Wall Street is not reassured, and neither are we
I must be a glutton for punishment, because I’ve been glancing at MSNBC again. The tone of the talking heads there (maybe that’s a misnomer; some of them seem more like shouting heads) is frenetic and energized. They look like people who’ve absorbed a big blow and are scrambling to figure out what hit them, floating theories as fast as they can as they watch the Dow plummet minute by minute.
The bailout bill was passed, and it was supposed to help. But the first hint that it wouldn’t came from reports last night that the overseas markets were down, and when the US stock exchange opened today it followed suit. Credit isn’t flowing yet, and if I’ve learned one thing in the last couple of weeks it’s that credit greases the engine that drives our economy. Without credit, the whole thing seizes up much like my car did one awful pre-cellphone night some thirty years while driving on a dark rural road.
Confidence is one psychological factor that’s necessary for the markets to move upwards again. Even if “the fundamentals are sound” (and we can debate that one), if people don’t believe they are, there will be hesitance to invest and to buy. Confidence is based not just on the cold and calculating analysis of indicators, it’s also based on optimism and trust, not only in the financial system but in those who run it and those who comment on it. Faith and trust in these people are in short supply right now, for understandable reasons.
Most of us didn’t take out risky mortgages. And yet here we sit after being told it’s all due to the small percentage who did, and the failure of government to regulate those who lent to them and then magnified the problem by bundling and buying and selling again and again.
Or was it too much government interference rather than too little, since it was a Congressional mandate that dictated that banks must make loans of this type? That’s what fed the process, although it wasn’t the only thing driving it.
So which party is more to blame for all of this? The answer to that question isn’t mere posturing and mindless finger-pointing, because the answer could determine the results of the coming election and affect our future in a major way. We’d like to have the wiser party in charge (although the phrase “wiser party” may sound like an oxymoron at this point).
A few basic principles seem pretty clear: Republicans generally like to deregulate the market, and Democrats generally like to regulate it more. But in recent years a great deal of the deregulation seems to have been bipartisan—for example, the repeal of Glass-Steagall was supported by both parties, although there were disagreements on some of the details (and if anyone can figure out exactly and precisely what those disagreements were, please explain in the comments section).
And I’ve been unable to find out which party was behind the suspension of certain rules by the SEC, such as the change in leverage requirements. Were the changes bipartisan, were they pushed by one party or another, or did the parties have little input on such things? And since there’s disagreement on just how much any of these changes actually contributed to the current crisis, it all might even be a moot question unless we can figure that one out, as well.
One thing that seem does seem clear to me is that in the case of Fannie Mae and Freddie Mac, widely regarded as the epicenter of the current quake, it was the Republicans pushing for more restrictions and transparency and the Democrats fighting (successfully) against them. So it might be said that which party is in favor of more regulation depends on what’s being regulated, and why.
I saw a brief statement from George Bush today that counseled patience while the details of the bailout plan are worked out. He was speaking from San Antonio, and he projected a sense of weariness and the impression that he can hardly wait for January, when he goes home and leaves this mess to his successor. I can’t quite imagine why anyone would want the job at this point, though, or who would be up to it. And I’m being bipartisan here; that includes all the candidates.
I recall him making that warning shortly after signing the bill (“This is going to take awhile.)”
That warning was on the CNN, FOX, and many other websites, but seemed to disappear rather quickly.
As one observer said, the earmarks on the bailout bill aren’t “sweeteners”. That would be high-fructose corn syrup. This stuff is g-ddamn bribe.
I usually vote republican. This year, I’ll vote one hundred percent for outcumbents, which in our area, is generally the same thing. But if were truly a rep in and a dem shooting for it, I’d vote dem.
Throw the bums out, and hang them on the way.
Neo,
As you know I’m not an especially gloomy sort; a sunny optimism which borders on Pollyanna-ishness is more my style.
But I am inclined to think we are in for a very rough ride here. The stars are aligned against us, and everything is in place for a “Democratic” (socialist) takeover of our already reeling institutions.
Like Richard Aubrey above, I would oust every incumbent of any political affiliation, and send them out of town only after a liberal application of tar and feathers (there are one or two Democrats and a small handful of Republicans I would spare).
Jamie Irons
I’m not sure whether to be worried yet or not. Yes, the rescue bill passed. But no actual money has been distributed yet, so the credit markets are still choking on the same sub-prime mystery meat. The Europeans seem to be flailing around now too, having suddenly realized that their unsinkable planned economies aren’t doing so great after all. I think it’ll be a week or more before we know anything.
And, FWIW, I’m pretty sure that there were no earmarks added to the bailout bill. The Constitution says the House gets to vote first on any bill having to do with finance. To expedite the process and allow the Senate to proceed with their vote, the Senate attached the bailout bill to a previously passed bill and sent it “back” to the House.
All those tax exemption extensions were part of that previous bill which had already passed the House 93-2 and which was going to be passed by the Senate just as unanimously. (That’s why that particular bill was chosen, because it was uncontroversial.) We don’t have to like that stuff in the original bill, but it’s simply incorrect to claim that Congress wasted time or trivialized the problem by adding those random items to a tightly focused bailout plan. All those things were already there.
If McCain is goiing to win he needs to convince the electorate that he can get both parties to work together to pass legislation to address this crisis. We cannot just let free markets do their thing at this point. We need a strong government initiative to get the economy back on track. I think what we need from the next president is a Marshall plan to get this country off of oil. It is something most people think needs to be done and it would be a lot better than Roosevelts public works programs back in the 30s. To fund it we have to cut the military as much as possible. Get out of Europe and South Korea and concentrate on the Middle East. We have to expect our allies to start carrying part of the load because we obviously can’t afford it anymore. We can’t afford Obana’s health care and we can’t afford McCains tax cuts. At this point we need the government to lead the markets by the hand (I’m normally for leaving the markets alone.) McCain must demonstrate that he understands how serious the situation is. Obama is just going to be on cruise control until the elections are over.
Let me first say that I will probably vote a straight Republican ticket this year. Now:
since it was a Congressional mandate that dictated that banks must make loans of this type
If this refers to the CRA, you’ve been watching too much Fox News. I summarize and provide links here and here.
The short:
CRA had nothing to do with subprime. It basically ended before subprime exploded, and much subprime happened in the wrong areas to be CRA. Different organizations, with different regulations, were responsible for the 2 types of loans. Nothing in CRA mandated the NINA loans, the lack of income verification, the increased leverage permitted by the SEC, the “voluntary self-regulation’ permitted by the SEC, the rating of toxic sludge mortgage securities as AAA (also permitted by the SEC).
No part of this crisis has anything to do with the CRA.
Of course I could be wrong but as a long time student of the markets, this was a wash out day and, like a good cold snap, will put things in order. Even if it’s another couple of days, it’s gonna turn soon, if it hasn’t already, and things will start to level off. Life will go on. Really.
And BTW, on every trading day, there’s money to be made somewhere. Today was no exception.
Bryan C,
Thanks for that info.
Hi Webutante: Glad to see you know this place too.
Something that struck me about the headlines today.
At one point, the Dow had dropped almost 800 points
“See there, the bailout didn’t do any good!”
(in spite of Bush’s warning that this will take a while).
But, at the close, it was down about 370 points.
Forget percentages; my shaky math seems to show it recovered a bit over half the loss.
If this is the Apocalypse, why did it recover anything at all? Why didn’t it just keep going down?
Is it remotely possible that it is adjusting to a new equilibrium, will eventually stabilize there, and the world may still be here for a while yet?
Just wondering.
There you go Paul. This was far too sassy a decline today for it to be the end or even nearly the end. We’re are indeed about to turn. When things really get bad someday, we will go into a long term languish kind of like the end of a bad marriage….
Web: Having never been married, I cannot relate.
So, I’ll accept your word that it is not a good thing 🙂
The problem here seems is not partisan or bipartisan, but systemic. Political system as such does not work. The fact that people are greedy and unscrupulous is not explanation of its inefficiency: peoples are always such, and the smart system MUST take it as granted and still be efficient.
Credit is flowing somewhere Ray Vincent and American Equity Mortage are still running saturation ads that “now is the best time to refinance” @ 5.3%. I heard them both to and from work yesterday. They stick in my head because they are so annoying.
I work in the financial industry, and this “thing” is not anywhere near over. Not to be all gloom and doom, but wait until the public starts to become aware of the situation with public-funded pension plans. Just for example, the Illinois state pension plan is something like $44 billion dollars in debt, and that is not atypical of many of these types of plans. When that news begins to percolate through the system, you are going to see some real panic set in. I think we might see the Dow below 8,000 before it is all done, and we may be looking at a multi-year stagnancy.
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I think that, if nothing else, it is going to be critically important not to conflate ‘regulation’ with ‘social engineering’ as we look back to determine cause and forward to determine fix.
I’m far more in favor of ‘de-social engineering’ than I am in favor of ‘deregulation.’
I’m opposed, however, to knee jerk reactions to increase either or both.
I’m torn about whether to blame CRA for any of this mess. I have yet to see hard statistics on default rates of these loans. However, I certainly do not believe CRA by itself caused this mess and it may not have been a huge direct factor. On the other hand, Fan-Fred rehabilitated themselves after the accounting scandals by becoming the poster child for affordable housing and both Congress and HUD permitted Fan-Fred to conflate “subprime” as “affordable housing”. Even if no banks were coerced into making bad loans, the fact that Fan-Fred were happy to buy their junk meant lenders could make high-profit loans with very little risk. This was a bad idea. See both AEI and neo’s earlier post on “For want of a nail”.
The bailout did not contain only previously passed by the House, certain to pass by the Senate provisions. The Bailout bill is HR-1424. The original HR-1424 was passed by the House on March 5, 2008, 268-148, and contained only the provisions for equitable treatment of mental health care. The Senate took that bill as their “shell”. They added into it the provisions of HR-6049 which had passed the House on May 21, 2008, 263-160. HR-6049 contained the energy tax credits and the alternative minimum tax provisions.
After the original HR-1424 was passed by the House in May, no action had been taken on it by the Senate before it was transformed into the bailout. After HR-6049 was passed by the House in May, it failed two cloture votes in the Senate in June.
HR-1424 was also amended to pick up other provisions such as exempting wooden bows and arrow for children from an excise tax (originally introduced as HR-6564, never acted on) and allowing Exxon Valdez plaintiffs to income average (HR-1334, never acted on). There seem to be other provisions in HR-1424 (See Title V, Subtitle A) but I have not tracked down their origins.
An excellent source for tracking these bills is http://www.govtrack.us/congress
Thanks Elise, that’s very informative. I did some poking around on the original House bill but apparently I didn’t dig as far as I should. Still, I think the issue is more complex than some people think (that the Senate and House wasted time during a crisis while writing in sweetheart deals out of nowhere.)
Oh, and good point about the CRA. The CRA was a product of the same Congressional mindset that pushed Fannie and Freddie to embrace bad risks but it’s not all the same thing. I think some people are using the CRA as a catch-all for the larger issue, which unfortunately makes it harder to argue the actual facts when critics wave away the actual CRA as unimportant.
You’re welcome, Bryan C, and you have a good point, also. I would have preferred a clean bill with only changes directly related to the crisis. However, having dug through this, I have to agree that the argument, “This isn’t really a crisis because the Senate is frittering away time making up earmarks” loses a lot of its punch once you realize all those extras were sitting around waiting to be packaged up as sweeteners.
As for the CRA, a
commenter at TigerHawk put it very well:
Focusing on CRA ignores the elephant argument: regardless of which law, the Congress, led by Dodds Shumer Frank, dictated the rules by which Fannie and Freddie lost over $3 Trillion.
Follow the money, you win the ideological argument by default. Follow the ideological argument, and the money is forgotten in the rush to defend housing for all. It’s the money that matters most, even to those who want to preserve and defend low income housing.
(Every so often I read or hear what I’m saying and I’m appalled at how easily we are all now throwing around amounts in the trillions. I was talking to someone yesterday about the exposure to credit default swaps and I first said “million”, then corrected myself to “billion”. My conversational partner gently pointed out to me that we were actually talking about “trillion”. Ugh.)