Moral hazard blast from the past

by Russ Roberts on November 20, 2011

in Gambling with Other's $

Robert Rubin, the man who in 1995 orchestrated the rescue of those who lent money to Mexico, had some second thoughts in 1997. This is from a WSJ article by David Wessel with the headline, Rubin Says Global Investors Don’t Suffer Enough:

Treasury Sec Robert Rubin, in remarks to reporters in advance of trip to Hong Kong and China, says global investors are not sufficiently exposed to risk of lending money unwisely to countries that are on unsustainable course; offers no solution;

(This appears to be the whole article (retrieved via LexisNexis) but it reads like an abstract.)

Hmmm. I think he was on to something. I have a solution. How about making creditors take losses?

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{ 85 comments }

Bastiat Smith November 20, 2011 at 2:00 am

WHAT!?!

If creditors took losses, they might have to examine their financial instruments and other equities!! Who has time for that?

Micke November 20, 2011 at 8:12 am

I’m all for creditors taking losses, just as long as they are fully compensated by the governement. Otherwise, society as we know it would collapse, as I understand it. Or at least as it’s explained on TV.

Adam Smith November 20, 2011 at 10:06 am

Me too. I am laughing out loud now. (LOLing? Not sure about computer slang verb structure.)

muirgeo November 20, 2011 at 11:15 am

It’s kind of a LOL situation but that is exactly what Hank Paulson said to get them their first $trillion. The next $16 trillion from the Fed was asked for and received behind closed doors.

morganovich November 20, 2011 at 11:40 am

first trillion?

next $16 trillion?

where are you getting these absurd numbers?

TARP as a whole paid out $245bn. it has made a handsome profit from the banks. take out the automakers, freddy, and fannie, and it was a big win for the treasury.

also:

this phrase “bailout” is a media myth.

if you have a dry cleaner and your press breaks, so you borrow money from a banks to fix it, then pay it back over 2 years, is that a bailout?

no.

it’s a loan.

if you pay it back (as the banks have) it’s called a “successful loan”.

pouring cash into freddie and fannie, yup, that is absolutely a bailout. they can never pay it back.

also worth noting for those of you trying to put this on paulson: he wanted to do asset backed lending, not direct investment. he had to shift because pelosi and reid would not support his plan precisely because it would only prop up the solvent and they could not support GM and F+F who were clearly not.

lending to the illiquid is one thing, to the insolvent another.

the stability of any fractional reserve banking system requires a lender of last resort.

if you have a $million in good loans and need to borrow $100k for short term liquidity needs, it’s fine to use it as collateral. done this way, tarp would have made a killing.

be careful blaming paulson for pelosi’s hijacking.

Methinks1776 November 20, 2011 at 11:47 am

I will argue about this with you until we both die, I think.

It was a loan backstopped by people who did not willingly sign up to backstop it. The interest rate at which the loan was made was very likely well below a level that compensated the lenders (taxpayers) for the risk they took.

You cannot point to a good outcome and claim it was a good trade because it had a good outcome.

TARP was a lousy trade that unwilling suckers (taxpayers) were forced into by the all-powerful state.

But, I agree with the rest of your post :)

Nikolai Luzhin, Eastern Promises November 20, 2011 at 12:04 pm

You cannot point to a good outcome and claim it was a good trade because it had a good outcome.

Methinks1776 So the gov’t should come in and look at your trades and deny you comp/commissions, etc., when it was a “bad trade” that had a good outcome?

Methinks1776 November 20, 2011 at 12:34 pm

Idiot.

morganovich November 20, 2011 at 2:31 pm

methinks-

if you are arguing that this should have been the action of the fed, not the congress, i agree.

however, if you are arguing that a fractional reserve banking system can exist without a lender of last resort to provide asset backed lending in the event of short term illiquidity, then you are going to need to lay out how such a system would work.

even with outlandishly high reserve ratios like 50%, a system can become illiquid, and running such high rations has massive effects on growth, capital availability, and interest rates.

i think TARP was poorly constructed and executed, but it was nothing like a bailout.

also note that by your definition, most lending is involuntary.

if you keep money at B of A and they give me a mortgage, you are exposed to me, regardless of how you feel about it. sure, you can pull your account, but only if you even know about the loan, which you won’t. at least we knew about TARP.

those who kept money in a lehman brokerage account were not so fortunate.

ultimately, i agree that we need to hold governments to higher standards as they risk our money, but TARP was not very risky if you leave out F+F and the automakers.

the banks had plenty of collateral. it just wasn’t liquid.

further, the returns have actually been excellent.

take out F+F and tarp is $40-50bn to the good. that’s an excellent 3 year return on $200bn of lending in this interest rate environment, even adjusted for the risk of the banks.

MS, GS, and JPM borrow an a tiny fraction of that.

TARP was above market rate, not below.

morganovich November 20, 2011 at 2:33 pm

ps i agree with you on nikolai’s post.

it’s complete non sequitor.

of course you get paid if you draw to an inside straight and hit it, or hit 20 and get an ace for 21.

that doesn’t make it a good idea nikolai.

Greg Webb November 20, 2011 at 4:23 pm

Methinks1776, you are correct with your analysis. TARP was a loan of taxpayer money forced by corrupt politicians to benefot their political cronies. The rate charged was definitely below market given the risk involved.

Methinks1776 November 20, 2011 at 11:12 pm

Morganovich,

You have no argument from me about F&F and Government Motors. F&F’s bailouts have now become a yearly event. AND their CEOs are paid millions in bonuses because they’re so good at collecting those checks from the government. Where’s the public Occupy This ‘n That outrage?

However, there were buyers for those bank assets. I remember big buyers like Citadel lining up. But the word out of Washington was the government would maybe take those assets off banks’ hands instead. The banks refused to sell to bidders in the market.

Why is that? Why would they miss the chance to hit the bid to dump those toxic assets unless the government was moving to overpay the banks for their trash with funds it was going to forcibly extract from taxpayers? That’s not an illiquid market by any definition. It wasn’t as liquid as the market for IBM stock, but it wasn’t as illiquid as “our leaders” claimed.

the banks had plenty of collateral. it just wasn’t liquid.

Yeah. They had plenty of toxic waste on their books. I get that some of those loans were still performing at the time, but the market expectation was that they wouldn’t be in the future.

further, the returns have actually been excellent.

Why wouldn’t they be? The Fed is transferring wealth from savers to banks by throttling the short end of the curve to both inflate asset prices and provide the banks with a spread so they can be super profitable. Very profitable for the banks at the expense of everyone else.

So, while the banks did pay back TARP, it’s only because they were effectively handed profits on a silver platter.

also note that by your definition, most lending is involuntary.

That’s not true. When you deposit money at a bank, you know (or should know) that the bank makes loans. It doesn’t matter that you aren’t participating in every lending decision. Investors in your hedge fund don’t participate in every decision you make either, but that doesn’t make their investment is involuntary.

I don’t remember any deal where I volunteered to backstop cronies for politicians and I bet you don’t remember doing that either.

those who kept money in a lehman brokerage account were not so fortunate.

That was only true of Lehman’s U.K. brokerage and that was only because U.K. law, unlike U.S. law, doesn’t provide the same protections and (perhaps) doesn’t force the brokerage to sequester customer accounts. It may also have been true for customers who had a JBO relationship with Lehman here. Economiser or maybe Greg Webb would be the patrons of the Cafe who would have a better answer to that.

Greg G November 20, 2011 at 11:50 am

morganovich

The bailouts of Fannie and Freddie and AIG were very much a part of what made it possible for the TBTF banks to pay back their TARP.

And my understanding is that Pelosi and Reid insisted that Paulson be given the authority to inject capital but they could not force him to use that authority. He could have created a new asset backed lending program but realized that would be like treating a heart attack victim by starting work on a hospital.

morganovich November 20, 2011 at 2:22 pm

greg-

nonsense. how did bailing out F+F help pay anyone? sure, AIG had big derivative exposure, but they also had plenty of assets to cover it if they had been broken up and sold. it might have taken a little longer, but your fundamental argument is baseless.

on what evidence do you base your claim?

F+F are still insolvent now. their bailout did not fund repayments, but huge loan losses.

Greg G November 20, 2011 at 3:36 pm

Morganovich

If Fannie and Freddie were not still supporting the mortgage market, housing prices would be much lower than they are now and a lot more borrowers would be under water. That in turn would put a lot more banks in trouble.

morganovich November 21, 2011 at 11:39 am

methinks-

“However, there were buyers for those bank assets. I remember big buyers like Citadel lining up. But the word out of Washington was the government would maybe take those assets off banks’ hands instead. The banks refused to sell to bidders in the market.

Why is that? Why would they miss the chance to hit the bid to dump those toxic assets unless the government was moving to overpay the banks for their trash with funds it was going to forcibly extract from taxpayers? That’s not an illiquid market by any definition. It wasn’t as liquid as the market for IBM stock, but it wasn’t as illiquid as “our leaders” claimed.”

i think you are engaging in some revisionist history here. that’s sure not how i remember it. sure, there were a few low ballers looking to buy fire sales, but they had nothing like the size to make it work. they were 10% of what was needed. makes all the sense in the world to let them go first, but the system was locked up, totally illiquid, and bid wanted. most of the obvious bidders for such assets were in trouble themselves. putting 5 billion to work would have been a sparrow fart in a hurricane.

“Yeah. They had plenty of toxic waste on their books. I get that some of those loans were still performing at the time, but the market expectation was that they wouldn’t be in the future. ”

which has proven to be inaccurate (except for F+F).

the issue was the F+F guarantees that made sludge AAA. the market bet on the federal guarantee and was right.

this was clearly a bad situation, but there was no way out once those guarantees were called on.

i am also not buying your definition of “voluntary”. federal loans are subject to democracy. you vote. not so if you have a B of A account. you can call politicians to account. all you can do with B of A is leave. (and you can do that with US states or the nation too). sure, right at the moment, you had no say, but if your bank wrote $1 trillion of italian CDS’s tomorrow, the same would be true. hell, you wouldn’t even know about it until the blew up.

your definition seems terribly over-broad. in the very short run, none of this is voluntary the way you describe it.

“I don’t remember any deal where I volunteered to backstop cronies for politicians and I bet you don’t remember doing that either.”

oh really? you never funded a company that does lobbying? that got government contracts? never worked at or invested in an entity that lent to the government?

regarding lehman, accounts got frozen. prime brokerage clients found themselves unable to move money, trade, etc.

in the midst of what was going on, that was pretty severe.

but my point was not that they took losses, but rather that they were never made aware of the risk at lehman. most had no idea what they were exposed to. (if they did, they would have left)

Methinks1776 November 21, 2011 at 8:42 pm

Morganovich,

I will give you that the buyers may not have been able to do all the size. Although, I think you’re kind of ignoring the fact that the buyers didn’t have to be American firms or American hedge funds. The market is larger than that. And “low ball” is…um…subjective. But, if the market was bidding X, why the hell would the Fed bid 4X? Oh, that’s right. Because it was bidding with OPM (and please don’t liken your bids with OPM to an unaccountable Fed’s).

which has proven to be inaccurate (except for F+F).

Only because of the Fed’s shenanigans, including asset price inflation.

federal loans are subject to democracy. you vote. not so if you have a B of A account.

You’re joking. My one vote can stop the government from forcing me to backstop the bad bets made by cronies? First I’ve heard of it.

It’s far easier to stop exposing yourself to the bad decisions of a hedge fund manager or a bank by shifting your money elsewhere than it is to stop the government robbing you with your one puny vote at the ballot box. If that weren’t true, you and I wouldn’t be paying the highest tax rates. And you and I wouldn’t have a second citizenship. Why would we need one if our vote were so powerful?

BTW, are you saying that the you are investing your investors’ capital against their will? By your definition, that’s exactly what you’re saying. They volunteered to make your their agent. You act on their behalf (just as the bank does in making loans with depositors’ money). You’re really stretching the definition of “involuntary”.

oh really? you never funded a company that does lobbying? that got government contracts? never worked at or invested in an entity that lent to the government?

What? Have you lost your mind? First of all, no, I’ve never funded a company that does any lobbying (I don’t invest, remember?). Second, working for a company that either lobbies or buys treasuries is not a contract between me and the government where I agree to make cronies whole when they lose on their bets.

but my point was not that they took losses, but rather that they were never made aware of the risk at lehman. most had no idea what they were exposed to.

First of all, you don’t’ have to be aware what your Prime Broker is exposed to. As a customer of the firm, your account is supposed to be sequestered. If the Prime Broker fails, your account is moved to another broker and life continues as normal. Until MFG robbed its customers as the CFTC looked on, this is how it worked. Trust me, I clear through a TBTF whose CEO decided to make the firm chief underwriter of and investor in subprime trash. I was on the phone with our lawyer every day in 2008 making sure I understood what our exposure was.

Second, if you’re a JBO firm or in a division outside the U.S. where there aren’t laws that protect customer accounts, then your know that the probability of you going down with the Prime Broker is higher. If you did nothing to hedge your exposure to the PB, well….then that’ll serve as a lesson.

It’s not as if it was a big secret on the Street that the I-banks were jam packed with an alphabet soup of trashy pass-thrus.

muirgeo November 20, 2011 at 3:47 pm

morganovich,

Have you seen the audit of the Fed?

morganovich November 20, 2011 at 5:15 pm

greg-

if freddy and fannie had never taken over the housing market and reduced lending standards as they did, we would never have been here in the first place.

further, i think your analysis has some real flaws. transaction and new mortgage volume is WAY down. they are not having as big an effect as you might think.

finally, they were the ones using a government guarantee to buy crap loans and package them into MBS’s with AAA ratings.

blaming banks for seeking to profit from this is like blaming a superior poker player for taking all you money when you bet poorly.

you seem to be apportioning the blame in the wrong place here.

this was a failure of federal housing and lending policy, not a failure of the banks.

homeowners being under water does not nesc harm the banks anyway. if you can still pay as most underwater owners do, they are fine.

you seem to be garbling a large number of ideas here and getting your causality wrong.

morganovich November 20, 2011 at 5:17 pm

greg-

also:

if F+F were not currently 90% of the US mortgage market, the banks would have their traditional market in which to profit and cover losses. the fact that they don’t is forcing them into all manner of other business, particularly levered investments in US treasuries.

if you think taking away a businesses biggest traditional profit center is “propping them up” i’d hate to see what you think a harmful policy would look like.

Greg G November 20, 2011 at 5:29 pm

morganovich

I am not defending the policy. I think bondholders should have been given a haircut. But I do think the policy is motivated in large part by seeking to avoid further drops in real estate values that could easily trigger another round of bank failures. Many underwater homeowners do not continue to pay.

morganovich November 20, 2011 at 5:53 pm

greg-

most underwater owners do pay.

the default rate is 10%ish of the underwater rate.

further, i still think there is a big hole in your thinking.

taking away their largest and most profitable market to prop up an industry seems like a pretty perverse way to do things.

the nationalization of F+F has harmed banks more than it has helped.

in 2006 F+F were 40% of the market. today, they are 90%.

losing 83% of your market is not good for an industry.

Methinks1776 November 21, 2011 at 7:31 am

Morganovich,

A 10% default rate can do a lot of damage to a levered portfolio.

You know, reading through the comments on this issue, one thought keeps reoccurring: Central planning doesn’t work.

Greg G November 21, 2011 at 7:38 am

morganovich

Maybe a 10% default rate on underwater loans seems manageable to you. If so, you need to consider that these underwater loans are not evenly distributed among banks. In many areas banks have a very high percentage of underwater loans and are barely adequately capitalized now. Further deterioration would cause many to fail and their failure would threaten other banks.

My point is not to say that this justifies current policy but just to say your portrait of the banking industry overstates its strength by a lot.

morganovich November 21, 2011 at 11:44 am

it’s not a 10% default rate.

it’s 10% of underwater loans, which are about 30%.

3% default rates are unpleasant, but survivable.

of course, many of those “defaults” were already guaranteed by F+F.

the killer is that banks cannot make new loans to shore up their books.

that whole market has been taken.

this has far more damaging long term effects on their financial health than would writing down impaired assets and selective loan restructuring.

brotio November 21, 2011 at 3:28 pm

Have you seen the audit of the Fed?

Have you seen any polyps while you have your head jammed up your keister?

Greg Webb November 21, 2011 at 3:30 pm

:)

Seth November 20, 2011 at 12:51 pm

Nice. Here’s what I usually hear:

“I’m okay with creditors taking loss…

[For homes], just as long as everyone who wants to can buy a house.

[For student loans], as long as every student who wants to can go to college and earn a degree in whatever they like.

They don’t realize that their desired outcomes implies socializing the losses incurred by creditors.

SmoledMan November 20, 2011 at 12:54 pm

Liberals keep telling me that it’s in society’s best interest that everyone get a college degree. Even if it’s a useless degree, it makes the degree holder feel better about him/her-self. I fail to see how training these people to be good, solid Democrat voters is in MY best interest.

g-dub November 20, 2011 at 6:05 pm

One of my “liberal” friends commented to me that the OWS’ers were “educated.” In a certain fraudulent sense, sure, I suppose some are indeed “educated.” I almost blew my coffee out my nose.

Jon Murphy November 20, 2011 at 8:34 am

And for Wessel, who fervently supported the bailouts (if I recall correctly), to write this piece, it’s quite amazing.

Becky Hargrove November 20, 2011 at 8:51 am

Of course the good falls with the bad. Who’s going to ‘go along’? (left or right)

Harold Cockerill November 20, 2011 at 8:52 am

I think the Greeks are getting ready to force a bunch of losses on some lenders. This may get really interesting.

Nikolai Luzhin, Eastern Promises November 20, 2011 at 8:57 am

making creditors take losses?

why don’t we just let Iran get the bomb and then exchange a couple of salvo’s

I know the facts don’t matter, but does anyone read the papers and look at the markets right now and how they are reacting to Europe which is at the brink of this happening.

As they can see into that black hole, they know to do such would be madness.

When one let’s banks become TBTF one has no choice but to socialize losses—there are several ways to do such, but one has no choice but to socialize the losses.

Emil November 20, 2011 at 9:22 am

Actually most private banks have already written down their Greek credits, the ones that are too big too fail in this case are mainly the European central banks

Jon Murphy November 20, 2011 at 9:33 am

Right. US exposure to Greece is minuscule. Not even enough to cause a ripple.

Nikolai Luzhin, Eastern Promises November 20, 2011 at 10:06 am

Emil

what is the point of your idiotic statement?

Jon Murphy November 20, 2011 at 9:33 am

“…one has no choice but to socialize the losses.”

Why?

Nikolai Luzhin, Eastern Promises November 20, 2011 at 10:04 am

Jon if you don’t know what makes a Bank to Big to Let Fail . . .

Jon Murphy November 20, 2011 at 10:12 am

No, I don’t. As far as I am concerned, nothing is too big to fail. It was a phrase concocted by politicians, used by politicians, and spouted by politicians to help out their buddies. In economics, there is no such concept.

To believe in TBTF is to buy into a bogeyman theory.

Nikolai Luzhin, Eastern Promises November 20, 2011 at 12:09 pm

In economics, there is no such concept.

Jon baby, this makes you a mindless troll.

TBTF is the fundamental role of of economics, being central to the questions about how to maintain and grow confidence

If you let institutions TBTF fail, you destroy confidence, and w/o confidence no economic activity is possible

vikingvista November 20, 2011 at 12:14 pm

Definition of “TOO big to fail”: Any organization of such size that its failure TOO much negatively impacts TOO many TOO powerful government officials.

Jon Murphy November 20, 2011 at 12:29 pm

“If you let institutions TBTF fail, you destroy confidence, and w/o confidence no economic activity is possible”

Another swing and a miss.

The graveyard is full of important men who could not be spared, and yet, were in the end.

The Roman Empire has fallen. The British Empire has fallen. The Medici’s have fallen. The American Empire will fall.

History is full of institutions that were “too big to fail.” But they did. And something came along to fill the void. And we all move on. As you have said, Nik, Nature abhors a vacuum.

But, then again, I suppose you knew that.

Nikolai Luzhin, Eastern Promises November 20, 2011 at 12:33 pm

Jon, in a hour I will forget more than you ever learned in a lifetime.

Since you claim to be living in the long run, having such a broad altitude on life that the passing of the roman empire and 1000 years of dark ages is of no moment to you, why do you bother to put out so much so term BS as you troll this blog?

all I can discern is that you write to prove you are an ….

Jon Murphy November 20, 2011 at 12:35 pm

It was called the Dark Ages, it but was anything but. Modern historians do not use that phrase anymore. We have since discovered huge advances in the sciences and mathematics that occurred during the Dark Ages.

Methinks1776 November 20, 2011 at 12:36 pm

Luzha, hopefully in the next hour you will forget how to use your computer.

Fingers crossed.

Jon Murphy November 20, 2011 at 12:39 pm

Actually, Methinks, I hope not. After working all day, it’s nice to come home and relax with some popshots at witless weasels.

Jon Murphy November 20, 2011 at 12:41 pm

Actually, remember the video game Duck Hunt for the original Nintendo? It’s out in the early 90′s. You “shot” ducks that flew about in highly telegraphed paths.

That game reminds me of Nik. Most of the time, I can manipulate him into taking the conversation in the direction I want. For example, I wanted to talk about the Fall of Rome. And, I had been waiting to use that line about the graveyard for a couple days now.

Of course, from time to time he’ll surprise me by saying something wicked stupid, but for the most part you can lead him around by the nose like a puppy.

Greg Webb November 20, 2011 at 4:36 pm

“witless weasels”

LOL! At the risk of being redundant, let revise that slightly — witless leftist weasels.

Greg Webb November 20, 2011 at 4:28 pm

“but one has no choice but to socialize the losses”

Yes, they do. Let them fail.

Adam Smith November 20, 2011 at 10:02 am

Thanks to Muirgeo for his previous reply to an earlier comment, I am reflecting upon what you wrote me.

This post just reminds me the road to serfdom wasn’t paved in a day. Robert Rubin is so repulsive, I can’t glean anything from a paragraph related to him, I just start obsessing about my own charismatic shortcomings.

Socialization of losses is of course the 5 iron in the tool bag of the anti-capitalists. The Dalai Lama, a China Exile, plays a much better wealth destroying game with it. There is no bizarro Dorian Electra or airhead media star who will ever sing a love song about Robert Rubin.

The bright side of lending to Mexicans is they are steadily climbing the immigrant prosperity ladder, soon they’ll be a just another peripheral section of the American tapestry like Italians, or the Irish. A healthy nation, has many independent and unique friends.

An alternate shortcut out of this malaise, might be to rethink our national social contract with Women and Non-Assimilating social groups like the 1 billion Africans. In the aggregate, they are not going to become a flavor of the Western Republic World Order. The unisex and apartheid schemes are complete failures, and we should immediately stop the distechnic innumerate effeminate boys factory we claim is public and higher education.

We can keep on doing this: http://media.oregonlive.com/oregonian/photo/2011/11/occupy-portland-n17-496cd5b90fe2b00f.jpg to women and alternative social groups, or we can risk our current dominion to build a more harmonious world where apples, oranges, and bananas remain incomparable yet integral to a delicious medley of spontaneous order.

muirgeo November 20, 2011 at 10:27 am

” Hmmm. I think he was on to something. I have a solution. How about making creditors take losses?” Russ

I have come to understand how right Russ is on this point. The problem is one of pragmatism. All of us talking heads here have no idea how to make them take the losses. Those bond holders are taking down democracies and countries as over in Europe as we speak. And we used to laugh at my father in laws, “Do You Know who the Bilderberger Group is?” bumper sticker. And now one of their board members is the technocratic head of Italy. And the other Mario brother a former Goldman Sachs VP heads the ECB.

People like to laugh at the OWS movement but I’d say to them…. what’s your plan?

Great piece by Douthat on the issue today;
http://www.nytimes.com/2011/11/20/opinion/sunday/douthat-conspiracies-coups-and-currencies.html

Seth November 20, 2011 at 12:38 pm

“All of us talking heads here have no idea how to make them take the losses.”

One way is to vote for political candidates that will hold to the idea of limited government and try to engage others to do the same.

muirgeo November 20, 2011 at 3:49 pm

Yeah but the two party system doesn’t offer those candidates. That same money controls the vote and whip gets elected. People are too uninformed and too uninvolved.

Seth November 20, 2011 at 4:36 pm

That’s why I’ve decided to ‘throw my vote away’ (see link).

The two parties won’t offer that if we always pick the lesser of two evils. They’ll just keeping getting “more evil” or further from what we want.

But if more of us start voting for other candidates, the two parties might get the message.

http://ourdinnertable.wordpress.com/2011/11/05/why-i-may-throw-away-my-vote/

muirgeo November 20, 2011 at 6:24 pm

I think that’s a great idea. The problem being until enough people do it it won’t be effective.

I thought about making a deal with a republican friend I trusted that I would not vote for the democrats if he promised not to vote for the republicans and we both chose a separate third party or independent candidate. And then getting a petition to that effect going around. If you chain lettered it to people maybe at some point it would have an effect.

But then again look how fast Scott Brown from Massuchusetts went from being independent to being Wall Street boy.

Jon Murphy November 20, 2011 at 6:28 pm

Third parties have long played an important role in American politics. Don’t forget, we once had a Progressive Party. Now Democrats are happy to trot out that label.

And the Republicans were once a 3rd party. As were the Dems.

The Muckrakers, Free Soil, Abolitionist, and Prohibition parties are all parties that have had major effects on American politics. Don’t discount the 3rd parties.

PrometheeFeu November 20, 2011 at 11:16 am

I think we could solve the credibility problem. How about we have the government take a short position on the big banks. Or better yet, require that all members of Congress and the Senate take a short position on the big banks. I’m sure bailouts would go away. (OK, there would probably be some other unintended consequences, but one problem at a time people…)

PrometheeFeu November 20, 2011 at 11:21 am

OK, here is an alternative: A trigger legislation. If the S&P500 drops by more than X% over Y time period, the Chairman of the Fed, every member of Congress, the President and the Treasury Secretary must immediately use 5% of their assets to short big banks in proportion to their market cap. They can exit the position only after the market has rebounded.

Methinks1776 November 20, 2011 at 11:23 am

That’s tongue-in-cheek, right?

PrometheeFeu November 20, 2011 at 12:03 pm

More like a not completely formed and reasoned idea. Yes, it would have some huge problems: Congresscritters might want to make big banks fail all the time.

morganovich November 20, 2011 at 11:28 am

“Hmmm. I think he was on to something. I have a solution. How about making creditors take losses?”

absolutely. however, we need to be careful with that way in which this is done.

the greek “haircuts” provide a good example of how not to do it. while it may have seemed orderly, it was, in fact, a ruthless and capricious changing of the rules.

the write downs were “voluntary”. yeah, right. they were voluntary in the same way giving a mugger your wallet to avoid being stabbed is voluntary.

the key reason it was rammed through this way was to avoid triggering the CDS’s that insured the debt. it wasn’t “default” it was “voluntary”.

this will have wide reaching negative effects for the EU. no one trusts any EU CDS anymore. thus, there is no insurance. imagine that home owners insurance went away. would you pay as much for your house? i doubt it.

with bonds, if you pay less, yields rise as do the margin requirements that clearing houses require.

oops, look at those spanish yields go.

far from preventing a derivatives based knock on effect and saving the EU, this triggered a different one: higher rates for everyone.

nice work.

i am all for making creditors face losses, but this has to be done to all of them. the german landerbanks that wrote greek CDS’s bet wrong. they need to face their losses too. they are certainly not giving the premiums back.

reapportioning them capriciously is never the right course.

this amounts to a huge nepotistic windfall. it will wind up doing more harm than good.

Chucklehead November 20, 2011 at 4:41 pm

“imagine that home owners insurance went away. would you pay as much for your house? i doubt it.”
I would pay as much for my house. Insurance never entered my mind when buying. I would have been better off self insuring anyway. Lack of insurance will lead to more prudence if you must bare the full cost of accidents.

morganovich November 20, 2011 at 5:23 pm

chucklehead-

your name is well chosen.

“I would pay as much for my house. Insurance never entered my mind when buying. I would have been better off self insuring anyway. Lack of insurance will lead to more prudence if you must bare the full cost of accidents.”

oh, really. and who would give you a mortgage on an uninsured home?

to self insure, you’d need capital in escrow. that’s capital you would not be able to use elsewhere.

even if you are a cash buyer, you’d be willing to put as much capital to work with more risk than you would with an insured asset?

that seems like the definition of bad investing to me.

if my house burned down and i had no insurance, i would be able to afford a new one, but for most people, this is wildly untrue.

they would be in deep trouble.

for most people, even considering buying a home without a mortgage is impossible. without insurance, a mortgage is impossible.

take it away, and prices would drop 80% as the price of a downpayment would become the price of a home.

try looking at a housing market in which insurance first becomes available (like moscow or beirut). you’ll see prices go up 4-5X in 3-5 years.

this works in reverse too.

Jon Murphy November 20, 2011 at 5:26 pm

“without insurance, a mortgage is impossible.”

That depends on local laws and regulations. You can get a mortgage without homeowners insurance.

morganovich November 20, 2011 at 5:56 pm

jon-

oh really? try it. where can you get these magic mortgages?

who would lend to you if they were going to get zeroed in the even the house burned down? they might lend you the price of the land, but that’s it. you can’t even get a car loan without insurance.

or, they would treat it as unsecured (which is not a mortgage) and charge you credit card style interest, but i am unaware of anyone crazy enough to do it (or to take such a loan).

Jon Murphy November 21, 2011 at 7:23 am

“where can you get these magic mortgages?”

New Hampshire

Chucklehead November 20, 2011 at 10:55 pm

The chances of my house burning down are miniscule. Since most of its value is in the land, it is not in as much risk as more valuable financial assets which are not insured.
As long as you have a mortgage in my state, the mortgage company holds title, so it is not your house until you have a clear title. When I bought my first house with 20%down, insurance was required. When I bought my second with 50% down, it was not, perhaps because the land value exceeded the loan.
As for insurable, LLoyds will insure anything for a price.
I am pleased you like my name.

SmoledMan November 20, 2011 at 12:49 pm

Ok I can see how this work. Muirbot throws out a fictitious $15 trillion number and he gets away with it. The average OWS dummies believes this crap.

Jon Murphy November 20, 2011 at 12:52 pm

It’s not entirely fictitious. it’s the amount of loans the Fed has given to banks over the past 20 years. He’s just trying to use that number saying it was given out in TARP, and then claim it’s a free-market principle.

SmoledMan November 20, 2011 at 12:56 pm

How much in personal bank accounts has the FDIC insured over the last 20 years? To me it’s the same moral hazard. But big banks ooga booga scary horrible…

Jon Murphy November 20, 2011 at 12:57 pm

No I agree.

muirgeo November 20, 2011 at 3:53 pm

I think it’s more like the past 3-4 years Jon….

http://sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf

Jon Murphy November 20, 2011 at 3:59 pm

Still not sure where you’re getting $14T

Greg Webb November 20, 2011 at 4:58 pm

He’s not. Muirgeo is wrong with the numbers that he presents and his proposed solution of even more regulation. Congress, the President, and the Federal Reserve clearly exceeded their powers with TARP and the Fed’s loans to banks. Muirgeo’s solutions, as well as that of every leftist troll on this blog, supports both the corrupt politicians and their political cronies on Wall Street and among the banks now denoted as TBTF. That is why those witless leftist trolls are “useful idiots.”.

The solution is simple: Let Them Fail.”

Jon Murphy November 20, 2011 at 5:02 pm

Right. I added up every number in that report (including the page numbers) and I still only got to about 4T

muirgeo November 20, 2011 at 6:31 pm

Look at table 8 approximately page 131.

Jon Murphy November 20, 2011 at 6:44 pm

*facepalm*

Those are loans the banks had on their books, not what they got from the government.

*facepalm*

Dan J November 20, 2011 at 10:13 pm

Hundreds of thousands of federal GOVT rules and regulations and yet there are still liberal declared inequities. Should tell ya something, chief.

muirgeo November 21, 2011 at 12:31 am

Wrong Jon. The title to the table is below. The number is indeed exaggerated because they counted every loan including recurring 1 month loans. Bottom line they still received far more bail outs and subsidies than just the TARP. Far more than any one homeowner got, far more than the auto companies or the solar companies.

Table 8: Institutions with Largest Total Transaction Amounts (Not Term-Adjusted) across Broad-Based Emergency Programs

I mean what is your point? That these mega banks don’t get special treatment , access and subsides?

Jon Murphy November 21, 2011 at 7:24 am

Wow, you are an idiot, aren’t you?

Greg Webb November 21, 2011 at 3:32 pm

Yes, Jon, muirgeo is an idiot.

Chucklehead November 20, 2011 at 4:33 pm

Too big to fail means to big to succeed.
Elimination of credit default swaps would go a long way to prevent contagion of other firms, and correct prices of questionable securities. Small haircuts for depositors would also provide incentive for a more prudent risk policy. Wiping out stock and then bond holders helps, as would a increase tax over a certain size of institution, say $500 billion total assets.

Dan J November 20, 2011 at 11:06 pm

How about GOVT just staying out of trying manage the housing mortgage industry, all together?

Dan J November 20, 2011 at 10:09 pm

If creditors take losses on their poor choices, then they won’t make risky bets. Meaning, they are highly unlikely to loan to LMI borrowers are individuals with poor qualifications. $1,000 bet on how this would play out (hint: the GOVT played this trump card once already in the 70′s and the 90′s).
Well….. Just so happens that having standards in lending means that inner city folk (more likely to have low income, poor or low credit, little to zero money down) will not qualify, aka be denied, a loan on a mortgage. Therefore, GOVT will call out the financial institutions for being discriminatory and declare that banks must lower their standards and meet quotas. As banks decry the losses in defaults, GOVT will tell them to sell their loans to a GSE. When the GSE becomes dangerously over leveraged, they will simply bring Wall Street into the mix. And, the congressman whose significant other will be in a top position, while he advocates the financial stability of the GSE even as it already crashing.

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