"Compromise, if you must, on the policy—but never on the truth."
- Paul Krugman, "How to End This Depression", The New York Review of Books,
Showing posts with label Great Recession. Show all posts
Showing posts with label Great Recession. Show all posts
Thursday, May 10, 2012
Saturday, February 18, 2012
I predicted the Great Recession?
In the usage reports I receive I've noticed that a blog entry has no title. I'm going back through the list of blogs and haven't found it after 2008-01-08. But on the way, I've found many interesting things that I wrote, some right on, some whimsical, some whatever. But one that really struck me as too right on was "Free market is a construct, not reality".
Probably many other commentators made similar predictions, but I was amazed that I was so right about mortgage default spinning out of control. Remember that this was well before the 2008 elections.
Probably many other commentators made similar predictions, but I was amazed that I was so right about mortgage default spinning out of control. Remember that this was well before the 2008 elections.
Tuesday, January 18, 2011
Ideology, compromise, and the big picture
Today was another publication day for me. My letter to the editor of the Star Tribune was published as "Political Discourse: You want compromise? Are you sure about that?"
Ross Douthat also wrote a blog about politicians jockeying for position rather than trying to solve problems: "The Roots of Overheated Rhetoric".
He does take a good look at bigger issues than just who believes what on some "little" issue. However, I take issue with one of his statements: "a protective government ready to save us from our foolishness when the economy goes bad".
Who is this "we" in "our foolishness"? Granted, many of "us" overextended ourselves with inducements from many sellers of this and that; a little reflection could have kept our credit card bills small. On the other hand, credit was extended by "trusted advisors" who few had any reason not to trust. When the mortgage officer at "Neighborhood Bank and Trust" tells us we can afford the mortgage, few of us have the expertise to ask the right questions. And when "Oversize Bank and Trust" of Wall Street tells Neighborhood Bank and Trust that it will buy Neighborhood's mortgages, Neighborhood feels it can and should sell as many mortgages as it possible. The whole problem was out of "our" hands.
Well, maybe not completely. Enough of us believed the rhetoric about "getting the government out of the way", not realizing less government oversight meant less corporate oversight of the long-term effects of its short-term thinking.
Ross Douthat also wrote a blog about politicians jockeying for position rather than trying to solve problems: "The Roots of Overheated Rhetoric".
He does take a good look at bigger issues than just who believes what on some "little" issue. However, I take issue with one of his statements: "a protective government ready to save us from our foolishness when the economy goes bad".
Who is this "we" in "our foolishness"? Granted, many of "us" overextended ourselves with inducements from many sellers of this and that; a little reflection could have kept our credit card bills small. On the other hand, credit was extended by "trusted advisors" who few had any reason not to trust. When the mortgage officer at "Neighborhood Bank and Trust" tells us we can afford the mortgage, few of us have the expertise to ask the right questions. And when "Oversize Bank and Trust" of Wall Street tells Neighborhood Bank and Trust that it will buy Neighborhood's mortgages, Neighborhood feels it can and should sell as many mortgages as it possible. The whole problem was out of "our" hands.
Well, maybe not completely. Enough of us believed the rhetoric about "getting the government out of the way", not realizing less government oversight meant less corporate oversight of the long-term effects of its short-term thinking.
Tuesday, September 29, 2009
The problem with "financial products"
Back in the mid 1960s, a member of our church invited us to breakfast with one of his business associates. His sole purpose was to sell us a "financial product" that they were selling. Just the name "product" raised red flags for me. A product is something you can touch.
Maybe the term "financial product" was created to give substance to services or financial documents that could be bought and sold.
Now it appears my caution of over forty years ago has shown itself to be extremely prudent. "Financial products" became more and more complicated, cut apart, resold in other arrangements, becoming more and more removed from the reality of the agreements that created them in the first place.
Bob's Bank knew Harry Homeowner and could vouch for him. Bob knew better than to lend money to Dan Deadbeat. However, Fred Fast didn't care about Dan's credit because he could sell the loan to Super Bank who would sell it to Mega Bank who would sell it to … None of these knew anything about Dan Deadbeat or that he had already missed four payments. They only had the word of the person or institution further down the sales chain.
And like the tulip bulbs with grossly inflated prices finally had no buyers, these "financial products" with grossly minimized risk suddenly had no buyers. Those who had sold their tulip bulbs and bought no more probably had their proceeds in golden guilders. I wonder where those who sold their "financial products" and bought no more have their proceeds.
I was going to write that at least one could touch the tulip bulbs, but I wouldn't be surprised that the only thing bought and sold was promise of delivery of certain kinds of tulip bulbs.
So, if someone offers to sell you a "financial product", thank them for the breakfast and go your own way.
Maybe the term "financial product" was created to give substance to services or financial documents that could be bought and sold.
Now it appears my caution of over forty years ago has shown itself to be extremely prudent. "Financial products" became more and more complicated, cut apart, resold in other arrangements, becoming more and more removed from the reality of the agreements that created them in the first place.
Bob's Bank knew Harry Homeowner and could vouch for him. Bob knew better than to lend money to Dan Deadbeat. However, Fred Fast didn't care about Dan's credit because he could sell the loan to Super Bank who would sell it to Mega Bank who would sell it to … None of these knew anything about Dan Deadbeat or that he had already missed four payments. They only had the word of the person or institution further down the sales chain.
And like the tulip bulbs with grossly inflated prices finally had no buyers, these "financial products" with grossly minimized risk suddenly had no buyers. Those who had sold their tulip bulbs and bought no more probably had their proceeds in golden guilders. I wonder where those who sold their "financial products" and bought no more have their proceeds.
I was going to write that at least one could touch the tulip bulbs, but I wouldn't be surprised that the only thing bought and sold was promise of delivery of certain kinds of tulip bulbs.
So, if someone offers to sell you a "financial product", thank them for the breakfast and go your own way.
Tuesday, January 08, 2008
Free market is a construct, not reality
Some write that there should be no bail-out of borrowers who are defaulting on their loans. These commentators write that the borrowers willingly entered into a contract and should accept the consequences of their inability to pay. These commentators also say the lenders shouldn't get any help as the lenders also willingly entered into a contract.
Like "there ain't no such thing as a free lunch" there ain't no such thing as a free market. Those who preach about a free market also forget about the detail of externalities. Few transactions are between a willing buyer and a willing seller with no effect on anybody else. If a dealer sells a car to a buyer who knows the brakes are bad, it may be a third party who suffers damage to life, limb, or property when that car doesn't stop. If a factory belching smoke sells its products far away, it is the people who live nearby who suffer the effects of pollution.
Similarly, a large number of defaults can affect more people than the borrowers and the lenders. More conservative lenders are going to take even more care choosing their borrowers. This in turn will drive up interest rates for more solid borrowers. There are already stories about the "credit crunch".
Defaults of home mortgages are going to put more houses on the market. A larger supply of houses is going to depress prices for those who would like to willingly sell their houses. The depressed prices may be good for potential buyers, but the increased mortgage rates and decreased availability of money to lend could offset the low price benefit. This could lead to fewer buyers which would lead to even lower prices.
Low demand for houses also affects realtors and builders. The lower earnings for these two groups could also lead to less spending by them in other areas, like autos and appliances and many other goods and services.
Fewer purchases by more people leads to a slower economy. Couple this with rising fuel costs, is it any wonder the stock market is in turmoil?
Like "there ain't no such thing as a free lunch" there ain't no such thing as a free market. Those who preach about a free market also forget about the detail of externalities. Few transactions are between a willing buyer and a willing seller with no effect on anybody else. If a dealer sells a car to a buyer who knows the brakes are bad, it may be a third party who suffers damage to life, limb, or property when that car doesn't stop. If a factory belching smoke sells its products far away, it is the people who live nearby who suffer the effects of pollution.
Similarly, a large number of defaults can affect more people than the borrowers and the lenders. More conservative lenders are going to take even more care choosing their borrowers. This in turn will drive up interest rates for more solid borrowers. There are already stories about the "credit crunch".
Defaults of home mortgages are going to put more houses on the market. A larger supply of houses is going to depress prices for those who would like to willingly sell their houses. The depressed prices may be good for potential buyers, but the increased mortgage rates and decreased availability of money to lend could offset the low price benefit. This could lead to fewer buyers which would lead to even lower prices.
Low demand for houses also affects realtors and builders. The lower earnings for these two groups could also lead to less spending by them in other areas, like autos and appliances and many other goods and services.
Fewer purchases by more people leads to a slower economy. Couple this with rising fuel costs, is it any wonder the stock market is in turmoil?
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