SUBSCRIBE NOW WELCOME BACK. Do you want to continue reading where you left off? New Republic subscribers can pick up where they left off no matter which device they were previously using. SUBSCRIBE NOW

Go Home Why Liberals Need to Rethink Everything They Knew About...

POLITICS AUGUST 27, 2011

Why Liberals Need to Rethink Everything They Knew About Housing Policy

BY HAROLD POLLACK

Gretchen Morgenson and Joshua Rosner just published a major book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. The book is excellent in explaining the misconduct of executives who ran Fannie Mae and Freddie Mack. Yet it goes off the rails by overstating the role of these firms (and understating the role of others) in creating the housing meltdown and the closely-linked foreclosure crisis. Indeed, our current economic crisis should prompt us to ask more far-reaching questions about the origins of the crisis.

Looking back, many of us—and by “us,” I certainly include liberal Democrats—were slow to recognize the general dangers posed by the housing bubble, and the specific dangers posed by the political economy of government sponsored enterprises (GSEs). Many of us were also unduly credulous about the presumed benefits of home ownership. While perhaps not as easy to address, these uncomfortable questions must be raised if we hope to guard against the possibility of something of this magnitude happening again.

In an excellent review in the American Prospect, Robert Kuttner demonstrates how private firms such as Countrywide were far more culpable—economically, morally, and legally—than Fannie Mae, Freddie Mac, or other GSEs in initiating the current crisis. Fannie and Freddie certainly did not originate “liar loans” and other predatory mortgage products that have cost the taxpayer so dearly and that led so many families to lose their homes. The timing of events demonstrates that GSEs were profit-chasing followers rather than fraudulent leaders herding into the abyss.

That said, Fannie and Freddie’s conduct was both appalling and reckless. Many of the ultimate victims were moderate-income residents of predominantly minority communities, precisely the sort of people whom progressive housing policy seeks to help. The GSEs’ culpability starts with two principal malefactors, Jim Johnson and Franklin Raines. These executives earned enormous salaries by taking on enormous risks—risks which led to the eventual destruction of their companies and to a massive bailout. The culpability extends to many others, too—to the industry’s many patrons and enablers in both political parties. These officials helped to mix an explosive brew of for-profit incentives backed by implicit government guarantees. When the housing market blew up, this mixture blew up, too. We should hold people accountable.

The dangers embodied in Fannie and Freddie were hardly unknown. Two of my politically moderate professors noted the dangers of such hybrid arrangements thirty years ago. On the left, James Galbraith’s Predator State noted the same familiar pathologies, though he drew somewhat different political implications.

For years, many people realized that the structure of GSEs was fundamentally problematic. Yet both parties accepted these firms’ leadership into the Washington fold and failed to effectively head off their eventual implosion. It was a fundamental error of judgment to allow people such as Raines and Johnson to play politically influential roles. The sight of prominent politicos (current and former) teemed around Fannie and Freddie should have triggered greater alarm. The alarm bells failed to ring sufficiently loudly or sufficiently often for regulators and elected officials to effectively intervene.

But beyond GSEs’ perverse incentive structures, we need to ask hard questions about what we are trying to accomplish in housing policy. We overestimated the value of home ownership as a strategy to stabilize neighborhoods and to provide a path to upward mobility. Here in Chicago, lenders and their allies were able to depict efforts to provide mortgage counseling for vulnerable home buyers as a return to redlining and discrimination. Such rhetoric was more politically effective than it should have been, and it remains more effective than it should be right now—for example, when civil rights organizations oppose provisions that would require mortgage originators to retain five percent interest in potentially risky loans.

Here is one central reality. A small down payment mortgage is the most leveraged, least diversified investment most Americans will ever make. If we internalize the idea that housing prices do not automatically traverse an upward escalator, it’s not obvious that we should be encouraging families to take these risks. The risks are greatest when families assume subprime mortgages or are victims of fraud. But even when everything is transparent, there are inherent risks.

It’s easy to overlook these risks because housing prices were on a positive trajectory for many years. Low-interest, low-money-down VA and FHA loans promoted upward mobility for a quarter-century following World War II. One might regard these policies as central pillars in the creation of a stable middle-class. Maybe they were. Yet in retrospect, the more important factor was the anomalous stable and prosperous stretch of American economic history that supported these policies. There is no guarantee that such sustained and stable prosperity will return anytime soon to Americans of modest means.

Consider a married couple making $60,000 a year. Suppose they buy a $200,000 home with a fixed-rate 30-year mortgage and $6,000 down. That’s hardly a reckless scenario. Yet if local home prices drop by ten percent, this family is $14,000 underwater. If their marriage or their furnace breaks, if someone loses a job, this couple is in real trouble. If family dislocations arise from broader economic difficulties that depress local property values, they are in even deeper trouble.

Progressives should be chastened by the history of the housing mess. We need to rethink the all-American aspiration to widespread home ownership. When our society offers no guarantees to buffer instability and risk, we need other, safer ways to support families and neighborhoods, and to promote upward mobility.

Harold Pollack is a professor at the University of Chicago School of Social Service Administration.

SHARE YOUR THOUGHTS

Show all 79 comments

You must be a subscriber to post comments. Subscribe today.

79 comments

While perhaps not as easy to address, these uncomfortable questions must be raised if we hope to guard against the possibility of something of this magnitude from happening again.
That from shouldn't be there.

- kpidcoc

August 27, 2011 at 7:26am

You must be a subscriber to post comments. Subscribe today.

"Yet in retrospect, the more important factor was the anomalous stable and prosperous stretch of American economic history that supported these policies. There is no guarantee that such sustained and stable prosperity will return anytime soon to Americans of modest means." In other words, it isn't housing policy per se that's gotten us in this mess but a much bigger loss, shared prosperity. Yes, shared prosperity, for what Pollack omits from his homage to days past is a much more equitable distribution of prosperity. American prosperity hasn't disappeared; it's just that it's now being concentrated in a very few. Pollack's insight is essential to understanding our mess and the path to overcoming it.

- rayward

August 27, 2011 at 8:36am

You must be a subscriber to post comments. Subscribe today.

Rayward: But note the important word "anomalous" in that quote. Pollack is saying that the equitable distribution of wealth in the post-WWII years was an aberration that was out of step with American history. The shared prosperity of that era was a result of two things: (1) a lot more well-paying jobs and (2) highly progressive tax rates. The Republicans in recent years have been working (quite successfully) at destroying the "immoral" tax structure enacted in previous decades so the rich can amass an ever-larger share of the wealth. And they think the tax code is still not regressive enough. Right now, they're also doing everything they can to prevent jobs from being created, hoping to blame the high unemployment rate on Obama and the Democrats and thereby gain complete control of the government. With a wrecking crew like that in Washington, how can we possibly expect a return to prosperity?

- DAVIDDREIER@EARTHLINK.NET-old

August 27, 2011 at 9:38am

You must be a subscriber to post comments. Subscribe today.

Professionals knew something was seriously wrong with the economics of the "housing industry" a long time before the crash. Of course, it is not the job of highly educated Property Appraisers and Analysts to be whistle blowers, but they knew all along what as mess we were in. I listened to a senior analyst from Moody's Analytics at a conference in 2006 in NYC explain the possible dynamics of mass foreclosures in the US markets. The map the Moody's executive presented had all the information necessary to visualize what was about to happen; cities, locations within cities, regions, etc. where the massive foreclosure were expected to occur. It was in plain site. Not a word of caution or concern from the well heeled professional valuation specialists in the audience. If Moody's Analytics knew, so did S+P and Fitch. Time for policy experts, builders and government to exit from the single family housing game. Nearly 60% of American families own their home, down from a high, estimated 68%. 60% home ownership remains a colossal achievement, notwithstanding the crisis. The soundest housing policy going forward, in my opinion, is to encourage "limited equity" cooperative, multi-family housing, which is a proven and successful ownership structure. Examples include NYC's Penn South housing development or Co-op City in the Bronx. These developments have weathered the fierce storms of the Great Recession-Depression. They have remained affordable and financially secure. The limited equity co-operative can be a vertical (like Penn South or Co-op City) or horizontal development,i.e. spacious garden apartment developments, found throughout America, but still owned and operated by single investors (Landlords). Limited equity co-ops provide many of the benefits of home ownership, with a vastly lower risk profile--financial risk being diffused among the multiple owners and not concentrated on one family's ability to remain solvent. Sometimes the old ideas are the new ideas.

- LawrenceGulotta

August 27, 2011 at 9:54am

You must be a subscriber to post comments. Subscribe today.

Yes, anomalous, not only in American history, but world history. That's how I understood Pollack used the term. That's American exceptionalism as it should be understood, defended, enhanced, and advanced throughout the world.

- rayward

August 27, 2011 at 10:29am

You must be a subscriber to post comments. Subscribe today.

I am sorry, but this is misconceived. Yes, we over-emphasize home-ownership. But that's primarily because it has become the only source of wealth for most people. However, a moment's thought should suffice to make clear that the nation as a whole cannot become wealthier by the cost of housing becoming ever higher in real terms. Krugman pointed out years ago that a boom based on selling houses back and forth like tulip bulbs was destined to be a big bust. We only become wealthier as a whole because the things we consume become cheaper in real terms, not more expensive. The purpose of the housing industry should be to provide shelter at prices people can afford. The financing method is really not of primary importance. We had an absurd boom in housing prices and in risky or even fraudulent mortgages because the financial sector is completely out of control. If it hadn't been housing, it would have been something else, as it has been in the past, because without adequate regulation the financial sector will ALWAYS get out of control and create a boom and bust in something. The problem isn't home ownership, it is finance. Why is this? Because the output of finance is an intangible, a piece of paper. And there is no inherent limit to how much paper the finance industry can print and sell. Of course, it should be limited by the quantity of real assets underlying the paper, but, as should be obvious by now, the "value" can be bid up to any number in the short term and it is easy to issue paper that isn't backed by much if anything at all. That used to be considered fraud, but that was in the old days. Now Wall Street can commit massive fraud, walk off with tens of billions, and hardly a word gets said, certainly not by our neutered securities law enforcement. Pollack is hunting in the wrong places. The core issues are distribution of income and regulation of finance. The housing debacle is a side-effect of the maldistribution and lack of regulation of finance. Both are only getting worse. There will be more problems, likely in the form of long-term unemployment and falling real incomes for many and more banking crises. The answers? The simplest are to return to a highly progressive tax system that relieves at least the bottom 60% of all income taxes and a strict regulation of finance the focuses relentlessly on the key issue, leverage. As long as unlimited leverage is permitted through off-balance sheet financing of various kinds, derivatives, CDOs, we will be in trouble. As well, if people had reliable health care, education for their kids through whatever level they can successfully achieve, and secure retirement income, a lot of the impetus to use housing as our national piggy bank would disappear. Houses could then be for living in. Then we could focus on affordable housing. It is noteworthy that in Texas of all places, where they have tight mortgage-lending rules and low housing prices, there was not nearly the problem that occurred elsewhere.

- roidubouloi

August 27, 2011 at 11:29am

You must be a subscriber to post comments. Subscribe today.

Maybe we ourselves, the American people, played a role too and simple logic should have caused lightbulbs to go on? Some of us did notice acre after acre of enormous houses going up, with pricetags in the hundreds of thousands, and wondered, ok, who can afford ALL of those gigantic, expensive houses? Well it turned out, not so many of us could afford them. And in real terms they just aren't worth that much. But, there was this pressure to be a home-owner. This is a clear case of psychology affecting economics - there have been some discussions lately about whether psychology affects economies. This is a clear example of the fact that of course it does. The status and supposed security and "investment potential" of home ownership was sold to the people regardless of the facts and they bit. (Fact: if psychology DIDN'T affect economies would the advertising industry be so powerful and such a vital facet of our society? In this case the psychology of home ownership is woven into the "American Dream" itself!) Also, there was a concerted effort in the 1990's to begin driving up rents here in Chicago (I was working for a commercial RE company at the time). This was successful because rental property was in growing demand as more and more buildings were "condo-ed" so that contributed to the increasing cost of housing. But the demand was only apparent and clearly temporary; and I believe it artificially inflated costs across the board - rents and house payments alike are increasingly beyond the ability of people to pay and the value of houses, condos and probably apartment buildings has clearly fallen relative to their supposed value just a few years ago. As an example: calculate the "value" of a 6-flat with one vacant apartment, vacant for a year or more and you can see that small real estate companies, who maybe hold a couple of buildings, are taking a big hit in the pocket and the real value of their properties has fallen. Indeed people have been evicted here because THE LANDLORD didn't pay the mortgage - the renters were tosses into the street even though they paid promptly and consistently. So here we have trickle-down poverty! What's happened to take up the slack: people moving in together, grown children living with their parents, seniors living in fear of losing their homes, people who lose their jobs losing everything, etc. The cost in human as well as financial terms is just enormous. It's important to realize this was no accident. Now we are left with a real mess and whether you're a renter or an owner, the cost of housing is proportionately much too high unless you're among the increasingly few fortunate. I honestly don't know how I'd afford any housing without my partner - even a little studio apartment. Alas all too many Americans are now experiencing this sort of vulnerability and winding up in foreclosure or even homeless. It's very hard on older people and people with disabilities though let us note: with the social safety nets it would be flat out impossible and the camps, hobos and soup lines of the 1930's would be a reality today. Instead of a messed-up housing market we'd be seeing tent cities. So we must NOT agree to any scenario in which the safety net is shredded any further. Given that housing is a basic need, something people absolutely can't do without, a progressive agenda AND a responsible conservative agenda must both include some sort of recognition that predatory Real Estate practices across the board are harming our society. AND we need to recognize that housing is a fundamental necessity and it must be affordable. From a capitalist perspective, one might want to look at the role of the insurance industry and other outside investors in American real estate as well. Artificially driving up costs is actually the opposite of how "free markets" are supposed to behave - ie the demand isn't real, it isn't coming from the society itself - so this is bad both from a socialist and from a capitalist point of view.

- Sophia

August 27, 2011 at 11:31am

You must be a subscriber to post comments. Subscribe today.

Sorry I meant "without" the social safety nets it would be impossible; apologies.

- Sophia

August 27, 2011 at 11:34am

You must be a subscriber to post comments. Subscribe today.

HP writes: "In an excellent review in the American Prospect, Robert Kuttner demonstrates how private firms such as Countrywide were far more culpable—economically, morally, and legally—than Fannie Mae, Freddie Mac, or other GSEs in initiating the current crisis. " But you miss the central point: CountryWide et al would not have made these loans if it was their own money. They only made these loans, and found ways to make more and more of these loans because the system (GSE) enabled them too. And encouraged them too. You note Morgenson goes off the rails in blaming Fan and Fred. But while Morgenson devotes hundreds of pages to the conclusion, you dismiss it with a single sentence. Shame on you for that. Wall street acted exactly as you would expect here. When told there was a lot of money to loan on houses to people without not-so-good credit, they did exactly that. That is what they were instructed to do. To look back and note they had a substantial role in all this is comical. And, can you finally admit the republicans were right to try and limit Fan and Fred activity starting in 2002? And can you finally admit it was shameful to blame their concern on racists ambitions?

- seattleeng

August 27, 2011 at 11:36am

You must be a subscriber to post comments. Subscribe today.

The standard set of garbage false claims from seattleeng. Knowing lies or merely the brainless repetition of the tripe he reads on Randian websites? You decide. No matter that the fraud was committed overwhelmingly by under-regulated or effectively unregulated private actors. The Randian wackos will always insist that it was really the government that did it. This is indistinguishable from the belief that the earth is flat and carried through the heavens on the back of a giant turtle. For the zealots of the libertarian right especially, there is no need for an empirical basis for any claim. Please explain the mechanism by which "the system (GSE)" enabled private firms such as CountryWide to commit massive fraud in sub-prime mortgages, those that, by definition, did not qualify for GSE financing. Otherwise shut the hell up and stop polluting this place with slimy lies, whether yours or someone else's.

- roidubouloi

August 27, 2011 at 11:53am

You must be a subscriber to post comments. Subscribe today.

The last time seattleeng tried to justify this garbage it was by claiming that it was the GSEs that invented mortgage-backed securities. That is substantially true, although it occurred decades before the sub-prime debacle. Yes, if no one had ever invented mortgage-backed securities, then no one could have committed fraud with mortgage-backed securities. According to seattle, the government therefore "inspired" the fraud. The government invented the internet too. One might therefore say that without the government there would be no internet fraud.

- roidubouloi

August 27, 2011 at 11:57am

You must be a subscriber to post comments. Subscribe today.

I do so love this idea of seattle's that Wall Street is just sitting around waiting to be "told" by government where and how to make money. It seems that the multi-millionaire MBAs and investment bankers of Wall Street just cannot figure out where the money is until they are advised by government bureaucrats pulling down $75K a year. This is a wonderful display of the psychosis of the right. According to them, the government is at one and the same time incompetent to produce anything of value yet omnipotent.

- roidubouloi

August 27, 2011 at 12:03pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Please explain the mechanism by which "the system (GSE)" enabled private firms such as CountryWide to commit massive fraud in sub-prime mortgages, those that, by definition, did not qualify for GSE financing." It's very simple. A FICO score of <590 has a default rate of 50% in a normal economy. In a down economy, it is almost 80%. Would a sane person loan their own money at a reasonable interest rate to someone with a FICO score of 590 or less? The answer is "no" they cannot afford to. It is a guaranteed loss. If it was your money, you would not make that loan either. And yet those loans were routinely made, at good interest rates, in the run up using GOVERNMENT-backed money. Not private money. Who enabled those? Fan and Fred. They did this by substantially lowering the underwriting requirements, which took root in Clinton's "Partners in Home Ownership" initiative. The primary goal of this program was to enable home ownership for those with very constrained financial situations. In an up market, this means the ability for that group to participate in some upside. Good. In a down market, this means financial ruin for that group. Bad. The government ignored the possibility of a downside, and only believed upside was possible, writing: "For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership." What the above graf ignores is that if home prices fall and interest rates increase, it will absolutely ruin the life of the person that is on the edge already. While you quibble over the earnings of billionaires that might impact a middle class family by a few thousand dollars if it were confiscated and evenly distributed to the masses, you ignore the hundreds of thousands the government has cost the lower and middle classes: 1) Encouraging and enabling highly leveraged purchases that have resulted in countless bankruptcies and destroyed credit. 2) Forcibly confiscating hundreds of thousands of dollars in social security payments, and then delivering a paltry return on those investments, cheating the middle class out of half a million dollars. 3) Structuring welfare such that earning ANY income will result in a greater loss of benefits, thusly ensuring work will never ever pay, and teaching generations that the government teet is the only option. Priorities, Roid, priorities. Do you really want to help the poor and middle class? Or do you want to screw the rich? I know the answer. But just know that NEVER have the rich suffered while the middle class and poor have thrived. Ever. The only way for the rich and middle class to thrive is for the rich to thrive. True under Reagan, true under Clinton, true under Bush. And Obama (and Carter) have demonstrated that if you screw the rich, you will screw the poor and middle class even harder. Give up your egalitarian fantasy fueled by envy. Focus on creating an environment for the rich to get richer, and the middle class will get dragged along at a healthy clip. Never truer that under Clinton. That decade showed the rich getting immeasurably richer than at any time in recent memory. They had huge gains. And just paid a tiny 2% more in taxes. It was awesome. And it was awesome for the poor and middle class too.

- seattleeng

August 27, 2011 at 1:40pm

You must be a subscriber to post comments. Subscribe today.

The middle class will be dragged along by the rich? OMG. Seattle you cannot actually have written that????

- Sophia

August 27, 2011 at 1:42pm

You must be a subscriber to post comments. Subscribe today.

Case in point, read about the horrible fallout from RICH Wall Street bankers and their games, playing with the subprime market, and endangering Europe as well as the US. Also, look at the income skewing, the rich are getting richer but the Middle Class is DISAPPEARING. Not getting richer, getting poor. For heaven's sake you try to run this fantasy by us????

- Sophia

August 27, 2011 at 1:44pm

You must be a subscriber to post comments. Subscribe today.

Here, fallout from The Housing Games: http://www.vanityfair.com/business/features/2011/09/europe-201109

- Sophia

August 27, 2011 at 1:45pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "I do so love this idea of seattle's that Wall Street is just sitting around waiting to be "told" by government where and how to make money." Do you remember the redlining accusations of the late 90's? That resulted in clearly defined ratios that banks must meet under the guise of "affordable housing goals". From Reckless Endangerment: First to go was a reliance on credit history, an age-old method for measuring borrower risk. “Lack of credit history should not be seen as a negative factor,” the recommendations said. “In reviewing past credit problems, lenders should be willing to consider extenuating circumstances.” Neither should relatively high expenses among low-income borrowers disqualify them from receiving loans. “Special consideration could be given to applicants with relatively high obligation ratios who have demonstrated an ability to cover high housing expenses in the past,” the guide said. [...] For loan officers who might be worried about the risks of default in such mortgages, the Fed’s guidelines provided a wonderful out. “Institutions that sell loans to the secondary market should be fully aware of the efforts of Fannie Mae and Freddie Mac to modify their guidelines to address the needs of borrowers who are lower-income, live in urban areas, or do not have extensive credit histories.” In other words, a banker confronted with these new relaxed requirements could off-load any risky loans to the government-sponsored enterprises responsible for financing home mortgages for millions of Americans. For institutions concerned about having to hold onto questionable loans and possibly generate losses in them, the fact that they could sell them to Fannie or Freddie meant one beautiful thing: Any downside could be handed off to the government. [...] Because Fannie was the leader in housing finance, its actions set the tone for private-sector lenders across the nation. “They were omnivores,” the former executive said. “The further they moved out on the risk curve, the more they pushed the market to follow. Johnson viewed this as his strategy of protecting the franchise at all costs.” [...] In late 2010, the degradation of mortgage lending and its disastrous effects, especially on minorities whom predatory lenders had targeted, had become obvious to all. In an interview, Munnell said that she never intended her 1992 study to result in relaxed lending practices for minorities. She said that she left the Boston Fed two months after her study was published and had nothing to do with its guidelines. SeattleEng: Munnell was the genius that wrote the poorly researched study that really brought redlining to the forefront of the debate. Another ivory tower do-gooder.

- seattleeng

August 27, 2011 at 1:49pm

You must be a subscriber to post comments. Subscribe today.

Sophia writes: "The middle class will be dragged along by the rich?" Tell me, Sophia. What point in history are you thinking of when the middle class has done well and the rich have not? Please let me know the administration or decade you are thinking of. I cannot wait. Don't worry, I don't expect a response from you.

- seattleeng

August 27, 2011 at 1:51pm

You must be a subscriber to post comments. Subscribe today.

We weren't talking about billionaires, seattle. We were talking about your claim that the massive fraud in the private mortgage-backed securities market was "enabled" by GSEs. There are a lot of words up there, but not a single one to back your claim. The sub-prime market was, by definition, the market for mortgages that could not meet the underwriting standards of the GSEs. Now, would you like to take another crack at explaining how the fact that the government had much higher underwriting standards than the private market (if you could even describe the private market as having standards) "enabled" the private market to commit massive fraud in the origination and sale of value-less mortgages? Your display is typical of the crackpot libertarian right. You claim that an unregulated market is the surest path to wealth. When the unregulated private market then destroys trillions of dollars of wealth, you do not reconsider for an instant your True Belief that an unregulated private market is the surest path to wealth. No, you concoct a fairy tale about how the private fraud was somehow "inspired" by the government. It never even occurs to you consider whether an unregulated private market is the problem, not the solution, even though the unregulated private market is what produced the disaster. You are indistinguishable from that kook trying to explain why The Rapture didn't occur on the designated day. Another fine example is your contention that the wealthy thriving is the necessary condition for everyone else to do well, the über-trickle-down theory. Well, seattle, the wealthy ARE thriving, like no time since the Gilded Age. Since the dawn of Reagan and his ouiji board economics, the wealthy have captured an ever larger share of GDP. How has that gone for everyone else? Massive loss of good jobs, stagnating incomes, loss of income share by everyone other than the wealthy, job insecurity, massive trade deficits, massive budget deficits, massive asset bubbles bursting, painful recessions including the worst since the Great Depression. And yet, you keep insisting that all we need to do is pursue ever more aggressively the very same policies that have wrought these disasters. Do you know what the word for that is, seattle? Insanity, that's what. As for your belief that I am motivated by envy, seattle, lose it. I am a multimillionaire, worth tens of millions of dollars. I don't spend my time worrying about what the billionaires are doing or thinking enviously of those wealthier than I am. I have more than enough. On the other hand, I find it distressing to be well-off in a society where so many people are forced to struggle while surrounded by great wealth, especially when I know that that is unnecessary, the result of the rich endlessly preying upon the not rich and employing fantastical justifications such as yours.

- roidubouloi

August 27, 2011 at 2:04pm

You must be a subscriber to post comments. Subscribe today.

But seattle, the volume and dollar value of mortgages that could plausibly be attributed to anti-redlining regulations is an utterly trivial share of the mortgage-backed securities debacle. Again that crackpot idea that the tiny, tiny tail of government regulation was somehow wagging the Big Red Dog of unregulated private market fraud. Must we feel sorry for the billionaires of the 50s and 60s, seattle? Did they suffer because income distribution was not radically skewed as it is today? And when Reagan actually began managing the economy with wacko supply-side economic theories, directing a much larger share of after-tax income to the wealthiest, did things get better or did they get worse? Do you have any ability to connect with reality?

- roidubouloi

August 27, 2011 at 2:12pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "The sub-prime market was, by definition, the market for mortgages that could not meet the underwriting standards of the GSEs" No, not true. The GSEs were the leaders in relaxed standards. Again, nobody but a GSE will loan their own money at a good interest rate to someone with FICO score <580. Plenty of places will (and did) loan someone else's money (taxpayer money) to those people. That was the problem. Read the text. Excerpt posted again: For loan officers who might be worried about the risks of default in such mortgages, the Fed’s guidelines provided a wonderful out. “Institutions that sell loans to the secondary market should be fully aware of the efforts of Fannie Mae and Freddie Mac to modify their guidelines to address the needs of borrowers who are lower-income, live in urban areas, or do not have extensive credit histories.” In other words, a banker confronted with these new relaxed requirements could off-load any risky loans to the government-sponsored enterprises responsible for financing home mortgages for millions of Americans. For institutions concerned about having to hold onto questionable loans and possibly generate losses in them, the fact that they could sell them to Fannie or Freddie meant one beautiful thing: Any downside could be handed off to the government. Roid, the last sentence sums all this up beautifully....

- seattleeng

August 27, 2011 at 2:18pm

You must be a subscriber to post comments. Subscribe today.

Once again, we see seattle's theory that GSE lending, to much tighter underwriting standards than the sub-prime market, by defintion, "inspired" the private market to abandon standards altogether. “The further they moved out on the risk curve, the more they pushed the market to follow." What is the cause and effect, seattle? How does GSE lending to riskier market segments force or encourage the private market to make loans that even a subsidized GSE wouldn't touch? All we have is the completely unsubstantiated statement that this is so. It is so because right-wingnuts say it is so. And they say it is so because their ideological True Belief insists that it must be so, reality be damned. According to the wacko ideology of the libertarian right, the unregulated private market can only do good and the government can only do bad. Hence, when the unregulated private market produces an epic disaster, SOMEHOW this must actually be attributable to government. In the complete absence of any causal mechanism, we get the "inspiration" theory. Private market bad behavior was inspired by better behavior by government. Pure crackpot nonsense.

- roidubouloi

August 27, 2011 at 2:21pm

You must be a subscriber to post comments. Subscribe today.

Why oh Why is it every time I read something out of U of C instead of understanding or wisdom I get some sort of circular logic that proves once again the wisdom of "free markets" and culpability of government? So now it's "us liberals" who are to blame for the banking crisis! Why of course! That's what Rush says, and as "seattleeng" marshals his well rehearsed facts, the real culprits, the bankers themselves who have spent millions a year lobbying congress for the lowering of standards and removal of quotas, actually writing the legislation that made fannie and freddie mac the "fall guy" in any default, and it's the liberals who are to blame! The banking "industry" got exactly the mortgage backed guarantees it paid for: they take the money, we (through fannie and freddie) get the debt. So how is that our fault?

- gabriel2001@comcast.net

August 27, 2011 at 2:21pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Must we feel sorry for the billionaires of the 50s and 60s, seattle? Did they suffer because income distribution was not radically skewed as it is today?" It wasn't much different that today in terms of income distribution. And still, the middle class of today has substantially more in constant dollars than the middle class of the 50's. What you are upset about is that the brightest and most driven of our society have made faster gains than the average thinkers and moderately motivated . Hate to tell you brother, that will always be true. It has always been true. Why in the hell do I care an NBA player can jump higher than I can? Why in the hell do I care that Brad Pitt is better looking that I am? But for some reason, you spend your nights and days obsessing that someone who is smarter than you and works harder than you makes more money than you. Why? What is this obsession you have with rich people? They exist. So what. They do their thing, I do my thing. I am doing much better than my counterpart did 20, 50 or 80 years ago. That is all that matters. Sophia is doign better than her counterpart. And you are doing better than your counterpart from back when. Drop the envy and move on. It'll make you a better person. And your family will enjoy spending time with you again during the holidays. :)

- seattleeng

August 27, 2011 at 2:26pm

You must be a subscriber to post comments. Subscribe today.

Gabrial writes: "That's what Rush says, and as "seattleeng" marshals his well rehearsed facts, " Sorry, Gabby, it's not Rush. It's a long line of NY Times and WSJ writers that are pushing this meme too, with more than a few Pulitzer's under their belt. You need to read more I'm afraid.

- seattleeng

August 27, 2011 at 2:28pm

You must be a subscriber to post comments. Subscribe today.

I don't know who caused this latest bolding episode, but it wasn't me. Seattle, get a grip on yourself. The sub-prime mortgage-backed securities debacle was overwhelming NOT in the GSEs but in the private market. Sub-prime MEANS mortgages that could not meet even GSE underwriting standards and could not be sold to GSEs. You keep insisting that no one in the private market would lend money to borrowers with no credit and no history and no provable income, BUT THAT IS EXACTLY WHAT THE PRIVATE MARKET DID. And it do not do it because the loans could be laid off to GSEs. By definition they could not be laid off to GSEs. Instead they were packaged by Wall Street into CDOs, given prime ratings by the rating agencies, and sold off to private holders. The portion of this muti-trillion dollar fraud that threatened to sink financial institutions in 2008 was only the small fraction of this fraudulent crap that they still had in inventory, not yet laid off to investors, when the game of musical chairs came to an end because the private market could no longer buy this garbage. Have you no ability whatsoever to address the facts of what actually occurred? You seem to be completely mired in a libertarian fantasy world in which exactly what did happen never happened. You can re-quote the same nonsense forever, seattle, but it is still nonsense, bearing no relation at all to what actually occurred.

- roidubouloi

August 27, 2011 at 2:28pm

You must be a subscriber to post comments. Subscribe today.

Further, what is insidious even immoral about seattleeng's reasoning is the implication that bankers are just doing their job by funding loans they know will go bad and handing them off to government agencies or mortgage bundlers like goldman sacks (who designed these bonds to fail because they had their own bet against them!!). So you see, it's reasonable to expect that people will cheat and lie, but it's unreasonable to expect other people through law and regulation to do anything to restrict them. And once again, who are the biggest whiners and complainers about Dod-Frank? Not the securities industry per se......but the bankers!!

- gabriel2001@comcast.net

August 27, 2011 at 2:31pm

You must be a subscriber to post comments. Subscribe today.

'It wasn't much different that today in terms of income distribution.' Here again we see clearly that seattle can only justify his crackpot theories by claiming that reality does not exist. Income share of the top 10% in 1967, about 29%. In 1980, when Reagan arrive riding his ouiji board, 33%. Today? Nearly 50%. Since 1980, we have drastically reduced the progressivity of the income tax system, dramatically weakened organized labor, seen the wholesale corruption of government by corporations to siphon money into their own pockets (read shareholders, not working people) and adopted free-trade policies that force American workers to compete directly with foreign labor at much lower wages. The entirely predictable result of these policies is the income inequality we now see. This inequality is not the result of the genius of the seattles of the world, but due directly to the very policies they have championed to render wealth much less equally distributed. Has this been good for the country? Seattle says yes because we have experienced real income growth, but, overwhelmingly, the fastest growth in income of the past 100 years is associated with greater income equality and the slowest growth with greater inequality. This too does not even suggest to seattle that he revisit his crackpottery. The fact that income has grown even with supply-side policies proves them, even thought that growth has been both much slower and unequally distributed. Don't let any facts get in your way seattle. You never do. Indeed, you invent whatever facts you need to support your libertarian religion. Today is no different.

- roidubouloi

August 27, 2011 at 2:46pm

You must be a subscriber to post comments. Subscribe today.

You should stop your sycophanting adoration of the wealthy and detestation of everyone else. You would would be a human being. You might find you enjoy that.

- roidubouloi

August 27, 2011 at 2:49pm

You must be a subscriber to post comments. Subscribe today.

Seattle, please. You did not claim that the wealthy do well when the middle class does well, you claimed that the wealthy "drag" the middle class to prosperity WHICH IS PATENTLY RIDICULOUS. Indeed it generally works the other way around. It seems, looking at history, that past a certain point the wealthy begin to prey on everybody else. Indeed, many wealthy people got rich literally by enslaving other people and amassing the fruits of their unwilling, free labor. So???? Now, what gabriel says is absolutely correct, read the Vanity Fair piece, the banks were paying people a LOT OF MONEY to bet against their own companies using the sub-prime mortgage securities as though they were monopoly money. That's beyond immoral, I think these people ought to be in jail.

- Sophia

August 27, 2011 at 2:54pm

You must be a subscriber to post comments. Subscribe today.

Now, as to liberals and our contribution to the housing mess. It is possible that the idea of lending money to bad risks is stupid. I think the smarter alternative is to encourage affordable housing. Of course, encouraging better jobs, unlike the present course of action which is to offshore jobs and make EVERYBODY poor (except the rich) is arguing against widespread prosperity, ie the kind that can afford any kind of housing, period. So, we need to stabilize the housing market, forthwith; that includes rents. Given that housing prices are falling through the floor I am surprised that rents don't seem to be going down.

- Sophia

August 27, 2011 at 2:57pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Income share of the top 10%" But the top 10% includes people making $150K. Surely you aren't upset with that. That's a husband who is a cop and a wife that is a teacher, each 15 years into their career. Hardly anything to be envious over. The millionaires live in the top half percent. Roid writes: "Since 1980, we have drastically reduced the progressivity of the income tax system" Nope. The middle class pay less than ever today (14.2% effective, versus 18.6% under Carter and 16.9% under Clinton)). The top 1% today pay around 31% today, versus ~34% under Carter and ~36% under Clinton. And we've already addressed that big earners such as FDR and Nixon were paying paltry tax rates compared to Obama. And on the other side of the taxation, we have the largess of government, which is shoveling more than ever to the middle class. Benefits minus taxes have the middle class seeing a $6K advantage today. Things such as EITC, child credits, etc, have factored in heavily here, ensuring this figure is larger than any other time in history.

- seattleeng

August 27, 2011 at 2:59pm

You must be a subscriber to post comments. Subscribe today.

Sophia writes: " You did not claim that the wealthy do well when the middle class does well, you claimed that the wealthy "drag" the middle class to prosperity WHICH IS PATENTLY RIDICULOUS." Actually, what I wrote was: "Focus on creating an environment for the rich to get richer, and the middle class will get dragged along at a healthy clip. Never truer that under Clinton." To refute this, show me a time where the middle class gains outpaced the gains made by the rich. You cannot. Ergo, when the rich do well, the middle class does well.

- seattleeng

August 27, 2011 at 3:08pm

You must be a subscriber to post comments. Subscribe today.

Back to your tax lies, seattle? Nope, the average Federal income tax rate for the top 1% is about 23%, top 5%, 20%, top 10%, 19%. Plus, whenever a libertarian liar talks about Federal taxes, there is the convenient omission of payroll taxes that are actually regressive, with the bottom paying higher average rates than the top. Reagan oversaw a huge tax cut for the wealthiest and a huge tax increase for wage earners. http://www.taxfoundation.org/news/show/250.html#Data Like I said, seattle, you just invent whatever "facts" you think you need to support your radical libertarian ideology. Reality be damned. Here's another seattle whopper of a lie: "To refute this, show me a time where the middle class gains outpaced the gains made by the rich. You cannot.: Well more or less the entire period from the 30s to 1980, You see, seattle, when income share are becoming more equal, that requires, by algebraic necessity, that the change for those not at the top be better (even if that should mean only a lower decline rather than faster growth) than for those at the top. During that period, we had policies that favored income equality, and saw much faster GDP growth to boot. Thus, the whining rich did better in absolute terms too. The middle class boom dragged up the rich. Yet you are so despising of everyone other than the rich, whom you imagine to be the avatars of Randian superiority a class to which you also imagine you belong, that you can think of nothing else but making the rich richer, no matter that it comes at the expense of everyone else. And there is seemingly no lie you will not endless repeat to that end. Libertarianism is so bankrupt as a philosophy of government that it can only be floated on an endless stream of lies. It shares this in common with communism and fascism.

- roidubouloi

August 27, 2011 at 3:26pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Back to your tax lies, seattle? Nope, the average Federal income tax rate for the top 1% is about 23%, top 5%, 20%, top 10%, 19%." Wrong. See the CBO report on high income earners. Table 1, titled "Total Effective Federal Tax Rate" shows for 2005, the top percentiles are sitting right around 32%. During Clinton's boom years, that figure was 33-34%. And during Reagan, those figures were as low as 26-28%. Putting to bed the myth that taxes on the wealthy today are lower than ever. Not even close. Sorry, Roid, I know the facts hurt. www.cbo.gov/ftpdocs/98xx/doc9884/12-23-EffectiveTaxRates_Letter.pdf

- seattleeng

August 27, 2011 at 4:40pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Well more or less the entire period from the 30s to 1980, " Wrong again. I turn to the socialist Larry Mishel's data for this and also Saez's data (which inform's Mishels). You can go to www.stateofworkingamerica.org and play with the interactive feature which clearly shows everyone's fortunes track the top 1%. When the top 1% goes up, you see the top 1-5, and top 5-10% go up. Same when top 1% goes down. And it clearly shows the top 1% have always been doing better and better. AT least since 1917. Is that really a surprise? The top 1% are our best and brightest. They are the ones that create the new wealth from nothing. They create things that cause you to work a little extra harder so that you, too, can get something new and cool. That endless cycle is what moves us along. So, it seems that both you and Sophia cannot find a period in time where the middle class posted awesome gains and the top 1% suffered. I thought so. Some people get so focused on a goal, they miss the larger picture. Scott McNealy of Sun Micro, for example, got so focused on beating Microsoft that he forgot to take care of customers...and eventually Sun died. Same with President Obama. He has become so focused on equality, he has failed to pay attention to the larger picture. Remember when Charlie Gibson asked Obama about capital gains? And Gibson noted that when Cap Gains taxes were dropped, that revenues actually go up. Obama didn't really care about the revenue. He was more focused on making things "fair". In other words, he was fine if revenue went down! What he was more interested in was a big tax on the wealthy. Same problem as Scott McNealy. He (like you) was so focused on an end goal (equality) that he forgot to focus on the basics: Making sure the economy is working well. All this talk over private jets. Good grief. When the rich do well, everyone is happy. Clinton showed that in spades. And when everyone is miserable, the rich are still pretty happy. Obama and Carter have proved that too. Again, no time in history that is NOT true. At least according to my favorite socialist and "equalitist", Larry Mischel.

- seattleeng

August 27, 2011 at 5:13pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "What is the cause and effect, seattle? How does GSE lending to riskier market segments force or encourage the private market to make loans that even a subsidized GSE wouldn't touch? All we have is the completely unsubstantiated statement that this is so." But the GSE **DID** touch these loans. Almost all of them. Remember the guidelines I cited earlier? (pasted again below). See the the text that says Fan and Fred are modifying their guidelines to address the risky loans? Do you see the sentence after that in which the mechanism for banks to write these risky loans and then offload them to the GSE means the banks could dump the bad loans on taxpayers? Get a clue, Roid. These loans were NOT being made until Fan and Fred encouraged them to be made and agreed to carry all the risk. And once that mechanism was in place, the banks wrote as many as they could because they were profitable AND because it wasn't their money that was at risk. Are you asserting that GSE's did not encourage loaning to poor risks? Re-paste below: For loan officers who might be worried about the risks of default in such mortgages, the Fed’s guidelines provided a wonderful out. “Institutions that sell loans to the secondary market should be fully aware of the efforts of Fannie Mae and Freddie Mac to modify their guidelines to address the needs of borrowers who are lower-income, live in urban areas, or do not have extensive credit histories.” In other words, a banker confronted with these new relaxed requirements could off-load any risky loans to the government-sponsored enterprises responsible for financing home mortgages for millions of Americans. For institutions concerned about having to hold onto questionable loans and possibly generate losses in them, the fact that they could sell them to Fannie or Freddie meant one beautiful thing: Any downside could be handed off to the government.

- seattleeng

August 27, 2011 at 5:24pm

You must be a subscriber to post comments. Subscribe today.

Seattle, are you actually a moron? SUB-PRIME DEBT IS BY DEFINITION DEBT THAT CANNOT MEETING THE UNDERWRITING STANDARDS OF GSES. IT IS NOT "TOUCHED" BE GSES. SUB-PRIME MEANS, BY DEFINITION, THAT THEY CANNOT TOUCH IT. The overwhelming bulk of the mortgage debt that produced the crisis in housing and finances was NOT held by GSEs, not originated by GSEs, and was not "touched" by GSEs. Nor was it held by banks. Most of it had been securitized and sold to private investors. The portion that took down Lehman and threatened the whole banking structure was merely the portion of these garbage loans still in their inventory and not yet fraudulently sold off to private investors. You can fulminate all you want about the lending standards of GSEs, re-paste ad nauseum, BUT THE SIMPLE FACT OF THE MATTER IS THAT THE OVERWHELMING FACE PRINCIPAL AMOUNT OF PROBLEM MORTGAGES HAD NO RELATIONSHIP TO GSES AND NO CONTACT WITH GSES. THEY WERE ORIGINATED BY THE PRIVATE MARKET AND SOLD TO PRIVATE INVESTORS. In other words, seattle, even if everything you paste about GSE lending standards were true, even if the truth were far worse, it is largely irrelevant to what actually occurred here, on earth, in the actual world in which we live. Your argument is akin to saying that the disasters of hurricane Katrina were due to loose lending standards at GSEs. If someone says, but wait, loose standards at GSEs had absolutely no causal relationship to GSEs, you reply, "Let me re-paste. Don't you see where it says how loose standards were at GSEs? How can you deny that they had loose lending standards?" GSE lending had no causal relationship to the overwhelming majority of sub-prime mortgages including those held by financial institutions when the crash came. You are nuts.

- roidubouloi

August 27, 2011 at 6:55pm

You must be a subscriber to post comments. Subscribe today.

Pardon me: "If someone says, but wait, hurricane Katrina had no causal relationship to loose lending standards at GSEs, you reply, 'Let me re-paste. Don't you see where it says how loose standards were at GSEs? How can you deny that they had loose lending standards?'" _____________________________ Your writing has gone from merely deceitful to total lunacy.

- roidubouloi

August 27, 2011 at 6:59pm

You must be a subscriber to post comments. Subscribe today.

One little point to clear up, seattle. Your false claim that incomes of the wealthiest are always rising faster than the incomes of everyone else. See right here: http://www.rdwolff.com/content/rising-income-inequality-us-divisive-depressing-and-dangerous Through the 30s until about 1940, the income share of the top 10% was approximately 45%. It fell dramatically during WWII down to about 33%. With some bobbling, it pretty much stayed right there until 1980. If the income share of the top 10% falls, then, as a logical necessity from the simple algebra, it must be experiencing slower growth in income than the bottom 90%. If the share of the top 10% is maintaining a constant income share, then, also as a logical necessity from the algebra, it is experiencing growth at the same rate as the bottom 90%. Algebra permits no other conclusion. Thus, your claim is false -- BEEEEEEP, ejected again -- and my claim about the period from the 30s to 1980 is correct. Same old, same old. Whenever one checks your claims, they are ALWAYS false. What happened in 1980? The income share of the top 10% started to rise and has risen steadily until it is pretty much the highest it has been in the last 100 years. What else happened in 1980? Ronald Reagan rode into town on his ouiji board and began to implement your wacko, flat-earth, supply-side economics, initiating a class war of the wealthiest against everyone else, and steadily redistributing income from the bottom to the top. That's what. The redistribution of income is not the result of the sudden brilliance of the top earners, but of deliberate policy set in Washington. When we had policies that favored greater income equality, we had greater income equality. When we adopted policies that favored income inequality, SURPRISE!, we have since achieved greater income inequality. This is justified by supply-side liars on the basis of the claim that greater income inequality fosters faster growth so that the bottom ends up better off in absolute terms even if its share is smaller. According to your lie, seattle, this is "the top lifting up the bottom." What do the numbers show? From 1940 to 1980, US per capita GDP in constant dollars grew at an average geometric rate of 2.71%. From 1980 to 2007 (the peak -- the numbers for the post 1980 period would be worse if taken to the present), per capita GDP growth was at an average geometric rate of 2.01%. IT IS FALSE THAT RISING INCOME INEQUALITY IS ASSOCIATED WITH FASTER REAL GROWTH. Rising income inequality is associated with slower real growth. The core supply-side claim about the economy, the political justification for Reaganism, is a lie. All the rest of it is lies too.

- roidubouloi

August 28, 2011 at 10:30am

You must be a subscriber to post comments. Subscribe today.

Roid writes: "The overwhelming bulk of the mortgage debt that produced the crisis in housing and finances was NOT held by GSEs, not originated by GSEs, and was not "touched" by GSEs. " Wrong again. From WSJ: By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)—risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices. [...] Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks. See that, Roid? Out of 26M subprime mortgages, 10M were HELD OR GUARANTEED by Fan/Fred, and 5.2M by other gov agencies. That is 58% of all subprime mortgages that TAXPAYERS were on the hook for. And the big banks? Only 1.4M. So let's re-cap here: The government fingerprints were on nearly 60% of all subprime mortgages (with taxpayers left holding the bag) and the big banks were responsible for just 5.3% of the bad mortgages. This would not have happened without government recklessly loaning taxpayer money. Your credibility is zilch here. You have no numbers. No cites. No data. Just repeated bullheaded assertions. You are done. Cornered. Check mate, bro

- seattleeng

August 28, 2011 at 1:01pm

You must be a subscriber to post comments. Subscribe today.

Roid, I don't really care about the top 10%. They include the $150K earners, which as noted before, is a husband and wife union fireman and a union teacher, both 15 years into their career. If you want to argue that the unions have unfairly taken money from the rest of society by exploiting their monopoly, you won't get any argument from me. But instead of opening that can of worms, let's stick with the 1%--the millionaires and above--which was my original assertion. You can see the Mischel and Saez data on the 1%. Do you agree it shows the top 1% earnings share steadily increasing since at least 1913? It does. My point stands.

- seattleeng

August 28, 2011 at 1:36pm

You must be a subscriber to post comments. Subscribe today.

seattle - as someone who has been married to a Wall Street guy for 20 years, I have to laugh at your deeply ignorant notion of them as somehow being smarter than anyone else. My husband is brilliant, but he'd be the first person to tell you that uses very little of it at work. It's not necessary. Brad Pitt comes by his money with honest work and real talent, and more power to him for it. No one begrudges anyone making money honestly. This has been said to you constantly, but it doesn't compute with your winger bullet points so you are unable or unwilling to comprendo. Seattle - Wall Street workers are public sector employees, almost entirely supported by your tax dollars for being members of the lucky sperm club: right schools (since birth), right connections, your butt ends up in the right seat. It's very simple. Have you ever been to "business school?" There are few rackets with a more meaningless curriculum that these diploma mills for the rich. Wall Street employees take very little risk in anything they do - especially the higher up they go - and almost always land on their feet if they are "fired" or the firm closes. Most Bear Stearns and Lehman Brothers employees, for example, were employed (again, on your tax dime - thank seattle for subsidizing my kid's froofy private school! Really appreciate it!) within a couple of months, doing the same thing (very little of substance). Many Wall Street people have built careers in good faith - nothing wrong with wanting to make money - but they've watched the capital markets slowly be destroyed over the last twenty years with the mindless destruction of appropriate regulation and oversight. No one even pretends anymore that Wall Street is anything other than a gussied up goverment job pushing paper around until the next bailout.

- WandreyCer

August 28, 2011 at 2:17pm

You must be a subscriber to post comments. Subscribe today.

Worse, it's a professional gambling job in some cases. GSE's or no, whether you agree with the idea that the government should help the less wealthy or people with less than stellar credit acquire real property, there's no law that says the banks had to gamble with the sub-prime securities. This activity and not the loans themselves has landed us in a global mess. The loans themselves were after all secured by real property and could have been restructured so that people could stay in their homes, there was no need to crash the market at all. In fact I don't understand why the loans were simply restructured? It doesn't make any sense to me. Where is the sense in allowing the bottom to fall out? And putting people out of their homes because their interest rates suddenly ballooned, or because of a terrible recession? Why didn't the banks work with people to help everybody? It would have been a win/win and also, supported entire neighborhoods. There's been such an awful ripple effect, when a home is foreclosed upon, the whole area suffers and other homes go underwater. Another side of this: if you live in a condo and others are foreclosed upon and leave, YOU wind up with a greater share of the overhead because who else is left to pay for the common area stuff? Plus, the human tragedy is just huge.

- Sophia

August 28, 2011 at 2:47pm

You must be a subscriber to post comments. Subscribe today.

Plus, this: http://www.tnr.com/article/economy/94258/baker-congress-obama-downgrade The tail is wagging the dog?

- Sophia

August 28, 2011 at 2:49pm

You must be a subscriber to post comments. Subscribe today.

Wandrey, I am not an apologist for wall street. But if you are really interested in making sure this does not happen again, then its prudent to understand root cause. Wall street was not the root cause here. Loaning taxpayer money to those that had little ability to pay it back was the root cause. Is wall street clean in all this? Hell no. But they acted exactly as I'd expect them to act when participating in a program in which they were rewarded for loaning money to poor credit risks: They went as fast as they could and did it as efficiently as possible. I have no problem with Brad Pitt earning $30M for 6 weeks of work. But I also have no problem with a CEO or ANYONE earning lots of money as long as they can find someone to pay them that money.

- seattleeng

August 28, 2011 at 6:29pm

You must be a subscriber to post comments. Subscribe today.

Once again I don't think Seattle is actually correct in his assertion about "loaning taxpayer money." Fannie Mae and Freddie Mac are PRIVATE, to the best of my knowledge; their loans are backed by the government but the taxpayers do not actually put up the money. Now, I don't see why the taxpayers shouldn't help other taxpayers, after all we also have federally backed student loans, bank deposits etc - so? Without such mechanisms the lower 95% would REALLY be screwed wouldn't we? In other words, there would be even less ability for the not rich to improve our lots in life. As it is, the US is one of the most skewed countries in the modernized world, with respect to income and wealth, it's pretty bad. The lack of economic fairness, opportunity and the ability of people to Live The American Dream is actually quite appalling. Perhaps we should just cut to the chase and change our flag to a dollar sign because this much entrenched wealth and power is not democratic. It's also clear we have a class system in place and, Brad Pitt to the contrary notwithstanding, it is easy to fall but hard to rise, economically. Meanwhile, I think it is important to be precise and correct so if this is wrong can somebody please explain? http://hnn.us/articles/1849.html

- Sophia

August 28, 2011 at 8:43pm

You must be a subscriber to post comments. Subscribe today.

My internet is own due to Irene and I can't type much on an iPad. You'll just have to wait. But I can already tell you that you have read the the CBO docs incorrectly, if indeed you read them at all.

- roidubouloi

August 28, 2011 at 9:36pm

You must be a subscriber to post comments. Subscribe today.

The great injustice of the rich having to pay more taxes than anyone else is a favorite trope of the WSJ. Oh, so tough being rich....all those taxes due.....all that maintenance on their yachts; the outrageous surtax on jet diesel!! So somehow this whole conversation has really gone off the rails. I don't think any of us, and I include my self, but I'm really thinking about poor sea...eng who, as the right wing love to say "has his panties in a bunch" are focuses on the original article. Some how we're talking about the inequality of the tax system and what we really should focus on is the absurd allegations of Pollack's article. But just for the record, yes, the rich pay more, your right seattle, that's because they have more. duh. But as a percentage of their incomes, when you factor in all taxes which include those famously called "payroll" e.i. social security, medicare and medicade, state local and municipal property taxes and sales tax, the % of all taxes paid is a much greater % of earned income than the rich ever come close to paying. Indeed, the fact that the poor pays so little of the federal tax obligation should be real embarrassment to us all, e.g. that such a large % of our population make only a minimum wage income in a national disgrace.

- gabriel2001@comcast.net

August 28, 2011 at 10:30pm

You must be a subscriber to post comments. Subscribe today.

So my point being, it's not the liberal consensus that drove the economy into the ground due to excessively permissive standards; it's the bankers themselves who did it. So I advise all of you who think otherwise to get a clue, read this great summery of Morgenson's book: http://www.nytimes.com/2011/05/29/books/review/book-review-reckless-endangerment-by-gretchen-morgenson-and-joshua-rosner.html?pagewanted=all and rail against our system of crony capitalism, not "liberals" (whatever that means) or the poor suckers who got sold mortgages they couldn't service.

- gabriel2001@comcast.net

August 28, 2011 at 11:43pm

You must be a subscriber to post comments. Subscribe today.

Sophia writes: "Fannie Mae and Freddie Mac are PRIVATE, to the best of my knowledge; their loans are backed by the government but the taxpayers do not actually put up the money." Your knowledge is wrong. Where do you think the ANY money the government has comes from? Taxpayers. The CBO says “Specifically, CBO treats the mortgages guaranteed each year by the two GSEs as new guarantee obligations of the federal government,” the CBO report said. “For those guarantees, CBO’s projections of budget outlays equal the estimated federal subsidies inherent in the commitments at the time they are made.” and Until recently, the obligations of Fannie Mae and Freddie Mac had no official backing from the federal government, nor were any costs associated with them reflected in the federal budget. However, because of the GSEs’ size, federal charter, and major role in the mortgage market, most observers believed that the government would not allow Fannie Mae and Freddie Mac to default on their obligations. That implicit federal guarantee, which lowered their borrowing costs and increased the price that investors paid for their guarantees, represented a federal subsidy to the GSEs A little more background from Wikii: "Originally, Fannie had an 'explicit guarantee' from the government; if it got in trouble, the government promised to bail it out. This changed in 1968. Ginnie Mae was split off from Fannie. Ginnie retained the explicit guarantee. Fannie, however, became a private corporation, with only an 'implied guarantee'. There was no written documentation, no contract, and no official promise that the government would bail it out. The industry, government officials, and investors simply assumed it to be so. This unwritten, undocumented guarantee was what enabled Fannie and Freddie to be taken off the balance sheet of the government; this made the National Debt to falsely appear lower than it actually was." And of course, since the government DID bail them out ($317B according to the CBO), it means the above paragraphs are true by definition. www.cbo.gov/ftpdocs/122xx/doc12213/06-02-GSEs_Testimony.pdf

- seattleeng

August 29, 2011 at 12:11am

You must be a subscriber to post comments. Subscribe today.

Roid writes: "But I can already tell you that you have read the the CBO docs incorrectly, if indeed you read them at al" Stay safe. Can't wait to hear your response. Keep it short and actionable. You have a tendency to leave the old points you've lost and wander into new territory

- seattleeng

August 29, 2011 at 12:13am

You must be a subscriber to post comments. Subscribe today.

Gabby writes: "So I advise all of you who think otherwise to get a clue, read this great summery of Morgenson's book:" Read the account by Robert Reich, the guy in the administration implicated by the authors of the book? Since Reich doesn't take any substantive issue with Morgenson's account, why not just read Morgenson's book. She's a Pulizter prize winning NYT author.

- seattleeng

August 29, 2011 at 12:22am

You must be a subscriber to post comments. Subscribe today.

Sophia writes: "As it is, the US is one of the most skewed countries in the modernized world, with respect to income and wealth, it's pretty bad. The lack of economic fairness, opportunity and the ability of people to Live The American Dream is actually quite appalling." Forget what our top earns. Instead worry about how our middle class compares to the middle class in Europe, for example. Do you think the middle class in Europe has it better than the middle class in the US?

- seattleeng

August 29, 2011 at 12:30am

You must be a subscriber to post comments. Subscribe today.

Yes, the middle class in Europe lead much better lives than the middle class in the US. Why forget about the top? Don't they have enough? Aren't they vastly better off, with vastly higher incomes, than their peers of 30 years ago? Take their money, fund the government, give everyone else a break. You are always taxing, seattle, because I have to spend a lot of time doing the research you don't do before you make your various claims, no doubt not based on anything you know but your standard libertarian sources. I'm getting there. I pretty well have you nailed on your income distribution claim, definitely have you nailed on your tax claim, and have work to do on your GSE claim (tougher to find sources for that). Have no fear. It will all come together.

- roidubouloi

August 29, 2011 at 1:05am

You must be a subscriber to post comments. Subscribe today.

One attempt to measure this is the Human Development Index. The US is 4th on the absolute index, but a new index adjusts for income inequality and we fall to 12th, behind a lot of European countries, but still very slightly ahead of France (no doubt due to its high unemployment rate - middle class life in Paris is a dream compared to life at much higher income levels here). http://www.tnr.com/article/politics/94273/housing-foreclosure-fannie-mae-freddie-mac#comments

- roidubouloi

August 29, 2011 at 1:14am

You must be a subscriber to post comments. Subscribe today.

oops, wrong link: http://en.wikipedia.org/wiki/Human_Development_Index#New_methodology

- roidubouloi

August 29, 2011 at 1:14am

You must be a subscriber to post comments. Subscribe today.

Not to mention that the distance on the index between us and Greece, below us, is a lot less than the distance between us and Norway, above us, meaning we are a lot closer to Greece than to Norway. How can this be in the Greatest Nation the World Has Ever Known? Income inequality.

- roidubouloi

August 29, 2011 at 1:17am

You must be a subscriber to post comments. Subscribe today.

If we could run the HDI separately on the blue states and the red, the latter governing in a manner far closer to the radical right libertarianism of seattle, the red states would likely fall out of the First World altogether and be ensconced among the developing countries. The blue states are the only thing propping them up through income transfers via the Federal government. Time to let them sink.

- roidubouloi

August 29, 2011 at 1:31am

You must be a subscriber to post comments. Subscribe today.

Here is one debunking of the right-wing reinvention of history in which it is the GSEs and the Community Reinvestment Act that were responsible for the housing bubble. A good overview of the arguments. More to come. George Will Spreads Some Lies About the Economic Crisis Sunday, 03 July 2011 08:52 http://www.cepr.net/index.php/blogs/beat-the-press/george-will-spreads-some-lies-about-the-economic-crisis

- roidubouloi

August 29, 2011 at 1:45am

You must be a subscriber to post comments. Subscribe today.

Here is more of the actual rather than invented history of the relationship between the GSEs and the subprime market: Another important enabler was Federal Reserve vice chairman Roger Ferguson, who was receptive to the banks’ desire for lower capital requirements and promoted the heretofore unheard of idea of letting them devise the risk metrics to be used in setting minimum capital requirements. Another big shift was the 2001 revision to the 1988 Basel accord that significantly reduced the capital a bank would be required to hold against privately issued (non Fannie/Freddie) private label securities and increased the importance of rating agency grades in deciding the riskiness (and therefore capital weightings) of many bank assets. This private label (non Fannie-Freddie) securitization market, also known as “subprime” had grown in the early 1990s, Johnson cultivated a relationship with Angelo Mozilo, the permatanned CEO of Countrywide, which had been primarily an originator of conventional mortgages (that is, the kind that met the underwriting standards of Fannie and Freddie). Countrywide expanded aggressively into this market after Mozilo’s conservative co-founder and risk manager David Loeb retired in 2000. Needless to say, Countrywide also became expert in cultivating friends in powerful places, particularly through its notorious “Friends of Angelo” program, which gave cut-rate mortgages to Congressmen. Even though Fannie and Freddie did not guarantee subprime mortgages, they began supporting the market in 1997 as a result of HUD chairman Andrew Cuomo’s push to have them buy subprime mortgages in their investment portfolios The first generation of subprime took off in the 1990s when Wall Street started to offer financing, called “warehouse lines”, meaning credit lines against “warehouses” of mortgages, which allowed thinly capitalized originators to punch above their weight. The book chronicles how, as predatory lending increased, efforts to beat it back were blocked by the mortgage-industrial complex incumbents, notably Standard & Poor’s and Countrywide. Later efforts to clip the GSE’s wings were opposed successfully; it took accounting scandals to put a brake on their growth and subject them to more oversight. But the subprime market developed a life of its own as subprime originators became the new darlings of Wall Street. No one seemed to remember that this market had blown up impressively in the late 1990s. Warnings from housing analysts, and the few tuned in regulators like the Ed Gramlich of the Federal Reserve were ignored by the authorities. The assumption was that since investors were buying the mortgage securities, they were doing their homework and so the nay-sayers were worrywarts. But in reality, in the toxic phase of 2005-2006, subprime bonds were increasingly being sold to collateralized debt obligations, which for the most part weren’t sold to investors, but were retained by the banks themselves because they were treated favorably under new Basel II rules. And most of the rest of the investors were seduced by flawed rating agency models. So overlevered banks uncharacteristically ate their own bad cooking and got spectacularly sick as a result. http://fdlbooksalon.com/2011/08/20/fdl-book-salon-welcomes-gretchen-morgenson/ Basically, seattle has the story backwards. How unusual. The GSEs were the followers, not the leaders in subprime, because subprime mortgages were by definition ineligible for GSE backing. They only got into subprime belatedly by buying the subprime securities in the market. Contrary to my prior understanding, the commercial banks were not just warehousing them as marketable inventory but investing in them for their yield. I am pretty sure, however, that Lehman was not investing but just holding inventory.

- roidubouloi

August 29, 2011 at 1:59am

You must be a subscriber to post comments. Subscribe today.

The commercial banks, with Federally guaranteed deposits, and the GSEs, with implicit Federal backing of liabilities, were essentially in the same posture relative to subprime securities, buying them for yield. A complete failure of regulatory oversight. The securities were, however, the creation of Wall Street, not the GSEs, and they had absolutely nothing to do with the Community Reinvestment Act, the favorite villain of the right. Wall Street and the rating agencies defrauded commercial banks, private investors, AND the GSEs. Private, unregulated finance run completely amok and stealing from everyone. Goodnight, seattle. I will finishing cooking to a crisp your income distribution and tax claims tomorrow.

- roidubouloi

August 29, 2011 at 2:05am

You must be a subscriber to post comments. Subscribe today.

You need to send something crisp. All of the above is just late night dreaming from you. Your tasks are to refute the following: 1) The top 1% of enjoyed increasing gains for as long as we've been tracking this stuff (1913 or so) 2) Never has there been a point in time where the top 1% have suffered and the middle classes have thrived. The gains of the middle class (and top 10%, 5%, etc) largely track the gains of the top 1%. Ergo, take care of the top 1%, and the rest will follow. Clinton and Reagan both showed this. 3) GSE's and the the government carried a majority of the subprime loans 4) GSE's substantially relaxed lending requirements on those that were poor credit risks and unable to pay back the loans if the slightest hiccup occured in the market A simple cite on each will suffice as long as that link has backing data. Please refrain from your usual feigned outrage that the premise is so flawed you don't even know where to start. You've seen data on each of the above already. It's your turn to show data.

- seattleeng

August 29, 2011 at 10:58am

You must be a subscriber to post comments. Subscribe today.

Back iPad. Not to worry, you are quite toasted. However, your number one is a flawed premise. If something has been changing in one direction then one can only relatenratesof change, as we do not have alternative history as data. We shall that the more income for the top, the worse the rate of growth, eliminating both an practical and moral objection to not using progressive taxation to achieve both higher growth and greater income equality. Unless one believes the absurd libertarian claim that any outcome achieved by a an unrestrained market has the blessing of god or Ayn Rand. Also you are changing your claims to eliminate the causal relationships younwere claiming before as it emerges that your causal claims are bunk. Better to retreat now, eh, and make different claims that you think might withstand scrutiny.p

- roidubouloi

August 29, 2011 at 1:37pm

You must be a subscriber to post comments. Subscribe today.

Your core claims that CRA and the lending practices of the GSEs were the cause of the mortgage crisis are wrong. Your claim that progressivity of the fed tax system was notanreduced is wrong. Higher income inequality including that of the top 1% is associated with slower growth. That income inequality has not completely eliminated growth for everyone but the wealthiest is a meaningless claim. No reason to tolerate it if it merely damages the economy without crushing it, although it did crash it in 2008.

- roidubouloi

August 29, 2011 at 1:47pm

You must be a subscriber to post comments. Subscribe today.

"One attempt to measure this is the Human Development Index. The US is 4th on the absolute index, but a new index adjusts for income inequality and we fall to 12th..." A bit weak. Sure, if the index one uses doesn't make ones political point, just change the index! There is a logical fallacy in this most subjective of indices, in that if we have a higher living standard - a higher median income - like the GINI index it is at best irrelevant, at worst pernicious. Roi, the review you reference if anything supports seattleeng's point. A nexus of the political and the politically connected, including wall street. Burton's committee attempted to rein it in, but was soundly defeated, in typical Washington bipartisan fashion. While the subprime/GSE question is a bit of chicken and egg, subprime originated in the private sector. It was in time taken up and encouraged by the GSEs, through direct investment, the majority of which occurred in the slightly higher quality Alt-A space. The deeper arbitrage in subprime, and even prime occurred largely because of faulty securitized and CDO ratings, but was encouraged by the growth and increasing leverage in both the GSE and Wall Street balance sheets. Higher rating tiers were entitled to lower capital requirements under Basel. But bubbles always burst. Reality wiped out the high ratings, causing the leverage to boomerang in the opposite direction as had been assumed/hoped, wiping out the equity of the banking system and destroying the fantasy pricing structure of housing. We are still in the midst of this mess, with the fed trying to encourage inflation to catch up with and mitigate the needed fall in housing prices in order to avoid further debt deflation.

- ds111

August 29, 2011 at 1:53pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Yes, the middle class in Europe lead much better lives than the middle class in the US." Really? In what way? Don't say "medical care." Outside of childbirth, most in this country will make it to medicare without a day in the hospital and doctor bills that can easily be covered with savings. Don't say "discretionary income", as the EU tax rates are confiscatory on the middle class. Don't say "size of house" or "number of cars" or "number of TVs" or "educational opportunities" or "social mobility". What, specifically, are you referring to? Here's an article from the NYT on the plight of the middle class. www.nytimes.com/2008/04/29/business/worldbusiness/29iht-29prices.4.12443752.html And this was from 2008. If you think it's better now, hah. You note: The US is 4th on the absolute index, but a new index adjusts for income inequality and we fall to 12th. Again, why the concern with what the rich have? So the UN report says our middle class has it better than EVERY middle class in the EU (except for oil rich Norway), and you still complain that some have more than you. Classic, Roid, just classic.

- seattleeng

August 29, 2011 at 2:02pm

You must be a subscriber to post comments. Subscribe today.

Sorry it ate the link: www.nytimes.com/2008/04/29/business/worldbusiness/29iht-29prices.4.12443752.html Note this article is from 2008. If you think things are better for the middle class in Europe today, they not. They are worse. And I think getting even worse still. donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.donteatthelink.

- seattleeng

August 29, 2011 at 2:07pm

You must be a subscriber to post comments. Subscribe today.

Seattle, before attempting to look it up myself, does CBO have a similar paper for info prior to 1979?

- ds111

August 29, 2011 at 2:10pm

You must be a subscriber to post comments. Subscribe today.

ds111, I have looked at length over the years and cannot find such a study. But if you find it, please share.

- seattleeng

August 29, 2011 at 3:33pm

You must be a subscriber to post comments. Subscribe today.

Can't fathom what point you are trying to make with that link, seattle. The middle class in the US is struggling too. I didn't invent a new index, ds111. You can critique the index if you want, but it is at least independent of you, me, and seattle and has a lot of firepower at work on it. Do you know of anything comparable that leads to a different conclusion? It makes perfect sense to consider inequality in the index as using averages without taking account of dispersion will certainly lead to strange results. By considering inequality, the secondary index takes into account how many people enjoy a certain level, not just the mean or median. In what respects, seattle? In all respects. Because you are a libertarian extremist, you think that there is nothing worse in life than taxes. But for the taxes they pay, Europeans get health care, free education through graduate school for those who qualify, and retirement income security. Public transportation is excellent. Hence, at least four of the major sources of anxiety and insecurity in life are covered socially. They need to provide for their own food, clothing, shelter, and entertainment. In France, at least, they are guaranteed four weeks of paid holiday. When those are the only things you have to pay for, you don't need nearly the same after-tax income as you do here. You think money comes from a magic fountain, and that if you don't pay a tax, you are automatically richer. But if the tax you pay relieves you of an even larger out-of-pocket expense due to progressive taxation, then you are richer for paying the tax. For reasons bizarre to me, you don't mind paying a fortune to a private health insurance carrier that will try to kill you to save a dollar but get your knickers in a twist at the thought of paying less to government for much better coverage. Have you ever lived in Europe, seattle? I would live in Paris or Amsterdam or Copenhagen or Rome over any city in the US, and it cost me a lot less to live there than here, even with the Euro at 1.40. In Manhattan I pay twice as much for a lifestyle that, frankly, sucks compared to Paris. __________________ I still have work to do to finish debunking seattle's claims. He copies them off of right-wing websites and the false claims come fast and furious. It is always a lot of work to track down the necessary information, but thus far I don't recall him getting one right. Now that I have my internet service back, I shall keep at it. On the subprime crisis, it remains the case that subprime mortgages were ineligible for GSE financing. That is their very definition. Thus, seattle's claim that the originators of the junk were doing it because they could lay off directly to the GSEs is flat out wrong. The right-wing claim that the CRA had anything at all to do with subprime is really lunatic. Wrong market, wrong channel, wrong everything. And CRA loans are trivial compared to bank balance sheets. As you say, ds111, subprime originated in the private sector. Ultimately, the GSEs were playing in that market by being buyers, not of subprime mortgages, which would have been directly contrary to their underwriting standards, but of subprime securities that were packaged by Wall Street sliced and diced and accorded investment grade ratings by the rating agencies. Private holders bought them, banks bought them, pension funds bought them, municipalities bought them, and, a little late to the game, GSEs bought them too. The GSEs are really just another form of bank and we allow banks to hold investment grade securities. That is a questionable practice to my mind as they are in effect highly margined securities when held by highly levered financial institutions. Owning securities on margin at any level is a bad idea for financial institutions, unless they are Treasuries. This is just one corner of the colossal regulatory failure that allowed fraud by private finance to undermine the banking sector and compel a bailout at taxpayer expense. But the basic narrative of seattle and the libertarian right, that this was due to uncontrolled risk taking of quasi-public banks, is wrong. Contra seattle, who claims that no one would extend credit based on such low credit scores, etc., etc. if it were private money, that is exactly what did happen. The securities were bought by private holders, by privately owned banks, pension funds, municipalities advised by rapacious Wall Street bankers, and THEN by the GSEs following suit so that they would not be at a competitive disadvantage in terms of their income. Read the Moody's comments. The mortgaged backed securities themselves are de facto one off banks and should never have been permitted without the same level of equity required of banks. It is like creating a ginat bank with no effective capital requirement. There is a reason for bank capital requirements. They are there not just to protect the particular institution, but to protect the entire system from becoming over-levered. CDOs and the like evade that systemic governor. The fact that there were credit default swaps to give these pieces of crap investment grade ratings was also an outrage. The institutions that issued these guarantees were taking on phenomenal off-balance sheet leverage and should never have been permitted to do so. The entire business of allowing financial institutions to extend their credit to derivatives is insane, no matter what the derivative. If private holders want to swap risks, they should go right ahead. But as soon as they engage financial institutions in the deal, the institution is de facto violating its leverage limits and soon the entire financial system is at risk. Incredibly to me, the supposed re-regulation of finance has done nothing to rid the system of the hidden, off-balance sheet leverage that keeps it in a state where it must inevitably fail. This is Long-Term Capital by a factor of 1,000. Was it crazy for the GSEs to buy these supposedly investment grade securities? Not at all given the regulatory structure. It was the regulatory structure that was at fault however. The notion that GSEs should be able indirectly to buy, as a packaged security, mortgages that could not meet their own underwriting standards is preposterous on its face. But, although it was not necessary systemically, it was not by itself corrupt. Stupid yes. What was corrupt was the private sector creating fraudulent securities to sell to private holders, banks, GSEs, pension funds, municipalities,anyone they could con into it. The GSEs didn't do that, nor were they the reason the private sector did. They were, however, prominent among the latter buyers of the phony paper. But we could no more have let the GSEs fold than AIG, even if the GSEs did not have implicit government backing. That misses the point. We could not have allowed giant swathes of the financial system to fail without plunging ourselves into a depression. That's the very reason it has to be tightly regulated. It is an interconnected system and, whatever may be said of any single institution, the system as a whole is too big to fail. On the other hand, I cannot see why the shareholders of these institutions were not wiped out. When we were bailing out banks, I wrote here ad nauseum that it was not at all necessary to save the shareholders, and bond capital holders, to save the institutions. As occurred with GM, they could have been wiped out while the institutions themselves were recapitalized. It is also a wonder to me that there is not a trustee, as in the Madoff case, looking to recover the proceeds of the massive fraud. Many Madoff investors who made paper profits that they have had to disgorge were not culpable. Wall Street was culpable. Yet there are hundreds of Wall Street bankers walking around with tens of millions of dollars in their pockets that are all the proceeds of fraud. Stolen money. And no one is lifting a finger to force them to disgorge that stolen wealth. As far as I am concerned, every principal of Goldman Sachs ought to be bankrupted with the money going back to the Treasury to fill the holes left by the bailout.

- roidubouloi

August 29, 2011 at 10:18pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "The middle class in the US is struggling too." Yes, but by most all measures it's harder in EU right now. Roid writes: "Thus, seattle's claim that the originators of the junk were doing it because they could lay off directly to the GSEs is flat out wrong." Sound good, EXCEPT you do know that Fannie was the BIGGEST buyer of Countrywide mortgages, exceeding 30% in most years. See first graf of the WSJ link. And of course, I provided the previous WSJ link that established GSE or gov agency bought 60% of all subprime loans. Roid, it takes just a sentence to refute a claim. Your manifesto, absent a single cite or quote doesn't cut it. I've provided links verifying each. You've cited nothing. Just bluster. The following still stand. Untouched: 1) The top 1% of enjoyed increasing gains for as long as we've been tracking this stuff (1913 or so) 2) Never has there been a point in time where the top 1% have suffered and the middle classes have thrived. The gains of the middle class (and top 10%, 5%, etc) largely track the gains of the top 1%. Ergo, take care of the top 1%, and the rest will follow. Clinton and Reagan both showed this. 3) GSE's and the the government carried a majority of the subprime loans 4) GSE's substantially relaxed lending requirements on those that were poor credit risks and unable to pay back the loans if the slightest hiccup occured in the market PS. These aren't right wing talking points. Most of this is brought to the surface in books such as the one by NYT's Morgenson. online.wsj.com/article/SB121279970984353933.html?loc=interstitialskip donteatthelinkdonteatthelinkdonteatthelinkdonteatthelinkdonteatthelink

- seattleeng

August 30, 2011 at 12:59am

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Have you ever lived in Europe, seattle? I would live in Paris or Amsterdam or Copenhagen or Rome over any city in the US, and it cost me a lot less to live there than here, even with the Euro at 1.40. In Manhattan I pay twice as much for a lifestyle that, frankly, sucks compared to Paris." I've spent weeks upon weeks in Europe for business. I've been as far north as Tampere, and as far south as Nice. As far West as Birmingham, and as far East as Berlin. Parts are indeed very good. But parts of the US are also very good. In 2004, about 2600 people left the US to go to immigrate to France. In 2004, about 3600 people left France to immigrate to the US. The US has a population roughly 5X larger than France. If the US were just 62M people, then the number of people leaving the US to go to France would be just 520. Maybe there is something up with France's immigration laws, but on the surface at least it seems that people in France want to be here much more than people in the US want to be in France. http://www.migrationinformation.org/datahub/countrydata/data.cfm donteatthelinkdonteatthelinkdonteatthelinkdonteatthelinkdonteatthelinkdonteatthelink

- seattleeng

August 30, 2011 at 1:47am

You must be a subscriber to post comments. Subscribe today.

Bluster? Really? So far your record on all of the lies you purvey has been zero. Not once to date have you turned out to be correct once the homework is done. Do you think today will turn out to be the day your finally score? I am getting to you seattle, its just that it takes a lot more work to refute a lie than to tell one. But get this part straight: The GSEs cannot directly acquire a mortgage that does not meet their underwriting standards. The mortgages that meet their standards are called "conventional mortgages." The mortgages that don't are called "subprime" or "jumbo." GSEs could directly finance "Alt-A" mortgages considered between prime and sub-prime. I am working on sorting out the structure of the GSE portfolios so that we can separate the truth from the right-wing lies. Just time consuming. ________________ This morning, I had to work on completing my tax accounting. I noted that my office manager, who makes a gross of $122,500 a year, had total Federal taxes of 28.2%. But that doesn't include the employer portion of the payroll taxes, that the CBO properly considers a tax paid by the employee. By the CBO method, her Federal taxes were 33.3%, not including her piece of Federal excise taxes. The CBO reports that the all in Federal tax rate for the top 1% of earners was 31.2%. As Warren Buffett notes, his secretary pays a higher tax rate than he does. This is what seattle considers progressive taxation. The highest earners don't even pay the highest taxes. We will get to that too. Her total tax rate was 38.5% including state withholding. And we haven't even begun to account for real estate taxes, sales taxes, communications taxes. I'll bet she pays a total tax rate of 50%. Do you think the billionaires are paying 50% of even their stated taxable income in taxes, let alone their economic income that is typically more?

- roidubouloi

August 30, 2011 at 1:54pm

You must be a subscriber to post comments. Subscribe today.

"Never has there been a point in time where the top 1% have suffered and the middle classes have thrived." Since you are trying desperately to appear empirical, seattle, would you like to point out the periods when the top 1% have suffered so that we can consider how everyone else did? Oh, wait. There has never been a time when the top 1% have suffered. But your claim is that the success of the top 1% is what drives wealth for the middle class. Yet we can find lots of periods when the top 1% has done well (meaning all the time) when the middle class does not. What does this mean, seattle? Are you blustering or just very, very confused about the nature of cause and effect and empirical evidence? More to come.

- roidubouloi

August 30, 2011 at 1:58pm

You must be a subscriber to post comments. Subscribe today.

Your office manager may need an/another accountant seem, as it seems very high. That income range (81-90% in 2005) paid a federal effective rate (all in) of 20%, consistent with the previous 25 years.

- ds111

August 30, 2011 at 5:14pm

You must be a subscriber to post comments. Subscribe today.

Roid writes: "I am getting to you seattle, its just that it takes a lot more work to refute a lie than to tell one.... The GSEs cannot directly acquire a mortgage that does not meet their underwriting standards. The mortgages that meet their standards are called "conventional mortgages." And how on earth does this refute what I said? I said: "4) GSE's substantially relaxed lending requirements on those that were poor credit risks and unable to pay back the loans if the slightest hiccup occured in the market" And wiki says "Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in the start of a sharp deterioration in mortgage underwriting standards.[33] The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders." See that? The GSE LOWERED THEIR UNDERWRITING STANDARDS to reclaim lost market share. By the way, the time to type this was about 3 minutes. If you will refute the assertions, instead of dancing around the periphery with a bunch of mumbo jumbo, you won't waste so much of our time. Why not just admit the statements I've assembled are true? If you can't find any data to nullify them, it's no big deal. We just accept them as truths and move on...

- seattleeng

August 31, 2011 at 1:17am

You must be a subscriber to post comments. Subscribe today.

Roid writes: " Do you think the billionaires are paying 50% of even their stated taxable income in taxes, let alone their economic income that is typically more?" Buffet doesn't earn income. He earns cap gains. They are treated differently by every country in the world. Cap gains have already been taxed at a 35% corp income tax rate. And besides, when he dies, Buffet will face a final 45% tax. So, let's add this up: Buffett earns a $1.35 gross in income from mowing a lawn. He keeps $1. He invest it in a company that earn $1 in gross, and $0.20 net. They pay 35% tax on that $0.20. They give the $0.13 remaining to Buffet. He pay 15% on that $0.13, leaving him with $0.11. And then the dies, paying 45% on that $0.11 AND the $1. When all is said and done, he earns $1.35, and leaves the earth with $0.61 in his estate. Think about that: He started with $1.35, and left this world with $0.61. He's paying plenty. And paying far more than the secretary. She earns $1.35 for mowing a lawn, and will leave in her estate $1.10.

- seattleeng

August 31, 2011 at 1:25am

You must be a subscriber to post comments. Subscribe today.

Roid writes: "Since you are trying desperately to appear empirical, seattle, would you like to point out the periods when the top 1% have suffered so that we can consider how everyone else did?" The top 1% are suffering right now, as much as they can suffer. In 2007, there were 390K returns for $1M and above. In 2009, there were 237K returns for $1M and above. That's a lot less millionaires. 40% fewer. And yes, they are losing houses. Do I feel sorry for them? Not too much. But then again, our middle class are among the richest 5% in the history of the entire world, so its hard to feel sorry for them too. There are people in this world that will be eaten by a tiger tonight, and others will die of thirst tomorrow. Let's put things in perspective. But next time you think how good it'll feel to screw over the millionaires, just remember it'll hurt the rest of us a lot more. Keep them happy, as Clinton did, and everyone else will be happy. Just watch the data. When we see there are 40% more millionaires, incredibly the middle class will be happy too. It just works that way. www.lewrockwell.com/blog/lewrw/archives/93301.html donteatthelink

- seattleeng

August 31, 2011 at 1:33am

You must be a subscriber to post comments. Subscribe today.

SHARE HIGHLIGHT

0 CHARACTERS SELECTED

TWEET THIS

POST TO TUMBLR

SHARE ON FACEBOOK

Close