Topic: Global Economics

[runawayjimbo]

slslbs often says that the sub-prime loans that led to the financial crisis should have never been approved. He is absolutely correct. Here's why they were.

http://news.investors.com/Article/589858/201110310805/Housing-Crisis-Obama-Clinton-Subprime.htm

Smoking-Gun Document Ties Policy To Housing Crisis

President Obama says the Occupy Wall Street protests show a "broad-based frustration" among Americans with the financial sector, which continues to kick against regulatory reforms three years after the financial crisis.

"You're seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place," he complained earlier this month.

But what if government encouraged, even invented, those "abusive practices"?

Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.

At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

...

The regulatory missive, which had the effect of law, advised lenders to bend "customary" underwriting standards for minority homebuyers with poor credit.

"Applying different lending standards to applicants who are members of a protected class is permissible," it said. "In addition, providing different treatment to applicants to address past discrimination would be permissible."

To that end, lenders were directed to "make changes in marketing strategy or loan products to better serve minority segments of the market." They were also advised to "change commission structures" to encourage brokers and loan officers to "lend in minority and low-income neighborhoods" — a practice Countrywide Financial, the poster boy of the subprime scandal, perfected. The government now condemns the practice it once encouraged as "predatory."

...

HUD also pushed Fannie and Freddie, which in effect set industry underwriting standards, to buy subprime mortgages, freeing lenders to originate even more high-risk loans.

"Lenders should ensure that their loan processors and underwriters are aware of the provisions of the secondary market guidelines that provide various alternative and flexible means by which applicants may demonstrate their ability and willingness to repay their loans," the policy statement decreed.

"Fannie Mae and Freddie Mac not infrequently purchase mortgages exceeding the suggested ratios" of monthly housing expense to income (28%) and total obligations to income (36%).

[slslbs]

true. another example of a well meaning policy gone bad. In this case, very bad.

It's interesting that the financial lobby didn't block this initiative. could it be because they knew that they would come out ahead?

It also doesn't forgive the industry for packaging junk in "AAA" rated portfolios, derivatives, and credit default swaps.
I still don't get how people made commission and received bonuses on deals that eventually went bad - The fact that you can get paid as much for a bad deal as a good deal defies common sense.

Bad regulation is bad.
It doesn't mean all regulation is bad.
ex Sherman Anti Trust Act ( see PieGuy's post), Glass-Steagle (since repealed) are prominent examples of good regulation.
Some regulation is bad because it isn't thought out.
some is bad because the people being regulated twist it to their advantage and squash the little guy in the process.
 We should strive for good, responsible regulation, when needed.

[PG]

Has anyone read the book "Good to Great?" One of the companies profiled is Fanny Mae. It was written well before the crisis, obviously. But it talks about how Fanny became immensely profitable for the first time ever by embracing the sub-prime market. The book paints this as a great move. It does not mention any government "push" towards it.

That's not to say that the Clinton administration didn't push for greater home-ownership. There is no doubt that they did. But so did W. That was a very popular policy for a long time and it screwed us in so many ways.

It's still screwing up our job markets. Unemployment would be significantly lower right now if a higher percentage of lower-middle class people were renters who could move more easily for a new job. Home ownership stifles the natural ebb and flow of changing regional employment needs. There was a piece in that first episode of Rock Center with Brian Williams about a town somewhere in North or South Dakota (I can't remember which) that cannot find enough employees. They're ready to pay any truck driver willing to move there $80K a year. If some truck driver in Phoenix can't move there because he's upside down on his house and has no job, then we have stymied growth.

[runawayjimbo]

We should strive for good, responsible regulation, when needed.

sls - I agree with you, especially this part. Responsible regulation is a essential component of a functioning free market. But like I've said before, we should not be focusing on reactionary measures which can hamper businesses (e.g., Sarbanes-Oxley) or politically motivated policies (as mentioned in the article above). When politicians interfere in the market, it leads to the exacerbated cycle of booms and busts as companies greedily exploit holes in the regulations and it breeds corruption as firms do whatever they can to get a leg up.

Pie Guy - I haven't read that one, but I'd imagine the author would likely retract Fannie/Freddie's plunge into sub-prime as a great move. There's a book that's been on my list for a while (Guaranteed to Fail) that details how Fannie/Freddie got swept away in the events that led to the crash.

This is another example of why I oppose gov't interference in the markets. I have no doubt that the policies were well-intentioned (and you're right, it was promoted both by Clinton and Bush's "Ownership Society"). But the unintended consequences and perverse incentives that are created far outweigh any positive benefit IMO.

[runawayjimbo]

Also, job growth continues to struggle: 80,000 jobs added; unemployment basically unchanged

http://www.bloomberg.com/news/2011-11-04/u-s-payrolls-increased-by-80-000-in-october-as-jobless-rate-falls-to-9-.html

U.S. Payrolls Rose in October; Jobless Rate 9%

U.S. employment climbed in October at the slowest pace in four months, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben S. Bernanke this week.

The 80,000 increase in payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington. The unemployment rate fell to a six-month low of 9 percent from 9.1 percent even as the labor force expanded.

The crisis in Europe and looming deadline on U.S. budget talks may be prompting companies to hold back on concern failure to reach resolutions will put the global recovery at risk. Fed policy makers project the jobless rate won’t drop under 8 percent until 2013 at the earliest, one reason why Bernanke this week said additional stimulus “remains on the table.”

“We’re making progress at a very slow pace,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected an 85,000 gain in payrolls. “It indicates continued consumer spending, getting a little better over time. The labor market is consistent with moderate economic growth.”

The median estimate in a Bloomberg News survey was for a gain of 95,000. Payroll estimates of 91 economists ranged from increases of 50,000 to 150,000.

Stock-index futures trimmed earlier losses and Treasuries fell after the report. The contract on the Standard & Poor’s 500 Index expiring next month fell 0.2 percent to 1,252.8 at 8:46 a.m. in New York. The yield on the benchmark 10-year note climbed to 2.10 percent from 2.07 percent late yesterday.

...

[rowjimmy]

Picture money (epic infographic):
http://bit.ly/uZPemk

[UncleEbinezer]

^^^ Very informative graphic.  There are definitely some very interesting facts in here.


(said tongue in cheek)-> Since Apple has 76 billion cash on hand, they should get us started on the free degrees and education.  I can see it now...iPhones for iDegrees!  (I'm really just being a smartass, no need to judge)

[goodabouthood]

Picture money (epic infographic):
http://bit.ly/uZPemk

WOW! Lots of good info in there!

[runawayjimbo]

This was rich: the NY Fed put up a blog post on 6pm the Friday after Thanksgiving that basically says "we don't really know what we are doing." That kinda begs the question of why should a select group of people who don't know how to accurately forecast be entrusted with the awesome power of setting interest rates and manipulating the money supply? And how can they be expected to control the myriad of consequences that extend from those powers? (hint: they can't)

They also make a point to say "like most economists" throughout the post, because why take responsibility for your own fuckups when you can say "Everybody else was doing it!" The comments are also thoroughly entertaining as well.

http://libertystreeteconomics.newyorkfed.org/2011/11/the-failure-to-forecast-the-great-recession.html

The Failure to Forecast the Great Recession

The economics profession has been appropriately criticized for its failure to forecast the large fall in U.S. house prices and the subsequent propagation first into an unprecedented financial crisis and then into the Great Recession. In this post, I examine the performance of the forecasts produced by the economic research staff of the Federal Reserve Bank of New York (New York Fed) over the period 2007-10 and consider some of the reasons why we, like most private sector forecasters, failed to predict the Great Recession. This spreadsheet contains staff forecasts, the outcomes, and a standard measure of private sector forecasts—the Blue Chip consensus. In addition, staff material prepared for bi-annual meetings of the New York Fed Economic Advisory Panel provide some further insights into the evolution of the staff outlook.

The staff forecasts of real activity (unemployment and real GDP growth) for 2008-09 had unusually large forecast errors relative to the forecasts’ historical performance, while the forecasts for inflation were in line with past performance. Moreover, although the risks to the staff outlook were to the downside throughout this period, it wasn’t until fall 2008 that a recession as deep as the Great Recession was given more than 15 percent weight in the staff assessment.

...

Looking through our briefing materials and other sources such as New York Fed staff reports reveals that the Bank’s economic research staff, like most other economists, were behind the curve as the financial crisis developed, even though many of our economists made important contributions to the understanding of the crisis. Three main failures in our real-time forecasting stand out:

1. Misunderstanding of the housing boom. Staff analysis of the increase in house prices did not find convincing evidence of overvaluation (see, for example, McCarthy and Peach [2004] and Himmelberg, Mayer, and Sinai [2005]). Thus, we downplayed the risk of a substantial fall in house prices. A robust approach would have put the bar much lower than convincing evidence.

2. A lack of analysis of the rapid growth of new forms of mortgage finance. Here the reliance on the assumption of efficient markets appears to have dulled our awareness of many of the risks building in financial markets in 2005-07. However, a March 2008 New York Fed staff report by Ashcraft and Schuermann provided a detailed analysis of how incentives were misaligned throughout the securitization process of subprime mortgages—meaning that the market was not functioning efficiently.

3. Insufficient weight given to the powerful adverse feedback loops between the financial system and the real economy. Despite a good understanding of the risk of a financial crisis from mid-2007 onward, we were unable to fully connect the dots to real activity until 2008. Eventually, by building on the insights of Adrian and Shin (2008), we gained a better grasp of the power of these feedback loops.

However, the biggest failure was the complacency resulting from the apparent ease of maintaining financial and economic stability during the Great Moderation. Perhaps most important, as noted by some analysts as early as the 1990s, these adverse consequences of the Great Moderation were most likely to arise from the actions, judgments, and decisions of financial market participants:

Longer stretches of economic growth imply greater leverage and complacency and thus, greater financial problems when recessions do occur.
--William Dudley and Edward McKelvey

[slslbs]

1. Misunderstanding of the housing boom. Staff analysis of the increase in house prices did not find convincing evidence of overvaluation (see, for example, McCarthy and Peach [2004] and Himmelberg, Mayer, and Sinai [2005]). Thus, we downplayed the risk of a substantial fall in house prices. A robust approach would have put the bar much lower than convincing evidence.

2. A lack of analysis of the rapid growth of new forms of mortgage finance. Here the reliance on the assumption of efficient markets appears to have dulled our awareness of many of the risks building in financial markets in 2005-07. However, a March 2008 New York Fed staff report by Ashcraft and Schuermann provided a detailed analysis of how incentives were misaligned throughout the securitization process of subprime mortgages—meaning that the market was not functioning efficiently.

in other words, they didn't know WTF they were doing. They were buying and selling real estate securities, with new, recently "invented" methods of speculation without understanding the method. they were taking risks without understanding what the risks were.
why?
"incentives were misaligned", which can be restated as they all had serious conflicts of interest.

and - what wasn't stated, is that the regulators couldn't see the forest from the trees because they were connected to, or part of, the industry that caused the mess.
Imagine a world in which the cops and judges came from a rotating pool of people that included bank robbers, hit men, and the like. That's what our system of financial regulation and management it.

[runawayjimbo]

Someone please tell me this is just a bad dream

http://www.bloomberg.com/news/2012-01-18/summers-under-consideration-to-lead-world-bank-when-zoellick-s-term-ends.html

Obama Considering Summers for World Bank

President Barack Obama is considering nominating Lawrence Summers, his former National Economic Council director, to lead the World Bank when Robert Zoellick’s term expires later this year, according to two people familiar with the matter.

Summers has expressed his interest in the job to White House officials and has backers inside the administration, including Treasury Secretary Timothy Geithner and the current NEC Director, Gene Sperling, said one of the people. Secretary of State Hillary Clinton is also being considered, along with other candidates, said the other person. Both spoke on condition of anonymity to discuss internal White House deliberations.

Lael Brainard, the under secretary of Treasury for international affairs, is compiling a list of potential candidates to replace Zoellick, who was nominated to a five-year term that began in July of 2007 by then-President George W. Bush. By tradition, the U.S. president chooses the leader of the World Bank while the head of the International Monetary Fund is selected by European leaders. The nomination is subject to approval by the World Bank’s executive board.

White House press secretary Jay Carney declined to comment. Summers’ assistant, Julie Shample, said he was unavailable. Philippe Reines, a spokesman for Clinton, did not respond to a request for comment.

Scrutiny of Record

A nomination of Summers would bring scrutiny of his previous stints in government, both as former President Bill Clinton’s Treasury Secretary and Obama’s NEC director, as well as his tenure as the president of Harvard University.

“Larry is controversial,” said Erskine Bowles, who served as Clinton’s chief of staff. “Anything you appoint Larry to, you know there are going to be some people who are going to take shots at him. But you know he’s a brilliant economist, which I think everybody recognizes.”

Bowles said he had no information on the White House deliberations.

“He performed well in some difficult markets,” Bowles said. “I think it’s been a passion of his for a long, long time and I am confident that he will do a good job.”

Summers also may come under fire for some of his previous work at the bank, as well as the commercial relationships he has forged since leaving the White House in December of 2010.

In 1991, at the World Bank, he signed off on a memo that argued that less-developed countries might benefit from accepting pollution from first world countries.

Return to Harvard

After leaving the Obama administration at the end of 2010, Summers, 57, returned to Harvard University, where he once served as president and is now a professor at the John F. Kennedy School of Government.

Summers earned his doctorate in economics at Harvard in Cambridge, Massachusetts, and at 28 was granted tenure, the youngest age anyone had gained tenure at the time. He spent time on the staff of the White House Council of Economic Advisers in the 1980s before joining the World Bank as chief economist.

He was Clinton’s Treasury secretary from 1999 to 2001, after which he became president of Harvard. Summers quit that post in 2006 after a series of battles with the Faculty of Arts and Sciences, which teaches most of the undergraduate courses, and following a controversy over comments he made at a conference, in which he suggested women lacked an aptitude for science.

Period of Upheaval

Jared Bernstein, former chief economist for Vice President Joe Biden, said Summers would be a good choice for the World Bank.

“Larry has a deep understanding of global economics and is particularly tuned in to this moment in time, with all the upheaval in the system,” Bernstein said.

Under a long-standing unwritten agreement, the IMF has always been led by a European while the World Bank has been headed by an American. The U.S. in June backed then-French Finance Minister Christine Lagarde to take the head of the IMF.

Emerging market leaders such as Brazilian Finance Minister Guido Mantega have questioned the division of leadership posts at the two institutions, saying the choice should be made on the basis of merit, not nationality.

The World Bank, which was established to rebuild Europe after World War II, offers financial and technical assistance to countries. Under Zoellick, shareholders approved a capital increase providing the institution with $5.1 billion in cash and enhancing China’s clout at the lender.

[slslbs]

 

[goodabouthood]

Someone please tell me this is just a bad dream

http://www.bloomberg.com/news/2012-01-18/summers-under-consideration-to-lead-world-bank-when-zoellick-s-term-ends.html

Obama Considering Summers for World Bank


Under a long-standing unwritten agreement, the IMF has always been led by a European while the World Bank has been headed by an American. The U.S. in June backed then-French Finance Minister Christine Lagarde to take the head of the IMF.

Emerging market leaders such as Brazilian Finance Minister Guido Mantega have questioned the division of leadership posts at the two institutions, saying the choice should be made on the basis of merit, not nationality.

Agreed completely.

[runawayjimbo]

Former executive director at Goldman tells them just how badly they suck.

http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=1

Why I Am Leaving Goldman Sachs

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn't matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn't know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

[V00D00BR3W]

Hey, those are the job creators we're talking about here!