Looking for a fall guy for the housing crisis? Businessweek looks into the idea of “Federal preemption” as a yet another candidate.

BW defines Preemption as a “legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail—even if it means little or no regulation.”

This is why numerous state attempts to reign in bad loans, only to have federal authorities undercut them, occurred over the past decade.

There were numerous examples, from both red & blue states, including North Carolina, Iowa, Michigan, Georgia, Ohio.

“More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation’s top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism.

Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of “predatory” lending. They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. “People out there are struggling with oppressive loans,” Cooper recalls saying.

Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn’t budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC “took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West,” Cooper says.

This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the heart of the current financial crisis. Federal officials brushed aside their concerns. The OCC and its sister agency, the Office of Thrift Supervision (OTS), instead sided with lenders. The beneficiaries ranged from now-defunct subprime factories, such as First Franklin Financial, to a savings and loan owned by Lehman Brothers, the collapsed investment bank.”

Go figure. Yet another faulty idealogy underlying it all. I still cannot figure out why centrist pragmatism isn’t the dominant thought process in government . . .

>

Source:
They Warned Us About the Mortgage Crisis
Robert Berner and Brian Grow
BusinessWeek, October 9, 2008, 5:00PM
http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm

See Also:
Politicians, lobbyists shielded financiers; Lack of liability laws fueled firms’ avarice
ERIC NALDER
Seattle Post-Intelligencer, October 10, 2008
http://seattlepi.nwsource.com/business/382707_mortgagecrisis09.html

Mortgage system crumbled while regulators jousted
ERIC NALDER
Seattle Post-Intelligencer, October 10, 2008
http://seattlepi.nwsource.com/business/382860_mortgagecrisis11.html

Category: Credit, Real Estate, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

55 Responses to “More Ignored Warnings About Bad Mortgages (circa 2003)”

  1. Prior to commenting, please read the entire BusinessWeek piece.

    Kindly stay on topic. Source your comments with URLs. Stay relevant. Be intelligent.

    Silly, wingnut, and talking points (both left and right) will be deleted and their poster banned.

    Thank you for keeping this forum intelligent and value added.

  2. Tom Brander says:

    What I don’t get, is why you and others are not shouting out about the CDS, Credit Default Swaps, scandal Lehman’s CDS inventory sold at .08 on the dollar and there are 15.5+ Trillion of this toxic waste in the system as compared with only about $500 billion of bad mortgage paper, most of which would yield better than .08 on the dollar….and it was CDS that brought AIG down not mortgage paper.

    ~~~

    BR: Tom, I have been “screaming” about the ratings agencies for 2 years:

    See this:
    The Ongoing Impact of the Housing Sector
    Investor Insight, Aug 27 2007, 11:50 AM
    http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/08/27/the-ongoing-impact-of-the-housing-sector.aspx

  3. Don says:

    Another legacy of the Clinton Administration! Ha!

    Really, between Rubin, Greenspan and Gramm, and their minions and flunkies (Clinton and Bush), this was inevitable. I’m just surprised that the bubble lasted as long as it did, and that prices inflated to such an extent.

  4. larster says:

    If you cracked down on predatory lending, you might have to look into other credit issues, like easy money to corporate execs. Two denizens (possibly former denizens now) of the Forbes 500 were devestated by margin calls this week; namnely Aubrey Mcclendon of Cheasepeake Energy and Marvin Herb of coca-Cola enterprises. Herb lost 18.6 million shares to J P MOrgan, but he at least sold his company to CCE to get the shares. He certainly had enough money that one would wonder how he let himself get into this pickle. McClendon on the other hand was always ballyhooing his “insider purchase”. It turns out he lost his entire stake in the company $1.86 billion due to the margin call. I’ve worked w/Herb and McClendon was a funder of the Swift Boat attacks. Maybe this is a strong signal to the world that there is a God.

  5. I still cannot figure out why centrist pragmatism isn’t the dominant thought process in government . . .–BR

    BR, as you know, when your conclusions are, seemingly, at odds with *Reality, one has to go upstream and check their premises.
    http://plato.stanford.edu/entries/aristotle-logic/

    past that, instead of all this ‘looking-back’, I think it may be more helpful to try to bring into focus the coming Socio-Political events and their portents…
    (e.g. “The IMF is a secretive institution with no accountability

    The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy. Members of affected communities do not participate in designing loan packages. The IMF works with a select group of central bankers and finance ministers to make polices without input from other government agencies such as health, education and environment departments. The institution has resisted calls for public scrutiny and independent evaluation.”
    http://www.globalexchange.org/campaigns/wbimf/TopTenIMF.html

    In an October 10 speech at the Peterson Institute for International Economics (PIIE), he proposed a four-point action plan to help stem the downward spiral in world markets and begin to rebuild confidence. The plan would include a temporary government guarantee of liabilities, government action to take out troubled assets and force the recognition of losses, government provision of capital to the financial system, and a high degree of international cooperation.

    He was speaking at a conference titled “The Euro at 10: the Next Global Currency.” But while there was some talk of the euro’s role, speakers and the audience were more preoccupied with the financial crisis raging in all corners of the world, not least Europe.

    In his remarks, Strauss-Kahn said that “world leaders have some hard decisions to make, and must start making them soon.” He said he hoped the G-7 meeting of advanced-economy finance ministers later on October 10 and the October 11 meeting of the IMF’s steering committee, the International Financial and Monetary Committee, would “result in a shared approach to address the crisis of confidence.” …
    http://www.imf.org/external/pubs/ft/survey/so/2008/NEW101008A.htm

  6. AndrewBW says:

    Over the last five years or so, the city of Cleveland and others have made numerous attempts to somehow rein in payday lenders, but each time they did so the Republicans in the state legislature and the courts have shot them down. In addition the Cuyagoa County Auditor Jim Rokakis has repeatedly argued that there were problems in the housing markets and has repeatedly been ignored. The argument that nobody could have foreseen this is a straight-up fraud. Many people foresaw this.

  7. Moore says:

    Most of these comments are right on, especially about CDSs and other derivatives being the real and almost complete cause of the problem, not bad mortgages.

    I’d only add that government is business and business is government. Don’t obfuscate the matter. Whenever someone refers to politicians or the government doing this or that, what I read is that retainers of business have done this or that. Put another way, politicians have been implementing the wishes of big business. . . well, not even big business so much, which implies productive activity, but big finance (aka “The International Bankers”). Just look at who Obama’s largest financer is (Goldman Sachs), not to mention McCain’s. Point being, no one’s representing the average Joe and/or implementing reasonable, objective regulations. The question is, though, has anyone ever done that ? Maybe the libertarians are on to something.

  8. shameandscandal says:

    Thanks very much for the information. Check out the wikipedia biography of Hawke, in particular the last paragraphs —

    “During his term as Comptroller, Hawke has stressed the importance of the safety and soundness of national banks through such supervisory initiatives as Project Canary (an “early warning” system) and the “Supervision in the Future,” which makes extensive use of technology….

    “Also innovative was the (Comptroller’s) Office’s use, in 2003, of the 1863 National Bank Act to prevent the attorneys general of all 50 states from investigating and prosecuting predatory lending practices by banks and mortgage companies. Even in the face of a federal lawsuit filed by all 50 Attorneys General, the Office claimed the right to prevent the enforcement of any banking law in any state as applied to any national bank. This may have allowed the later financial collapse of the world’s economies to occur.”

    Nothing quite like near-realtime history writing. I wonder what happened to the canary. By the way, the wikipedia bio provides a link to a Washington Post op-ed by Eliot Spitzer, published on Valentines Day 2008, further describing the actions of the Bush administration to block states from investigating the lending practices of national banks. Might want to check back on wiki in a week to see whether history gets revised (or removed).

  9. Monkeyfister says:

    Here’s a little short video on finding a new job on Wall Street:

    http://www.youtube.com/watch?v=3XGJq8wrw5I

    –mf

  10. D. says:

    Because centrist pragmatists tend to be more fair and less power hungry.

    Power hungry people want it all for themselves and make it to the top.

  11. Smelly Tuna says:

    Mark E Hoffer you could start researching things at what most would consider one of the sources of “globalist” thought; the David Rockefeller nexus of organizations like the Trilateral Commission:

    http://www.trilateral.org/projwork/tfrsums/tfr57.htm

    More information about THE MAN:

    http://en.wikipedia.org/wiki/David_Rockefeller

    It’s pretty much a given that the banking system is controlling the political system and all the “we the people” stuff is an illusion.

  12. Bob A says:

    …the New World Order that George Bush I spoke of was delayed a little by the Clinton administration, but it seems it’s finally here.

  13. JoJo says:

    “I still cannot figure out why centrist pragmatism isn’t the dominant thought process in government . . .”

    Because pragmatism, basically by definition, requires that you understand the facts (data, history, processes, etc). That is much more difficult to do – especially for politicians who usually don’t know much about anything. Also, and more sadly, it’s not what wins elections.

  14. JoJo says:

    BTW, sounds to me that it would be appropriate that Mr. John D. Hawke Jr is made to answer some questions in from of congress.

    (of course this won’t happen since it would require the Dem leadership to put a Clinton appointee on the hot seat)

  15. Mike in NOLa says:

    This is just one manifestation of the tactics of big business to render powerless the States and average citizens. There’s nothing like a couple of good ass whippings from a state court or jury to keep them in line.

    For the past couple of decades, big business has tried to circumvent state laws by trying to make every rule promulgated by some agency in Washington govern the entire country by using the preemption argument. The has occurred in finance, environmental regulation, product safety and even cable tv regulation.

    The excuse given by those who used to scream “states rights” before they got control of the Federal Government is uniformity, but the real reason is that it’s easier for them to take control of a small group of appointed officials in Washington than of the officials back home who actually have to answer to voters.

    The capture of the SEC by Wall Street and its subsequent inaction’s contribution to the current fiasco is a good example, e.g.,
    Cox’s SEC Censors Report on Bear Stearns Collapse
    Report: SEC Gave “Preferential Treatment” to Wall Street CEO

    Surprised the article didn’t mention Eliot Spitzer who ran into the same problems when he went after Wall Street in the post dotcom era and after banks during the beginning of the real estate bubble:

    STATEMENT BY ATTORNEY GENERAL ELIOT SPITZER REGARDING PREEMPTION OF STATE CONSUMER PROTECTION LAWS (link is to google cache because the original link doesn’t seem to work)

    Or, see the presciently and ironically titled Free Eliot Spitzer! which comes from the American Enterprise Institute. (I don’t agree with the article as the AEI is just shill for Big Business, but it gives some idea of what was going on. And, I liked the title :)

    It’s a shame Spitzer couldn’t keep his pants on; he might have been the new attorney general and just the kind of SOB we need in the office to clean up Wall Street regardless of the lobbyists’ efforts in Congress.

  16. OhNoNotAgain says:

    Some would think that the OCC has been asleep at the wheel, when in reality (and as the article suggests) they have been an active partner with the banking industry in preventing any oversight or proscecution by the states’ attorney generals. Here is a link to the FrontLine piece on the credit card industry, wherein they detail the role that the OCC has had in making sure that the banking industry can do whatever they want without repercussions:

    http://www.pbs.org/wgbh/pages/frontline/shows/credit/

    The consumer credit industry has a lot of the same issues that were seen in the mortage lending industry.

  17. Smelly Tuna says:

    For those inclined to “connect the dots” there’s a couple of neat little sites that can help:

    http://www.theyrule.net

    http://www.namebase.org

    Namebase is actually useful in finding connections going back quite a few years. Theyrule is eye opening to just how “stratified” leadership is in the corporate world.

  18. Paul Jones says:

    Because centrist pragmatism doesn’t allow people to rape, pillage, and steal.

    When you understand the motivations of the power seeker, you realize that these people are dangerous from the outset.

  19. zgveritas says:

    I agree fully with Tom Brander above.

    The Swaps are the elephant in the room. They are the most toxic waste in our system right now. When short trading reform is discussed there is no consideration of how to stop unregulated synthetic shorting via swaps.

    The only context people talk about swaps and their brethren in now is to say that going forward we will open an exchange for them and trade them in the open.

    Beside the suggestion of canceling the swaps outright I see no realistic discussion of how the existing swaps problem can be managed going forward. With a series of credit events waiting in the wings I am surprised so little seems to be getting done on the subject.

    I have seen Buffet, Soros, Volcker, Roubini, Paulson and others breeze over the subject.

    Barry I think you should take the lead on the issue here. It is clear that all of the business news anchors read your site daily. I recommend you have one post per day on how to manage the swaps problem. Keep doing this until discussion of solutions gains traction in the mainstream media. You can start with an open thread asking the commenters at the Big Picture for ideas and see what we come up with.

    Nobody wants to be asked or ask about this on the business news networks now because they don’t want to reveal that the emperor has no clothes. We need to come up with a solution for this fast.

  20. Void all CDS paper. Invoke the “tough titty” rule!

  21. Paul Seda says:

    “I still cannot figure out why centrist pragmatism isn’t the dominant thought process in government . . .”

    It’s simple really. Washington attracts the type of people who cling to an ideology and use its underlying premises to inform all their decisions. Those portions of the bureaucracy that fail to maintain “the party line” are either forced out of their positions or locked away in some obscure part of the bureaucracy where they have no real power to influence decisions. This cuts across party lines. This leads me to believe the structure of our government is flawed.

  22. D.L. says:

    From today’s Bloomberg.com:

    “Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan. Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program”

    So it looks like the taxpayers are being forced to by subprime-backed toxic waste, with or without the “TARP”.

  23. John Wellman says:

    Pragmatism only keeps critical thinkers happy.

    Politicians routinely exchange hope creating promises for votes, shoving pragmatism to the side.

    Politicians revel in the realm of the possible not the probable.

    P.S. Regarding market valuation, I see multiple compression as the main driver of the markets decline up to this point. Looking towards the next 18-24 months, I see index earnings falling at least 10-15% due to our deleveraging scenario. Am I wrong to assume earinings will crater??

    Aloha

  24. Dan Duncan says:

    At best, the Business Week article is weak. At worst, it’s just pandering political B.S.

    First off,Preemption is a VERY broad issue, affecting all matters commerce that might happen to affect both the state and feds at the same time. If Premption is a “candidate” for this mess, then so are mortgages…or better yet–how about just saying money is a culprit?

    Have you considered the implications and complications if there was no Preemption Doctrine? Talk about unintended consequences.

    Next, if you lament the the failure to pass Assignee Liability provisions, then blame 40 years of a wildly dysfunctional tort system. No lender or investor would open themselves up to that kind of liability. Regulation is one thing, strangulation is another. Assignee Liability coupled with this nation’s tort system would have turned states like Georgia into “forum shopping” nightmares, where the likes of Dickie Scruggs would have set up shop in search of the nearest “aggrieved” plaintiff.

    The federal government didn’t kill the legislation, as much as state governments did as they realized that it’s passage would mean that state’s citizens would only be able to get mtg loans from the nearest Community Bank. No, the states themselves killed this legislation as the officials shit themselves upon learning that the passage of this legislation would have ensured the fact that they would not be re-elected. The citizens of these states HATED this legislation.

    Change Preemption around to:

    “Preemption…asserts that when federal and state authority over business conflict, the STATES prevail….”

    Do you really think this would have mattered? There is no way that citizens in Georgia—in the height of the real estate frenzy—while observing the hyper appreciation of homes in FLA, would have said, “I’m sure glad our state leaders are looking out for us and banished all those bad mortgage companies that would allow me to a home with zero down aren’t allowed in our state. I’m sure glad we have 5% appreiciaiton and
    I’m not not jealous of their 20% appreciaiton.”

    There’s no way. This article addresses nothing.

  25. john haskell says:

    There’s a reason that we honor people like Benjamin Franklin, Alexander Hamilton and George Washington in this country, and the reason is that they organized a Constitution that put the Federal Government in a position to regulate (among other things) interstate commerce so that we lived in a United States of America instead of a congerie of independent states.

    BW’s absurd suggestion that each state have its own mortgage laws should have no further time wasted upon it, especially in the current circumstances.

  26. CB says:

    Good point BR. Many warnings were ignored due to popular social engineering policies and no incentives for making unpopular but prudent choices. It is human nature- but for any hope of progress this needs to change.
    Odd that in this age of instant global information access, much of the immediate crises is due to a LACK of factual information about contract exposures and capitalization levels.

  27. James says:

    Looking for a fall guy for the housing crisis? Businessweek looks into the idea of “Federal preemption” as a yet another candidate.

    ———————

    Also see this Seattle PI story, “Mortgage system crumbled while regulators jousted”:

    “Scott Jarvis, director of the Washington state Department of Financial Institutions, said his files are full of letters from federal bank regulators, bankers and other lenders politely telling his office to take a hike.”

    http://seattlepi.nwsource.com/business/382860_mortgagecrisis11.html

  28. surferdude says:

    having an insider’s perspective at the fdic when the georgia law was under consideration i was amazed at how the agency geared up to stop the law. i had never seen the agency ever take such an active defensive stance against a piece of legislation.

    this all happened under the leadership of don powell, a bush apointee from texas, who not only mismanaged the fdic but the katrina clean-up. powell hollowed out the fdic’s supervision division and watered down examination activity.

    there was no front line supervision happening when high risk c&d and other re loans were being put on the bank’s books. at some point, someone needs to expose the utter failure of the fdic and other regulators to prevent these banks failures. the lack in supervision is illustrated by banks failing without being under formal enforcement action (like one this friday) and the high loss rate when they do fail. the two recent failures have loss rates at nearly 40% of assets, which is 3x the historical rate. basically, there has been no cop on the beat for years. yet, the executives at these agencies still hold their jobs or have been promoted; there is an absolute lack of accountability.

  29. georgia pig says:

    Centrist pragmatism? Maybe, but at what level of generality? I’m sure the majority in the Wachovia case thought they were being good centrist pragmatists.

    The Wachovia OCC case is an odd alignment of actors. The majority includes Ginsburg, Bryer and Alito; the minority includes Roberts and Stevens. Pre-emption came to the fore in the Commerce Clause cases of the Roosevelt era. The ostensible reasoning was that the states had been captured by corporate interests and the federal government was the only entity capable of reigning them in and balancing interests among the states. Ironic, no?

    I’m not sure how much pre-emption really matters, it was only a mechanism. The bubble was in bloom and used whatever political and legal tools that were at its disposal. Most wanted to believe that real estate could keep appreciating at 20% per year, just like most wanted to believe that Saddam had a stockpile of nukes. Mass delusion, a weapon of mass destruction.

  30. Double R says:

    Barry,

    For the most part, I love your work. You are head and shoulders above 95% of the market and economic pundits out there.

    Yet, I keep seeing you harp on the absolutley silly idea that this crisis is somehow a fault of “free markets.”

    This belief in “government regulation” is tantamount to a religious belief, in spite of the fact that this crisis is clearly the result of govt. intervention in the markets over the past 30+ years.

    Tell me, please–how is it a fault of so called “free” markets when:

    1. Govt. courts rule that Federal regulations have priority over state.

    2. Federal govt. policy at multiple levels encourages either idiots or crooks to assume positions of responsibility and power, and encourages the consolidation of that power (ie. fewer large financial institutions are better than many smaller institutions).

    3. Crooks in the private sector buy off federal regulators, and legislators of both parties to look the other way as they pillage and plunder ignorant investors.

    4. Federal Reserve monetary policy, combined with fiscal policy of the govt. has lead to a “bailout” mentality that makes professional investors in private markets risk seeking, knowing that they will gain windfall profits on the upside, and avoid loss on the downside, should things go wrong.

    In essence, the “bailout mentality” you so correctly rail against, creates a class of investors who are easily fooled by the crooks in the finance/investment sector of the economy.

    Barry, what you hope for, in essence, is a benevolent dictator–one who always makes the right moves, at the right time–in the face of overwhelming political opposition.

    And you hope that this person is discovered by a political process–no less.

    The fact is–any “regulator” who tried to reign in the bubble–when it benefited the politicians, the banksters, and the public, would have been tarred and feathered– accused of being against home ownership, motherhood, and apple pie.

    J.B. Say and Frederic Bastiat are turning in their graves…

    ~~~

    BR: I don’t see where we disagree very much.

    I believe in the free markets, but I also believe in the rule of law, and in preventing people from their own worst impulses. You need a ref on the field to make sure the game is fair and the rules are followed.

  31. austincompany says:

    Another idea on how to deal with the mortgage mess – make the people who made obscene profits on selling their “shacks” in California and Florida give the money back! Or at least contribute some of it (through taxation maybe) back to the banks that leant it.

    The main point here is that one rarely hears of where the money went to begin with that generated the bad loans, mortgages, etc. There are many people in Texas, Colorado and Washington State that can testify that that Californians distorted local real estate markets with their wads of cash. The cash obtained from — no not hard work and thrift, but simply buying a property in the late ’90′s or 2000s and selling it for quadruple in 2004-2006.

    I personally know of a couple here that worked all their lives to save some money to buy a small 5 acre farm near Austin, but when the money soaked Californians came, they drove the price out of their reach and they lost it. I heard a Californian bought it — with cash and had money left in the bank. They had sold a small 1100 sq. Ft. house they bought in the ’90′s for $200K for $1.4 mil.

    If the government needs money, why doesn’t it go after these lucky, lazy assh*les…

  32. bobbyside says:

    http://www.opednews.com/maxwrite/print_friendly.php?p=CREDIT-DEFAULT-SWAPS–THE-by-Chuck-Simpson-080924-49.html

    This is a decent common sense primer on CDS paper.

    What would be the fallout of nullifying the $62 trillion nv?

  33. Centrist pragmatism wouldn’t have changed much. By and large, most of Europe– especially Germany, Benelux, even Iceland– followed “centrist pragmatism” to a T. And now they all have as big a problem as we do.

  34. anon_ says:

    Article is correct. It is state regulators working with federal regulators that made regulations work, i.e. shared responsibility, not unlike current tax enforcement works. Derivatives, to my understanding were supposed to be federally regulated by CFTC.

  35. Barry, you seem to have devoted a large number of posts on this site to the excesses of “predatory lending”. Now, as far as I remember, no mortgage originator came to a potential borrower with a loaded gun and forced him to sign the mortgage. If Bloomingdale’s priced a sock at $250, is anyone obliged to buy it? Would it then be called “predatory sock pricing”?

    ~~~

    BR: You better go back and count again. Predatory lending doesn’t get a lot of pixels around here, because I don’t think it was a significant factor in the current housing/credit crisis.

    What does get some ink is when I see partisan bullshit, and any attempt to muddy the waters and keep us from the truth. Those people get the 14 inch spiked dildo up the arse, and deservedly so.

    We run money. That is a serious obligation, and getting at reality is important to me. The political asshats that try to obscure that reality have a very special room waiting for them if I were to become benevolent dictator.

  36. John says:

    Double R,

    Couldn’t it also be said that unwavering confidence in the free market to regulate itself is akin to religious faith?
    Seems to me there is more evidence to support a greater regulatory framework than we have now. Certainly there is a balancing act but I think it’s silly to believe that a bunch of people essentially betting with other people’s money are going to show restraint when they see the opportunity to make millions of dollars.
    Most of the big players in financials don’t have enough skin in the game compared to the potential upside to be incentivized to do anything but take on big risk and generate big returns. It’s human nature. And clearly our public companies don’t work the way they should. Companies sign ridiculous compensation agreements(is it really a good idea to reward short term stock performance?), employees use their company credit cards to take the family out to dinner, and no one in the corporate structure owns enough shares to really care about any of this.
    A case can be made that the free market can correct all this. I think that’s possible. But at what cost? Enriching the very few with the combination of capital and brains to take advantage of crashes like this while the vast majority of folks get hammered? That may be fair in a Darwinian sense but social order and peace have their value too. What’s the point of making a billion dollars if a mob of angry peasants rushes your mansion and tears it apart?

  37. Richard says:

    I’d be alot more impressed with the AGs efforts if the two examples of desired state regulation weren’t those cited:

    “They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. ‘People out there are struggling with oppressive loans,’ Cooper recalls saying.”

    Thing is, this suggests these State AGs weren’t out to reduce lending to people who could’nt pay the loans back, they were just out to lower their payments.

    At the margin, lower costs might have helped some borderline borrowers keep up their payments, but they also would have encouraged more such lending, as volume is a way to compensate for reduced profit per unit.

    More generally, those who think their state AG is looking out for them are deluded.

  38. Bob A says:

    …so how long will it take Congress to figure out that charging 30% interest rates on credit card debt will only result in deafult?

    Do we need to see Chase, GE and Capital One, the folks that got these laws pushed through go down first to see that happen?

    Why do we not see them voluntarily rolling these rates back now before it’s too late.

    Remember when we warned more than a year ago about how people would start walking from mortgages they couldn’t afford?

    Well guess what folks, people with nothing to lose sure aren’t gonna give a crap about filing bankruptcy to get out unsecured debt they can never possibly pay off.

  39. Mike in NOLa says:

    Dan:

    I knew someone would bring up “our dysfunctional tort system” which been the subject of so much propaganda from Big Business.

    It is(was?) the last defense of those who cannot get redress from government because the government has been bought and paid for by big business, as shown by the notable examples of the OCC and SEC.

    That is why there is such a push to limit lawsuits, even by elected state officials and not nasty trial lawyers, in order to funnel all decisions through appointed officials who can be controlled.

    “I shall not rest until every German sees that it is a shameful thing to be a lawyer.” – Adolf Hitler

  40. Mike in NOLa says:

    Forgot to mention that Roubini was on C-Span this morning:

    Nouriel Roubini, New York University, Economics Professor

    He points out the need for restoring confidence, but he seems a lot more impressed by the G7 statement than I. I think we need Paulson to actually announce a capital injection deal with a troubled bank or some other concrete plan.

  41. Bob A says:

    Zachary Roberts asks …
    “is anyone obliged to buy it?”

    “Experts” promoting things like the “Ownership Society” in forums such as “the State of the Union Address” are supposed to be believable and reliable.

    The average working American is not equipped to or encouraged to second guess such experts. In fact, they may even be accused of being ‘unpatriotic’ or even ‘traitors’ if they do…

    Average Americans simply drank the kool aid offerred those who knew better, or should have.

  42. kdp says:

    Government embraces centrist pragmatism because of the survivorship bias of the people who make it in to government. Also, non-centrists tend to be radicals who have a hard time mustering support, which hurts their chances of making an impact in government even if they make it in to government.

  43. Government embraces centrist pragmatism because of the survivorship bias of the people who make it in to government. Also, non-centrists tend to be radicals who have a hard time mustering support, which hurts their chances of making an impact in government even if they make it in to government.

    Posted by: kdp | Oct 11, 2008 4:04:01 PM

    I’m sorry, but that, the above, is complete and total bull*hit straight from a University text, unleavened by any Fresh Air–of readily observable Reality.

    All one would need to do is to peruse the statements made by many elected Representatives on their way to, self-selected, Retirement from Office.

  44. D. says:

    Centrist pragmatism wouldn’t have changed much. By and large, most of Europe– especially Germany, Benelux, even Iceland– followed “centrist pragmatism” to a T. And now they all have as big a problem as we do
    ————
    The US economy is so important that is has exported its way of life to the whole world.

    There is no doubt in my mind that a little more centrist pragmatism from the US would have made it easier for the other countries.

  45. Double R says:

    Barry, you wrote in reply:

    “BR: I don’t see where we disagree very much.

    I believe in the free markets, but I also believe in the rule of law, and in preventing people from their own worst impulses. You need a ref on the field to make sure the game is fair and the rules are followed.”

    My question is: how do you prevent the refs from betting on the game, or rigging it–aka the NBA, or boxing?

    The fact is, to blame the magnitude of this mess on lack of regulation misses the point. Why did so many supposedly smart market people miss this? How did so many people mistake chicken salad for chicken $#!&?

    The answer, in my mind–because regulation and monetary policy made it profitable to do so. Regulation + monetary policy distorted incentives of market participants to the degree that it was actually a losing bet to be worried about risk, until recently.

    I suspect I would strongly disagree with:
    “and preventing people from their own worst impulses”

    I believe people should suffer the consequences of their own worst impulses. Stupidity should be its own deterrent. If people suffer due to greed and foolishness, so much the better. The end result is less greed, suffering, and pain.

    What I don’t understand from the “more regulation” crowd is this:

    If you can easily believe market participants are not always competent to judge the risk vs. reward for various bets, where they bear the consequences on a daily basis, how in the world can you expect THESE VERY SAME PEOPLE, as voters, to elect politicians, who in turn, confirm the appointment of “regulators” who will generate a net benefit for all concerned?

    What is more probable–a “good” regulator being appointed, or a crook who is easily swayed by those in power?

    I think history overwhelmingly points to the latter being the typical case.

  46. Double R says:

    Barry, you wrote in reply:

    “BR: I don’t see where we disagree very much.

    I believe in the free markets, but I also believe in the rule of law, and in preventing people from their own worst impulses. You need a ref on the field to make sure the game is fair and the rules are followed.”

    My question is: how do you prevent the refs from betting on the game, or rigging it–aka the NBA, or boxing?

    The fact is, to blame the magnitude of this mess on lack of regulation misses the point. Why did so many supposedly smart market people miss this? How did so many people mistake chicken salad for chicken $#!&?

    The answer, in my mind–because regulation and monetary policy made it profitable to do so. Regulation + monetary policy distorted incentives of market participants to the degree that it was actually a losing bet to be worried about risk, until recently.

    I suspect I would strongly disagree with:
    “and preventing people from their own worst impulses”

    I believe people should suffer the consequences of their own worst impulses. Stupidity should be its own deterrent. If people suffer due to greed and foolishness, so much the better. The end result is less greed, suffering, and pain.

    What I don’t understand from the “more regulation” crowd is this:

    If you can easily believe market participants are not always competent to judge the risk vs. reward for various bets, where they bear the consequences on a daily basis, how in the world can you expect THESE VERY SAME PEOPLE, as voters, to elect politicians, who in turn, confirm the appointment of “regulators” who will generate a net benefit for all concerned?

    What is more probable–a “good” regulator being appointed, or a crook who is easily swayed by those in power?

    I think history overwhelmingly points to the latter being the typical case.

  47. Double R says:

    Barry, you wrote in reply:

    “BR: I don’t see where we disagree very much.

    I believe in the free markets, but I also believe in the rule of law, and in preventing people from their own worst impulses. You need a ref on the field to make sure the game is fair and the rules are followed.”

    My question is: how do you prevent the refs from betting on the game, or rigging it–aka the NBA, or boxing?

    The fact is, to blame the magnitude of this mess on lack of regulation misses the point. Why did so many supposedly smart market people miss this? How did so many people mistake chicken salad for chicken $#!&?

    The answer, in my mind–because regulation and monetary policy made it profitable to do so. Regulation + monetary policy distorted incentives of market participants to the degree that it was actually a losing bet to be worried about risk, until recently.

    I suspect I would strongly disagree with:
    “and preventing people from their own worst impulses”

    I believe people should suffer the consequences of their own worst impulses. Stupidity should be its own deterrent. If people suffer due to greed and foolishness, so much the better. The end result is less greed, suffering, and pain.

    What I don’t understand from the “more regulation” crowd is this:

    If you can easily believe market participants are not always competent to judge the risk vs. reward for various bets, where they bear the consequences on a daily basis, how in the world can you expect THESE VERY SAME PEOPLE, as voters, to elect politicians, who in turn, confirm the appointment of “regulators” who will generate a net benefit for all concerned?

    What is more probable–a “good” regulator being appointed, or a crook who is easily swayed by those in power?

    I think history overwhelmingly points to the latter being the typical case.

  48. Rob says:

    This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the heart of the current financial crisis.

  49. D. says:

    Double R:

    Your beliefs are obviously based on the assumption that governement is always bad.

    I know a lot of hard working decent people who work for the government. In case you haven’t noticed, there are bad apples in all professions, private or public.

    There are many services that will NEVER be undertaken by private business for a lack of profits but contribute enormously to our quality of life and to the well being of those profitable sectors.

    If it weren’t for government or the pooling of our efforts on a national level, do you actually believe we would live in such luxury?

    We got 1000 years of nearly free markets with no regulation and they weren’t called the Dark Ages for nothing!

    What Americans must understand is that free markets with no rule of law is fine for less than 1% of the population… but wait a minute… 100% of Americans have bought the idea that they can all have a chance to be in that 1% if they just work a little bit harder!

  50. D. says:

    IMO, the best scenario is benevolent dictator who understands all the complexities in our world, but how often has history given us that?

  51. Double R says:

    “Double R:
    Your beliefs are obviously based on the assumption that governement is always bad.”

    No, my beliefs are based on the fact that regardless of who gets chosen as a leader will suffer the same blindspots and weakness that humans inevitably have from the fact he/she is human. The damage these human weaknesses are compounded by access to centralized coercive power—which is what the govt. is after all.

    “I know a lot of hard working decent people who work for the government. In case you haven’t noticed, there are bad apples in all professions, private or public.”

    I’m sure there were kind and benevolent slave masters as well. That doesn’t justify the practice of slavery.

    Again, I do not want to hand a person a vast amount of power to use force and legitimized violence, and simply hope that he/she won’t abuse it because they are “decent”. Power corrupts. What I want are systems and traditions that do not depend upon the benevolence of the one in power for beneficial outcomes. I want a system that minimizes the damage from the inevitable mistakes that human beings make.

    “There are many services that will NEVER be undertaken by private business for a lack of profits but contribute enormously to our quality of life and to the well being of those profitable sectors. “

    This is an article of faith among believers in govt. But saying it does not make it so. If something is not profitable, in the sense that the provider is unable to convince productive people to exchange their productivity for it, via money, than the “contribution” to quality of life is mere speculation.

    If some alleged govt. regulation is so wonderful and beneficial to all, then all parties concerned should readily agree to abide by it, without need for a govt. to mandate it. It would become something of a common law tradition that evolves through time as a response to a certain problem.

    Govt. advocates claim people are not always able to find an optimum solution to a problem via the market. Yet, I’m suppose to believe, these same people, who can’t find a solution to a problem that they are very motivated to solve, are supposed to be competent to elect people, who in turn appoint people—to solve the problem? There is a gaping hole in that logic.

    I should point out—there are dangerous things the state creates that are unlikely to have been made on the market, because there is no need for it—ie. Nuclear weapons, chemical weapons, etc. Whatever good you believe govt. can do, can you at least balance that against the large evil of these two things?

    The bottom line: people are only complaining about the situation we are in because THEIR people (ie. Democrats/Republicans) are not in control. Again, they suffer from the delusion that “decent” people would have prevented this mess. I propose we had “decent” people in many areas of govt., and they STILL were unable to prevent this mess, because it was profitable for others to allow it to continue. So blaming this on “poor regulation” simply doesn’t fit the facts.

  52. What do we do besides pray and pay?? I am a retired senior, member of Myinvestorsplace.com
    We need sane answers and directions. Any suggestions will be most welcome. Thanks

  53. D. says:

    If it weren’t for government or the pooling of our efforts on a national level, do you actually believe we would live in such luxury?

    We got 1000 years of nearly free markets with no regulation and they weren’t called the Dark Ages for nothing!

    ———-
    It’s interesting you stopped at the first 2 points and didn’t try to argue those 2 above.

  54. Double R says:

    D.

    Your last post is idiocy–re: 1000 years of “unregulated” markets. History is the story of one govt. after another–kings, queens, princes, etc.

    It is also the history of war, rape, pillage, and plunder.

    At best, govt. is a necessary evil. It certainly IS NOT responsible for the progress we have seen over human history. We have progressed in spite of it.

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