread around the country, all depreciating at different rates, and all insured by the same people who couldn't possibly cover the losses if I was on the downside. If I can't understand what it is I own, I don't want to own it. Does anyone really not understand why that market disappeared?

We trust banks, because we know that even though the FDIC doesn't have any money, they can print it.

The toxic assets are mostly from the unregulated parts of the financial industry. There is nothing particularly puzzling about the value of a regulation-compliant mortgage, now is there? It's the odd pieces of the derivitives that must be marked-to-model.

Free market does not properly value black swans. Markets stink at prediction - German market of the late 1930's failed to predict war.

Danish and Swiss home mortgages are more robust than U.S. New York City co-op finance requirements set by elected boards make co-op defaults less likely than condo defaults. Regulations emerge, too, and are worthy of as much respect as prices.

That doesn't mean that free markets are perfect.

Evolution isn't perfect either, but produces results of great harmony and complexity.

Cutting taxes is meaningless if spending is not also cut. The record shows that government spending increased more under Bush than, well, is there a president under which government spending increased more than under the current regime?

Did any of this:

"...politically driven lending practices, price fixing in labor markets, price supports in agriculture, tarrifs in steel trade, illegals relegated to permanent underclass, artificially low interst rates, government enforced monopolies, and fake money."

In any way force Bear Streans to hold $13.40 trillion of notional contracts in derivative financial instruments? Did the government force Bear Stearns to leverage its $11.1 billion of net equity against $395 billion dollars of unregulated potentially illiquid worthless assets?

"He lowered rates..."

That needs to also be emphasized over and over. "The Bush tax cuts" are no such thing. They are tax-rate cuts.

He also never sought any thing more than a partial-privatization of Social Security (I think it was 15% of your SS?). Were that he had succeeded in even that modest reform.

>We have plenty of work to do understanding how the system collapsed so utterly.

Schoolbook capitalism assumes transparent markets that are made of comprehensible, public transactions. Much of modern finance has more in common with the dealings of Russian oligarchs, than the ideals of Adam Smith. A transparent market wouldn't have let AIG crawl so impossibly far out on that very narrow limb, for example. CDOs and CDSs are hardly the only problems in this regard.

Regulatory capture largely explains why hedgies and sovereign funds were allowed to drive prices up and lending standards down in housing markets, through securitization.

It's not like this was unexpected. The Economist was noting the divergence of house prices and rents by what, 2002?

Love your work,

Scott

Russ:

"the reduction in capital gains tax in 1997"

Did you just list a tax cut among causative government meddling...?

" Without the bubble or with a much smaller one, the CDO market never takes off and never collapses."

That's just backwards to me. CDO's are the enzyme that multiplied the bubbles effect and in fact fed the bubble. Who would have made such loans if they couldn't pass them right along? 3,4 or even 5% of houses defaulting over several years could not destroy the market.

Mix in unregulated derivatives and CDO's and you have your multiplier that has the ability to let companies leverage their assets 50 to 200 times over creating paper several times more valuable then the worlds yearly economic output.

By "free market", they must mean politically driven lending practices, price fixing in labor markets, price supports in agriculture, tarrifs in steel trade, illegals relegated to permanent underclass,

Of course, one of the candidates actually strongly opposed price supports in agriculture. Probably cost him votes, too. And the steel tariffs have already been dropped; they're nowhere as bad as other tariffs that still exist.

How about "Free the market 5 billion" ?

In the most simple way possible we know exactly what caused the housing bubble and its bursting.

Before government interference lending institutions of all natures did not loan money to people who could not show capability of repayment, and they especially avoided people with a proven track record of credit problems. Those people were known as permanant renters and most of them didn't even do well at that.

After government interference lending institutions were compelled through coercion and under the table agreements to loan to any taker who walked through the door.

This certainty as to cause is sated simply, it is the takers that caused the bubble and the collapse.

Without the taker's application the following is true and can't be denied.

A loan not made, can not be manipulated.

A loan not made, can not purchase a mortgage.

A mortgage not made, can not be foreclosed on.

How do we get takers who go into everything with the expectation of someone else cleaning up their mess while taking care of them as well? That is right, socialist theology carefully enculturated into each child starting, these days, virtually with birth.

What do the upthread (all) socialist do when the mess they created explodes all over everyone? They make every effort to lay the blame off on captialism and free markets. This is the never ending trip around the mulberry bush.

The takers (idiots with votes) always find it easier to blame others for the mess they make.

"reduction in capital gains tax in 1997"

Russ, by this aren't you equating a tax reduction with government involvement? Doesn't reducing taxes imply that government is less responsible?

The free market is already on it...

Here's your t-shirt -

http://site.despair.com/despairwear/government/?sort=collection

"But to get a really spectacular meltdown like we're in the middle of now, for that you need government."

Not necessarily, the market is quite capable of it too, but, in this particular case, it was absolutely the governments who did us in.

The Joker and the Schemers

If the free market could defend itself in order to answer a confounded citizen it would describe the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008. “You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…” collateralized debt obligations.

When I think of a small group of bureaucratic finance nerds in Basel thinking themselves capable of exorcizing risks out of banking, for ever, by cooking up a formula of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly by empowering the credit rating agencies and which was all doomed, sooner or later, to guide the world over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, I cannot but feel deep concern when I hear about giving even more advanced powers to the schemers.

"reduction in capital gains tax in 1997"

Russ, by this aren't you equating a tax reduction with government involvement? Doesn't reducing taxes imply that government is less responsible?

I don't know if I would technically call it a loophole, but the tax cut in 97 made it cheaper for people to shift much of their investment money to real estate.

If anything it's an argument for lowering taxes across the board instead of a kind of targeted tax cut.