nzmorange
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RE: Every post election 90 day market shift since 1908
(03-05-2017 05:07 PM)Owl 69/70/75 Wrote: (03-05-2017 11:10 AM)nzmorange Wrote: (03-04-2017 09:41 PM)Owl 69/70/75 Wrote: (03-04-2017 03:07 PM)nzmorange Wrote: No. That's not true, either. Bubbles pop. By the time the Democrats got control of 1/3rd of the federal government and a minority of state governments, the bubble was already there. It's popping was inevitable, and popping it sooner was better than later. But even then, it was a Republican fed chair that correctly popped it by raiding rates on June 29th, 2006 (the June '06 - Oct. '07 delay was how long it took for the markets to adjust). And IMHO, the two biggest drivers of the bubble (other than the obvious reckless borrowing practices of millions of Americans) were: 1) a lack of regulations, and relatedly, 2) a lack of fear from a select group of bankers who essentially committed fraud.
But to be very clear, I don't mean to paint the DNC as blameless. They weren't. I also don't mean to paint the GOP as all bad. They weren't. Like most things in life, every significantly large group did some good and some bad. Your assertion that it was all the Democrat's fault and/or Pelosi's and/or somehow sparked solely by them is terribly misguided.
What regulation would have made a difference, and how?
For starters, the first Bear hedge to go under specialized in illiquid assets. As such, many of the assets weren't traded regularity, so 2 independent parties had to value the assets on the books. It's my understanding that one of the parties, Goldman, put on shorts and suddenly and dramatically slashed the fund's values. In doing so, sparked a liquidity crunch that killed the fund. But Goldman made an incredible amount of money, even if that fund's failure began the Great Recession (to clarify, it began it - not caused it)
But the more classic example would be the symbiotic relationship between financial institutions and ratings agencies.
The common issue in both examples would be that it's a really bad idea to let the "neutral" 3rd party giving valuations make money off of their decisions.
But honestly, there are countless regulations that could have helped.
Those range from financial risk limitations that are too complex to explain on this board, to some simple measures like strengthening fiduciary duties and restructuring current laws to make jail time *more* of a possibility (but the part of the problem there is w/ the structure and mentality of the DoJ).
But nothing you mention would have prevented the crash. It would have been a different crash qualitatively, but once the bad loans were into the banking system, the crash was inevitable. And nothing you propose would have prevented the bad loans.
As you note, you are talking about things that brought the crisis to light, not that caused it. Something was going to happen to bring it to light, that was inevitable because it was going to come to light at some point, somehow, some way. Once the bad mortgages were in the system, there was no way to prevent some kind of crash, and it was going to be bad. All the stuff you are talking about were ways that the financial industry tried to hedge the way out of the crash, but those efforts failed because the mortgages performed worse than even the worst expectations going in. What the financial speculation did was to alter when and where and what kind of crash we had. Without it, the crash would have hit the Main Street banks more than the investment banks, we would still have had the foreclosures and the resulting loss in homeowner equity value and bank lending capacity, the financial system would have locked up due to causes from a different direction, and we would have had pretty much the same results, just with a different list of names going insolvent.
I hold the Bush administration accountable in two major ways:
1) Democrats have pretty much always pushed for lower underwriting standards, but republicans have generally refused to go along. What appeared to happen (and this is a guess, but a well educated one) is that after 9/11, republicans were terrified that a crash was imminent, they saw a way out through a housing bubble, so they went along with writing mortgaged to previously non-qualified applicants in order to stimulate the home construction industry.
2) Bush (and Cheney and Rumsfeld) wasted so much political capital on the damn wars that they couldn't really address these issues. They needed the democrats to hold ranks to at least some extent on the wars, so they let the likes of Dodd and Frank and Raines and Gorelick go unchecked. I think they knew better, I certainly hope they knew better, it would be really discouraging if they were too stupid to know, but they didn't act, and for that I hold them accountable.
Your analysis has a flaw. The loans were based on market mechanisms that created liquidity. Those market mechanisms broke because a void in regulations allowed a system based on fraud and corruption to flourish.
A framework where risks could have reasonably been fully understood and evaluated by those taking them could have prevented the crash - or at the least, it would have mitigated it into being normal market volitility, rather than the biggest correction since the Great Depression.
The regulations that I called for would have absolutely better illuminated risks. I think we disagree because you're starting your analysis at a later date than me. Yes, by 2006 a crash was inevitable. The best thing that could have happened would have been an interest rate hike to pop the bubble, which is what happened. The trick would have been to design a system to not let it get to that point.
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Every post election 90 day market shift since 1908
