When we have a speculative bubble in something like Dot-com stocks (remember that one, man!) we dont engender systematic risk. Still plenty of fallout. Debt-deflation. Scandals and frauds (Enron, Worldcom). But regulated entities like banks are not super at-risk. When its real-estate… which seems to bubble every 10-20 years…. then banks will become bankrupt. This is not actually that hard to fix, and has LITTLE to do with interest rates (which apply to the whole economy).

1. So first we had: Speculative Bubble in Housing. This is predominatly driven by low-down payments, but also by typical market factors: speculators, rates, demographics, catalysts, confluence of factors, etc.

2. Then we added: Mark-to-Market accounting for banks. Do you know how dumb this is? Imagine someone foreclosing on your house when you are current on your interest payments. You bought for $1M, borrowed $800k. But your neighbors house just sold out of foreclosure for $300k. You must put up $500k or you are “MTM bankrupt”! MTM for illiquid assets is one of the dumbest things ever created by man. It deserves a Darwin award. It is so obvious that in crisis all illiquid assets get marked down an extra 50%. This is a recipe for bankrupting ALL banks. As soon as we took this off, banks went up 200%. The concept is simply insane.

3. Finally, everyone denied there was a problem (Fed, FDIC, Ben Stein, Bear, Fannie, Freddie, Lehman, Paulson, Congressman and Pundits who naively believed in “the market”). The was ZERO leadership to get in front of the problem. The fault lies 33% with citizen speculators, 33% with banks and brokers, and 33% with regulators and the govt. None wanted to propose a better solution. Foreclose, recover 0.10, repeat. Stick head in sand. Its sad, bc there is probably a better “organized” solution… like splitting the losses btw the 3 parties (homeowner, bank, govt) which kinda quasi gets done through support like TARP. But the frictional costs are very high. Anyway, its over now.

4. Then finally and this might be the worst. SCREAM for regulation, lower leverage, and blame in the aftermath when it is completely unneccessary. The truth is the capitalist market does a fine job after the crisis. Once the situation is clear, we dont need the regulator. As Jamie Dimon has said — “We need counter-cyclical regulation”.

At least it created massive opportunity in L/S stocks and massive upside to taking risk in the crisis. It should setup for a strong stock market for years. The herd was long 1-yr ago, and fearful in the crisis, and will now huddle in cash during a long bull market (subject to event risk). Classic.

His take: it’s both, and the partisan bickering is a smokescreen. A lot of it appears to agree with Barry. Maybe he’s a fan?

Our regulators, charged with preventing Greed from winning, lost.

Greed won, and this is what happens. Ben Bernanke, whatever his faults, did not CAUSE the meltdown; he failed to stave it off.

Bernanke or who ever has the right… should adjust down payments to aid in smoothing out the ups and downs of markets where leverage and lending are involved… IE housing… etc. And it is important to time these adjustments to the markets… taking into account deflation….inflation historic changes in price per period… and what real costs should be.

Right now… we could be giving people 20% of a home’s price for someone to buy in the form of some kind of lien/bond/prefered ownership. As the economy housing stock recovers to normal… reduce it to 0%. As things start to warm 5 then 10 then 15% down could be required… but quick enough up or down to actually stay ahead of bubbles happening or killing the market. Sure… it would take speculators and huge profits out of our nice free market… but I say… too bad… the whole world economy needs to be more stable and not able to be imploded just so Goldman Sachs and 500 other “in the know” smarty pants, can become the first Trillionaires.

A terradollar is a multiple of a dollar as much as a pentagram is a multiple of a gram. It’s teradollar (= trillion dollars = 10^12 dollars).

Barry, you really are trying to get me to buy your book. ;-) Perhaps, I am going to do it.

rc

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BR: Prior to late 2005, Fannie & Freddie were precluded from buying nonconforming (i.e., subprime) loans.

They eventually changed their purchasing standards (late 2005) when Angelo Mozila threatened to take all of his business away from them, and give it to Wall Street. By the time Fannie & Freddie acquiesced, the boom had already peaked.

So no, my talking point spouting ignorant little friend, they were not the cause of this.

But thanks for coming by!