"e.g (1) greedy business people who mispriced risk, trusted flawed models, and engaged in unethical if not illegal practices, (2) political ideologues, (3) cronyism and corruption, and, yes, the (4) widespread imprudence of US consumers, cheered on by W. and Saint Alan, which excesses were made more viral by (5) unwise fed interventions, the erstwhile free marketers got cold feet and decided that the people's money was necessary to bailout the financial system (and soon the auto industry) from their mistakes instead of letting the free market do its work."

But the necessary condition of all of this was the GSEs and their practices. And they were a stronghold of the Democrats. Which is why all this posturing is watered-down manure.

http://mauberly.blogspot.com/

I'm not absolving the GSE's. They did play a role, albeit a late one. The are coddled by the Dems because they are key in mortgages being made widely available to the less well-off, but they are also vital to banking system reserve liquidity, which is why they were created.

However the GOP attack against the Dems, essentially blaming them for the "subprime" mess, is that the GSE's gave mortgages to "minorities" and "deadbeats" who couldn't repay them. It was therefore the Dems fault that the system imploded on account of the "subprime" (minority) fiasco, because "they want to give government mortgages your money to minorities instead of making them work for it like you have to."

This feeds right into right wing talk radio, and the right wing financial commentators, play on one of their racist redneck audience's key hot buttons.

They even intimate that the GSE's "handed out" the mortgages involved, which of course, is false, since that's not what the GSE's do.

It's not only false, it's sick. At its darkest, it's a thinly veiled racist attack on Obama's candidacy. (Conveniently, Franklin Raines is black, and his image is liberally (pun intended) portrayed on the tube by the rightists.)

Moreover, I don't think that the Dems are exactly posturing on this. It's clear that the voodoo economics failed on many levels, and the Dems were peripheral to it, not central.

This was not chiefly a failure of the New Deal or Clinton's "New Democrat" (really GOP-lite) policies. It was principally a failure of Reaganomics as implemented by Ayn Rand's disciple Saint Alan, with some Dem help around the edges.

of this financial earthquake is housing, and the heart of housing finance were Fannie and Freddie. Blow all the other smoke you like about Republicans; it makes no difference. Good for the election, the Dems are in. Bad for truth.

http://mauberly.blogspot.com/

The epicenter of this crisis is the shadow banking system and the giant pool of global hot money, coupled with the Reaganomics in which it thrived.

Housing alone would not have brought the system down. Moreover, the housing bubble was caused by the policies of Saint Alan. The popping of that bubble was the catalyst for the blow of both funny money and the shadow banking system that created it.

This is the destruction of debt capitalism, when the US — really the West — outsourced production to low capital and low-wage but energy-intensive countries. Thereupon, the US economy became financialized, and that has led to the undoing of the US as a neoliberal, neo-imperial and neocolonial power.

The climax has already arrived. The rest is denoument.

Yes, Fannie and Freddie jumped in, but they neither started it, nor will they finish it.

This is the self-destruction of shadow banking on the basis of its own failures, and if we are very lucky it won't take civilization down with it — but I'm not very sanguine about that.

Epicenter means starting location, not root cause. The epicenter of a major fire is a spark or lightning strike, but fuel and dry conditions are the things that make it hard to stop.

Here, we've got a situation where the basic problem is overleverage and overlinking though the credit default swaps - the
'failures' of the mortage backed securities are just a spark that got things going in the direction they were going to go sooner or later.

"This is the destruction of debt capitalism, when the US — really the West — outsourced production to low capital and low-wage but energy-intensive countries. Thereupon, the US economy became financialized, and that has led to the undoing of the US as a neoliberal, neo-imperial and neocolonial power."

Spengler like, saying nothing about what happened.

http://mauberly.blogspot.com/

Spengler like, saying nothing about what happened.

I rather like Spengler's style although I don't share his outlook.

Lots has been written on this:

Debt capitalism self-destructs By Henry C K Liu

Superpower vulnerability By Henry C K Liu

Oh, and did you catch this? The first salvo against the dollar as global reserve currency, the underpinning of paper for oil.

China paper urges new currency order after "financial tsunami"

is a fact; it's not an 'understanding'. And of course it appears along with the problem in mortgages. It does threaten the dollar; it may bring it down. But if it does, then it will be true to say that the dollar fell as result of the crisis, not the other way around.

The only funny money I know about is akin to monopoly money. This is real money that is being lost now.

http://mauberly.blogspot.com/

perhaps I'd agree with you. (This is what they'd like us to believe.) However, the problem is mortgage-backed securities (and other types of securitization), together with a lot of other financial wizardry that is often called "funny money." It's turning out to be funny money because it isn't worth what it was supposed to be and can't really be valued absent a market, which the feds are afraid to permit, let alone force.

This is not a mortgage crisis or banking crisis comparable to the Great Depression. We are dealing with what Warren Buffett called financial weapons of mass destruction some time ago. Wall Street didn't hear it, nor did the Fed or Treasury.

The effects of those exploding WMD are about to be felt through widespread pain. So far, it's been all "understanding;" the facts have not yet unfolded. Observing that we are still in the bubble stage of the US economy that the financial authorities are trying desperately to support, Doug Noland thinks that we are only at the beginning of the unwind, while the Fed and Treasury have already shot their big guns.

Yes, some are living in tent cities already, some people are underwater, etc., but by and large the US public has not taken a really big hit yet, and this present crisis is the first of many hard decisions that the country is facing over the next several years.

The treasurer of the State of Iowa was quoted today to the effect that the president said that Wall Street got drunk. He went on to say that the president was right, but he was also the bartender and he kept pouring the drinks, so that now the state is in the position of experiencing the consequences for some time to come.

You may say that the president wasn't the bartender. But he was still saying that the economy is strong until Paulson and Bernanke presented their bailout proposal. And John McCain still thinks the fundamentals are strong.

Keep doling the punch, guys, the taxpayers will clean up the vomit.

BTW, why do you think that Paulson is saying that the US is in dire peril, and Congress needs to act immediately, giving him dictatorial powers over the execution? What do you think he told Congress behind closed doors that convinced them that the situation is indeed dire, and for some of them to say that this is the most serious domestic situation they ever faced?

your parenthetical:

'(This is what they'd like us to believe)'

It is mortgages and mortgage backs that they are discussing. They are the focus of the hearings, to wit, what the government is going to pay for them. They have also discussed downsizing the GSEs after the crisis is over.

The rest of your account is ancillary. Noland, whom you cite, has written for years about the GSEs and how they are at the center of this crisis. He folds a theory of 'Moneyness' and 'Credit Bubbles' into the facts. And he has a theory of how one bubble leads to another. But I don't need that to talk about the facts.

All I am talking about is just the facts. Mortgages are at the center of this situation.

http://mauberly.blogspot.com/

My point is that if mortgages were the basis of this it would be relatively simple to fix. The sticking point is that the bulk of it is not ordinary two-party mortgages but MBS, which are much more complex than mortgages owned by a single party, as they used to be, and much more difficult to deal with owing to the number of parties and complex legal issues involved.

This bailout is represented as being about "mortgages." In reality its about L3 assets aka "toxic waste." The hidden agenda is to get the taxpayer to pick up the tab for L3 assets at nearly marked to fantasy value in order to prevent catastrophic loss of systemic "moneyness," as Noland would say.

The "dire problem" is really "moneyness." Government intervention since the dot com bubble has steadily undermined the dollar to the degree that the moneyness of the system is now at stake. The real news in economic circles recently was money market funds "breaking the buck" amid large cash outs, with the attendant consequences for moneyness.

This is not about preventing certain Wall Street entities from bankrutpcy, essentially allowing them to reorganize (recapitalize) at taxpayer expense. Rather, it's about propping up the bubble economy so that asset values don't fall precipitously. It is estimated that about a thousand regional banks are about to fail (only 12 have failed so far) and this bailout doesn't address that at all. Wiser heads are counseling to put this 700 billion in the FDIC, for instance, instead of Wall Street L3 toxic waste.

Efforts like Paulson and Bernanke are porposing and Congress largely buying with some modification, mostly involving throwing in more funds for homeowners in trouble, will further undermine the dollar and threaten the moneyness of the system — which is why Noland says it will not work and lead to greater problems down the line, since this is just the start of a much longer unwind of dislocations, bad attitude, failed assumptions, and the consequences of moral hazard that are now being amplified instead of corrected.

The earthquake will be when the ploy fails to work and either asset values fall or the dollar blows up. I tend to think it will be sequential.

First, the markets will erode asset values as financial contagion spreads to the real economy, and the ensuing crisis will take down the dollar as the government throws gobs of money/credit at the problem by increasing indebtedness and "printing" in the attempt to maintain "the American dream," which is turning into a nightmare, especially for the boomers about to retire who are losing their nest eggs.

An unpalatable alternative is to have future US taxpayers fund the dezombification of the financial system (which this bailout won't actually do) with a huge influx of capital that must be borrowed, or else let foreign interests (now our creditors) own it and collect a significant portion of US national income as rent. The former isn't really feasible, since the US has no savings, and why would the rest of the world underwrite more debt in the face of a declining dollar instead of demanding an ownership stake?

While I am sympathetic to the facts of your argument, my point is that those facts are being misused by the powers that be (Paulson and Bernanke) to foster their hidden agenda, and that in reality an entirely different scenario is unfolding that they are actually trying to head off, or at least delay until IBGYBG.

The problem is lack of economic education, so that opacity and complexity rule. Congress and the American people are getting rolled by Paulson and the Wall Street crowd in and out of government. Congress is either not smart enough to be able to penetrate behind the "facts," or else they are complicit (bought off) — and these are not mutually exclusive. It's possible to be both stupid and greedy at the same time.

I'd read Noland and not you.

http://mauberly.blogspot.com/

Just the GOP talking points?

"Mortgages," "GSE's," "Franklin Raines," fraud investigations involving the GSE's, etc.

If I wanted to hear this, I'd read the talking points instead, or get entertained by the faux concern of the right wing talk shows and blogs.

(I'm not suggesting that anybody posting here on The Agonist is buying into this or putting it forward. Just pointing out where this is going.)

MinnPost.com-[Rep. Keith] Ellison angered and shocked that some are blaming the poor and blacks for Wall Street's troubles

Much to the shock and contempt of Keith Ellison, the culprit responsible for today's financial crisis has been discovered by those on the right end of the political spectrum.

The villains?

"Poor blacks caused this,'' said Ellison, Minnesota's the 5th District congressman, scornfully. "That's what we're supposed to believe. Little ACORN caused this. The mighty captains of Wall Street got taken down by little ACORN and poor black people. That's what you're hearing on the right. The gall and audacity of this is beyond imagination.''

In fact, many, including 6th District Rep. Michele Bachmann, seem to be saying that the demise of Wall Street can be traced to the Community Reinvestment Act (CRA) of 1977.

That's right. In the eyes of some, today's problems aren't a product of greed, or lack of regulation, but instead can be traced to the Jimmy Carter era. That's when Congress passed CRA, an act that encouraged commercial banks to invest in housing in cities that were facing both redlining and major decline. The idea was simple: Stabilizing neighborhoods, through home ownership, would stabilize cities.

The act had the support of a nonprofit organization, the Association of Community Organizations for Reform Now (ACORN). It survived two terms of Ronald Reagan, the Gingrich era and three terms of Bushes before apparently creating today's crisis.

But now, a handful of economists and a lot of conservatives who are looking for a scapegoat claim that it was the CRA that encouraged risky lending that led to the defaults that have led to the mess we're in.

In one of her recent interviews with CNN's Larry King, Bachmann seemed to be referring to the CRA when she said this:

"If you look at the housing crisis, government has to take its share of the blame. After all, government was goading these mortgage lenders, saying you're redlining. You're being discriminatory. If you don't give loans out to marginally credit-worthy people, we're going to come after you. The Democrat-controlled Congress wants to have these mortgage lenders make loans to people with marginal credit. Rep. Michele Bachmann Rep. Michele Bachmann

"Well, guess what? If you aren't making money lending, this is not a shock when you have loans that aren't paid back. And now the American people have to come in and step in and pay for these bad loans.''

Bachmann is not alone in seeming to point fingers at the poorest for the collapse of the richest. Investors' Business Daily and The Wall Street Journal also have opined that the CRA is a major player in the collapse. Conservative bloggers and radio talk show hosts are happily pointing out that Jimmy Carter and, of course, Bill Clinton are the problem.

But most economists seem to agree that, at most, 20 percent of the bad loans that have led to the collapse can be traced to CRA.

more

I'm a Roosevelt Democrat. And you're an intellectual hack.

http://mauberly.blogspot.com/

I'm sorry if I offended you. That was not my intention.

You posted what I saw as the standard GOP line about mortgages and GSE's that I had just heard Buchanan spouting on Maddow — and which W just repeated substantially in his address to the nation. The final piece I offered shows the link between this narrative in thinly veiled right wing code and the way the right wing actually takes it "on the street."

It seems to me necessary to point that out. I'm not claiming that you intended it that way in your post, since I have no way of determining your intentions and you did not offer it in that context.

I am neither a Republican nor a Democrat, so I am not defending the Dems here. As a matter of fact, I am unimpressed by both Obama and McCain. Right now, the party closest to my political preferences is the Green Party, although I haven't yet decided my vote.

My intention has simply been to call attention to the self-serving nature of the GOP taking points on this. They not only side-step the real issues that the American public should be looking at but also direct blame unfairly against minorities and the poor, at least implicitly.

From the economic point of view, my view is that Reaganomics is a disaster for America, and I am still waiting for the Dems to come up with a sound economic plan underlying a progressive vision, since the GOP doesn't seem inclined to do that anytime soon.

http://mauberly.blogspot.com/

"Waste, fraud and abuse" has long been a GOP mantra. Now it's turning out that the waster, fraud and abuse by welfare queens was much less than that taking place under the lax regulatory stance of Reaganomics, and the absence of oversight of existing rules. It was common knowledge in the marketplace that mortgage lenders were giving huge mortgages to anyone with a pulse. Now that is coming home to roost.

While it is essential that such investigations and prosecutions take place in order to establish justice and right the system, it is a bit of scapegoating. Business took the lax attitude of Reaganomics as a wink wink from government that anything goes — and it did, with the Fed fueling the orgy with 150 proof vodka laced punch in the form not only of lax oversight but also superabundant low-cost credit.

Reaganomics has been a narrative of waste, fraud and abuse at all levels that historians will be researching a writing about for some time to come, as they did with Teapot Dome some time ago.

Sept. 24 (Bloomberg) -- Frank Raiter says his former employer, Standard & Poor's, placed a ``For Sale'' sign on its reputation on March 20, 2001. That day, a member of an S&P executive committee ordered him, the company's top mortgage official, to grade a real estate investment he'd never reviewed.

S&P was competing for fees on a $484 million deal called Pinstripe I CDO Ltd., Raiter says. Pinstripe was one of the new structured-finance products driving Wall Street's growth. It would buy mortgage securities that only an S&P competitor had analyzed; piggybacking on the rating violated company policy, according to internal e-mails reviewed by Bloomberg.

``I refused to go along with some of this stuff, and how they got around it, I don't know,'' says Raiter, 61, a former S&P managing director whose business unit rated 85 percent of all residential mortgage deals at the time. ``They thought they had discovered a machine for making money that would spread the risks so far that nobody would ever get hurt.''

Relying on a competitor's analysis was one of a series of shortcuts that undermined credit grades issued by S&P and rival Moody's Corp., according to Raiter. Flawed AAA ratings on mortgage-backed securities that turned to junk now lie at the root of the world financial system's biggest crisis since the Great Depression, according to Raiter and more than 50 former ratings professionals, investment bankers, academics and consultants.

``I view the ratings agencies as one of the key culprits,'' says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. ``They were the party that performed that alchemy that converted the securities from F- rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.''
http://www.bloomberg.com/apps/news?pid=20601109&sid=ah839IWTLP9s&refer=exclusive

http://mauberly.blogspot.com/

...Pointing this out [in many previous articles dating back several years] is not to claim I was particularly astute or prescient, but to say that it is not possible that amid such clear signs of impending trouble that those in charge of billion of dollars of other people's money, supported by high-priced research, were caught off guard. Criminal dishonesty with derelict of fiduciary duty is difficult to deny.

Too big to fail versus moral hazard, p. 3