(08-27-2016 10:16 PM)Machiavelli Wrote: So your little kiddo wants to know about the 2008 recession. Her's a bed time story to help the little Tiger out.
So it goes a little something like this:
You lend a quarter to Annie today and she says she'll give you two quarters tomorrow when she gets her allowance. (But you know she always gets in trouble and never gets her allowance). You then tell Bob if he gives you a quarter and a dime, you'll tell Annie she needs to pay him the two quarters instead of you. Bob is a little worried because he knows Annie almost never gets her allowance, but an older kid named Moody tells him it's a good bet because Moody thinks Annie is going to get her allowance. Moody is supposed to be very trustworthy, honest and smart, so Bob agrees. However, Moody is being paid by you to tell people whether or not Annie will get her allowance. If he tells everyone that Annie probably won't get her allowance and be able to pay back the two quarters, you're going to stop paying him. And maybe Moody isn't as honest and smart as people think he is. Now you go talk to Charlie and bet him a quarter that Annie's not going to pay Bob. Charlie's a little more wary than Bob and he isn't sure that Annie is going to pay. He says he'll only agree to the bet if you pay him five dollars in the event that Annie pays. You say sure. Annie gets in trouble and she gets no allowance. Bob doesn't get any money from her. Charlie pays you a quarter because he was wrong. Everyone get mad at Moody and he says "oops". You, with your two quarters and a dime, go buy some ice cream and laugh about how smart you are for turning one quarter into two quarters and a dime. You are Goldman Sachs.
Here's the question that this glosses over. Why do you loan the quarter toAnnie when you know she won't repay you? Because you have a bunch of regulators telling you that you have to make so many loans to people like Annie, whether they will repay or not, or else they'll report you as racists for violating something called the Community Reinvestment Act (CRA). Now, that's not what CRA actually says--it says you don't have to loan to Annie, you only have to loan to people who are like Annie but who behave and get their allowances and will repay. But the regulators did't care about what the law said. They had the power to write regulations, and enforce them, so they wrote the regulations to say that unless you made X loans per year to Annies, whether they could pay or not, you were in violation of the law.
So you make the loan to Annie, and along come a second set of regulators who say, "Oh, no, bad boy, you should never have made this loan, your underwriting procedures are unsatisfactory." So you sell this loan to somebody else. Problem is, if that somebody is also subject to the same regulators, they don't want it either, because the regulators are going to say the same thing to them. So who is not regulated by those same regulators? Why, Wall Street, of course. And Wall Street is full of people who 1) need money to make payments on their Maseratis, and 2) are very adept at cooking up schemes to make lots of money. So they cook up all the schemes you outline, and more, to cover up your loan to Annie. Two problems were that 1) they cooked up those schemes assuming that Annie gets her allowance and pays you back half the time, and when Annie only gets her allowance one quarter of the time, there isn't enough cash to cover the losses, and the way the deals are interwoven drags a lot of people into the mess, and 2) the regulators go back to the banks who didn't get dragged in and say that because of something called mark-to-market, the fact that your buddy got dragged in means that you have to pretend that you got dragged in too, and report a paper loss that means you can no longer keep making loans. That's how the effect spread to everybody, including anybody who wanted to borrow money for any purpose. The solution was simple: 1) guarantee all loans made pursuant to CRA, so that banks could make the loans without having to pass the risk along, 2) require banks to get pre-approval for all loans made pursuant to CRA, and to apply normal underwriting standards to loans that don't get approved for CRA, and 3) at least temporarily until the crisis passes, eliminate the mark-to-market requirement so that the banks who did not screw up are not affected. There was a proposal to do basically that, instead of the massive bank bailout. At least in my part of the country, that's how the TEA Party got started, as a bi-partisan, multi-racial rainbow coalition opposed to bailing out Wall Street's Maseratis. Maybe even have a federal agency called something like Freddie or Fannie that approves the CRA loans and agrees to buy all approved loans from the banks. That gives Fannie and Freddie something to do besides manipulate the secondary market, and places the risk where it belongs--on the government, whose regulators caused the bad loans to be made in the first place.
OK, OK, I know, the left doesn't like it explained this way. They want it all about greedy Wall Street. But if you want to blame it all on greedy Wall Street, and none on bad regulation, explain this. Why do you make the loan to Annie, knowing she isn't going to pay you back? Unless, of course, somebody is making you do it.
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Children's night time story on the 2008 collapse.
