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Spengler has a look at the US financial crisis.
Lehman Brothers survived the American Civil War, two world wars and the Great Depression, but today, Monday, the firm that set the standard in fixed income markets will be liquidated. Potential losses are so toxic that none of the major financial institutions was willing to acquire it.
Lehman’s demise follows the failure last week of the two American mortgage guarantee agencies, Fannie Mae and Freddie Mac. It is remarkable that the US authorities, exhausted from their efforts to bail out the mortgage guarantors and other firms, have left Lehman to its fate.
An enormous hoax has been perpetrated on global financial markets during the past 10 years. An American economy based on opening containers from China and selling the contents at Wal-Mart, or trading houses back and forth, provides scant profitability. Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage.
The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability. …
Editors at IBD discuss the background to the credit meltdown.
Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the “trickle-down” economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend.
But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions. …
A month and a half ago, Village Voice published a long piece on the origins of the problems at Fannie and Freddie. That’s right, Village Voice. And they most of their finger pointing was in the direction of Andrew Cuomo. Of course, that would confirm Pickerhead’s world view that almost all problems in our society are caused by big government liberal Dems and their crazy schemes. It seems to be a good time to include this in Pickings.
There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.
Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded “kickbacks” to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York’s attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie.
It all starts, as the headlines of recent weeks do, with these two giant banks. But in the hubbub about their bailout, few have noticed that the only federal agency with the power to regulate what Cuomo has called “the gods of Washington” was HUD. Congress granted that power in 1992, so there were only four pre-crisis secretaries at the notoriously political agency that had the ability to rein in Fannie and Freddie: ex–Texas mayor Henry Cisneros and Bush confidante Alfonso Jackson, who were driven from office by criminal investigations; Mel Martinez, who left to chase a U.S. Senate seat in Florida; and Cuomo, who used the agency as a launching pad for his disastrous 2002 gubernatorial candidacy.
With that many pols at the helm, it’s no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors. …
Division of Labour posts on the media’s economic analysis.
On campus this afternoon I overheard the following remark by a non-economist, trying to explain to another non-economist the Lehman failure and today’s stock market decline: “It’s a combination of deregulation and greed. Boy, if you deregulate enough, the greed will follow.”
If I had butted in, I would have made two points. (1) If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. (2) What deregulation have we had in the last decade? Please tell me. On the contrary, …
David Harsanyi plays “whose a liar.”
There are many brands of truth. Some are poetic truths, others are political truths and some are staggering exaggerations — or what politicians frequently refer to as “talking.”
These days, there is an outbreak of artificial indignation over the “lies” of Republicans. John McCain, claims Barack Obama’s national press secretary Bill Burton, has run the “sleaziest and least honorable campaign in modern presidential campaign history.”
Ouch. We can attribute one of the following to this claim: 1) Burton has just landed on the planet Earth; 2) Burton is attempting to manipulate the media; 3) Burton is “lying.”
I pick 2. After all, we’ve all heard the self-serving myth that pits helpless, meek, high-minded, issue-oriented Democrats against mendacious and mean Republicans, who not only detest America — especially children and small vulnerable creatures — but will lie and cheat to keep all oppressed.
The facts betray a more equitable story. …