The Big Lie goes viral
November 8, 2011 12:34 PM Subscribe

What caused the financial crisis? The Big Lie goes viral. Barry Ritholz writes in the Washington Post about the story (the "Big Lie") that it wasn't irresponsibility on the part of the banks that caused the crash--it was really misguided government policies!

Some callouts that didn't make it into the published column.

What happens next? Regulators are trying to put additional financial regulations in place, to prevent a future crisis. Unsurprisingly, the bankers are resisting: Jamie Dimon launches tirade at Canada's bank chief (Paul Volcker provides some technical discussion of the proposed regulations).

And in the real economy, Ezra Klein reviews Obama's response to the economic crisis.

A previous explanation: The Giant Pool of Money (PDF transcript).

posted by russilwvong (82 comments total) 35 users marked this as a favorite

Wall Street traders have profited more under Obama than in eight years under Bush (via homunculus)
posted by jeffburdges at 12:41 PM on November 8, 2011 [4 favorites]

If you don't want those cats to get so fat, stop feeding them.
posted by Trurl at 12:44 PM on November 8, 2011 [5 favorites]

I love it when conservatives echo the dumb stat about the money Wall Street made in the 2.5 years of Obama vs. all eight of Bush. See, all eight under Bush also includes epic freaking losses they took when the bubble popped TWICE (2001, and again 2008). There has not been a bubble popped under Obama's term.

To the 99%: Whenever you see this stat, know that it is someone trying to get you to vote against your interest. (Or to not vote, which would probably be the same thing.)
posted by andreaazure at 12:47 PM on November 8, 2011 [34 favorites]

No legislation, no administration, no OWS, no Obama, no Romney, no President, no Consumer Protection Office, etc. can keep corruption from American institutions until we determinedly remove ANY monied influence from politics, at all levels (local, state, and national). Add to that an absolute (and legislated) requirement for ALL media outlets to provide a specific amount of their media time, for FREE, to candidates who qualify via vote-qualified prerequisites.

Living inside a Plutocracy like America is like screaming inside a cave you can't find your way out of. All you get is echos. The cave we're stuck inside of is made of private capital that has found a way to build a system of *legalizing corruption and favors*. Until that stops, we will continue to degrade. Count on that.
posted by Vibrissae at 12:49 PM on November 8, 2011 [62 favorites]

I recommend reading the comments at marginal revolution if you want to see this theory having gotten deep into people.
posted by a robot made out of meat at 12:50 PM on November 8, 2011 [1 favorite]

It fits with the larger American narrative. Them poors just did it to themselves and the government let them do it. If only they'd take some Personal Responsibility.
posted by Ghostride The Whip at 12:53 PM on November 8, 2011 [9 favorites]

Agreed, but that's a ThinkProgress link. I'd originally meant to look up the amount that energy traders made under Bush whenever I got around to reposting that link, but I forgot. We should abandon the Obama specific derail, sorry I posted it so early.
posted by jeffburdges at 12:53 PM on November 8, 2011

I keep getting a runtime exception in my head when I try to understand how something called "The Big Lie" would reveal the truth.
posted by humanfont at 12:55 PM on November 8, 2011

You know people put down George W. Bush, but he was the last American president to have a balanced budget, to not be at war, and to have an intact World Trade Center. Then something happened. I blame Obama.
posted by dances_with_sneetches at 12:55 PM on November 8, 2011 [47 favorites]

I suggest that you view the 60 Minutes interview with Jack Abramoff. He is the biggest criminal lobbyist thus far in our nation, and now, having served 3.5 years of a 4 year sentence, he spills the beans on how the system is corrupted. He know. He has been there and done it.

He then suggests that any regulations put in place will not work because lobbyists are clever and an get around them. he suggests that what needs to be done is to forbid any person who has served in Congress from acting as a lobbyist.

What in my view he does not say and needs saying: if he made millions and millions and got only 4 years (and then 6 months off), there is no real incentive to stay clean. Why not make sentences high enough so that a potential perp would give more thought before corrupting the easily (Abramoff's words) congress folks...He bought over 100 congress people with ease.
posted by Postroad at 12:59 PM on November 8, 2011 [12 favorites]

I sure don't what caused it but I can tell you what'll fix it right up: tax cuts.
posted by T.D. Strange at 1:01 PM on November 8, 2011 [2 favorites]

He then suggests that any regulations put in place will not work because lobbyists are clever and an get around them. he suggests that what needs to be done is to forbid any person who has served in Congress from acting as a lobbyist.

And we would get Congress to vote for this, yes? Your best bet maybe the Tea Party there...they're crazy enough to burn their own money.

What one does about the revolving door at the regulatory agencies is another kettle of fish, and one perhaps more pertinent...
posted by Diablevert at 1:04 PM on November 8, 2011

It's funny to see the previous comments here targeting the banks - thats not at all how I read his description of the scenario. Ritholtz is saying the fed dropping rates to zero resulted in pension funds reaching for yield, and the banks simply facilitated that process. I wish more people understood this process, and the big shift into risk assets that the fed dropping rates creates, sometimes with undesirable results. Unless you consider pension funds to be "Wall Street" - most people in finance certainly dont think that, then the previous comments about wall street fat cats etc. are really misdirected. Yeah yeah, queue someone to make fun of my handle instead of the content of the post.
posted by H. Roark at 1:08 PM on November 8, 2011 [1 favorite]

Here's my idea: The only people allowed to lobby a congressperson are his or her own constituents.
posted by ofthestrait at 1:10 PM on November 8, 2011 [18 favorites]

He then suggests that any regulations put in place will not work because lobbyists are clever and an get around them. he suggests that what needs to be done is to forbid any person who has served in Congress from acting as a lobbyist.

Abramoff was never a Congressperson, and there are legions of Young Republican/thinktank assholes like him waiting in the wings to become lobbyists. I think this would be minimally effective.

Note the "people are clever therefore rules are useless" arguments are always made by those who actually benefit from no or little regulation.
posted by benzenedream at 1:12 PM on November 8, 2011 [3 favorites]

I suggest that you view the 60 Minutes interview with Jack Abramoff.

Better yet, watch the doco. (Not to be confused with the comedy.)

Abramoff was never a Congressperson....

Why become one when you just rent?
posted by IndigoJones at 1:13 PM on November 8, 2011 [2 favorites]

At some point large capital holders are going to find that a destitute, unemployed and unemployable population leaves little opportunity for yield.
posted by 2bucksplus at 1:15 PM on November 8, 2011 [4 favorites]

I highly recommend Inside Job about the financial crisis. The film-maker does a great job getting academics in Harvard and Columbia to hang themselves with their own words.
posted by a womble is an active kind of sloth at 1:16 PM on November 8, 2011 [2 favorites]

John Conyers, Daniel Inouye, and John Dingell have served a combined 153 years in Congress.

Term limits + no congressional pensions + severe campaign finance reform + the Volcker Rule + banning most lobbyists = a good start.
posted by mattbucher at 1:22 PM on November 8, 2011 [2 favorites]

For many, the idea that the invisible hand could have failed in this way is tantamount to saying up is down or black is white. The idea that smart members of major financial services corporations could have failed in such a matter is simply impossible to them. The idea that too much freedom could be a bad thing, especially in the world of business and finance, is a total divide by zero.

Fraudsters like Bernie Madoff can fit into their narrative, because Madoff was an out-and-out fraudster, meaning he didn't play by the rules. But to say that the economy could be carried away on seas of irrationality and deceptively marketed investments? To say that even the weak version of the efficient market hypothesis might be off the mark in crucial ways? That's absolutely ridiculous, to many people. Surely the prices in the market must reflect all of the information that exists, they say! Surely people who are paid middle-to-enormous sums of money to manage the economy could not be hornswoggled by poppycock!

So, instead of laying responsibility where it lies, people blame the government, because surely only an outside force - an impediment to freedom - could have caused so much damage.

I'm turning into a cranky old man, especially on this topic. I ran into a "no big government" type guy the other day, and in a conversation about deregulation, I brought up, in passing, the example of the savings and loan crisis. He literally asked me what the S&L crisis had to do with deregulation. That's like asking what the JFK assassination had to do with gunpowder.
posted by Sticherbeast at 1:22 PM on November 8, 2011 [30 favorites]

Any restrictions upon who may lobby congress would evolve into limitations on 'good' lobbying only, i.e. organizations that push for civil rights, human rights, worker rights, environmental regulation, etc.

We should instead simply record every moment of their lives while in office, every interaction with a lobbyist, every gift, etc. Air all the laundry.

We should also elect representatives using state wide ranked ballots, probably single transferable vote, aka multi-winner IRV, i.e. eliminate gerrymandering and assist candidates who actually hold an opinion.
posted by jeffburdges at 1:22 PM on November 8, 2011 [4 favorites]

Attention American Voters! Vote Republican and you will continue to get suckered into voting against your own interests.
posted by Sparkticus at 1:23 PM on November 8, 2011 [1 favorite]

saying the fed dropping rates to zero resulted in pension funds reaching for yield, and the banks simply facilitated that process.

That's certainly a big part of it, and the giant pool of money gives a good layman's description of how it worked. But that is not The Big Lie.

The Big Lie is that the government forced the banks to engage in bad underwriting. That us straight up in-fucking-correct. Yes, there are programs out there to encourage lending to minority borrowers, many of whom had shittier credit than had been the standard. But those program's have been around for many years before the boom of the early 2000s; the boom was driven by innovations in securitisation. And that was Wall St. driven. Several major Wall St. Banks acquired subprime lenders during this period. The loans these entities were making were the worst of the worst, the ones that you hear about, no-nos and liar's loans often accompanied by outright fraudulent paperwork. And they were private, e.g. Not backed by the government. Fannie and Freddie's share of the mortgage market actually declined precipitously during this period --- they were less than 30 percent of the market in 2006, IIRC. (the FHA was about 3% or so). Since the collapse of the private mortgage lending market in 2007-2008, government backed loans are now 90 percent of the market --- but this was not the case during the boom.

Fannie and Freddie were not blameless during the boom --- as they lost market share, they began to relax their own standards, and they actually went ought and bought and held other people's shit-filled securities (which one reason why they have lost so much money). But the Big Lie is that the government twisted the banks' arm and forced them to make bad loans --- and this is verifiably not true. The banks did it to themselves, but they didn't care about the quality because they knew they weren't going to be the ones holding the bag.

wish more people understood this process, and the big shift into risk assets that the fed dropping rates creates, sometimes with undesirable results. Unless you consider pension funds to be "Wall Street" - most people in finance certainly dont think that, then the previous comments about wall street fat cats etc. are really misdirected. Yeah yeah, queue someone to make fun of my handle instead of the content of the post.
posted by Diablevert at 1:26 PM on November 8, 2011 [24 favorites]

And I should have hit preview. Sorry. Angry posting finger.
posted by Diablevert at 1:29 PM on November 8, 2011 [1 favorite]

Wall Street traders have profited more under Obama than in eight years under Bush.

There has not been a bubble popped under Obama's term.

Thinkprogress is not conservative. Some recovery from the last bubble was inevitable (I mentioned before I know a guy who got rich investing in Junk Bonds AFTER the crash). The important fact is that the Recovery has almost all gone to the "1%". The effects of the last bubble bursting are still trickling down. It's sadly unlikely that Obama or any 'mainstream Democrat', even Elizabeth Warren, can do much to help. And the Housing Crisis is far from over. So the choice is between continuing the current slow but steady decline and the Tea Party turning it into a total collapse (if the 'true believers' are stronger than the Big Business Lackeys, there will be no more Bailouts). The deep structural changes aren't going to happen until it gets much worse, and maybe letting the Glibertarians tear everything down will finally turn public opinion around, as those who really are responsible will run out of things to hide behind. Yes, millions will suffer more in the short run (maybe including myself), but it offers the possibility of rebuilding something stronger and better. In construction, often it's usually easier and cheaper to rebuild from a pile of rubble than to rebuild a rotten foundation while saving a semi-functional structure on top of it.

In this business like all the others, 'the customer is always right'.

In that business like all the others in America today, the best salesmen and the best advertising can sell any shit.
posted by oneswellfoop at 1:43 PM on November 8, 2011 [7 favorites]

And we would get Congress to vote for this, yes? Your best bet maybe the Tea Party there...they're crazy enough to burn their own money.

You're forgetting about the gigantic elephant sitting in Zuccotti Park. (And the other elephants it spawned by asexual division throughout the world. I admit it, at this point my metaphor kind of breaks down.)
posted by JHarris at 1:50 PM on November 8, 2011 [3 favorites]

At some point large capital holders are going to find that a destitute, unemployed and unemployable population leaves little opportunity for yield.

There's still a little room left on the credit cards. I give it a couple more years. And then, of course, like any other milch cow that won't produce, we'll be turned into hamburger and served to the next emerging civilization to the east of us. History: it's what's for dinner.
posted by seanmpuckett at 1:54 PM on November 8, 2011 [1 favorite]

At some point large capital holders are going to find that a destitute, unemployed and unemployable population leaves little opportunity for yield.

this will be a long time coming so long as they have access to foreign labor and markets and don't care if they have to live in armed compounds and pay for their own roads, water, safe food and other infrastructure.

the big lie is that we need criminal laws for the "little guys" but the market acts perfectly without regulation because people are just so good, nice and kind in the marketplace and so utterly trustworthy that they would never rip anyone off or cut corners.
posted by Maias at 1:56 PM on November 8, 2011 [4 favorites]

Peter Wallison (called out by Ritholz) previously on MetaFilter: Housing Crash Result of Government Incentives.
posted by russilwvong at 2:09 PM on November 8, 2011

So the Big Lie is that the current economic crisis was caused by a single factor?
posted by ZenMasterThis at 2:21 PM on November 8, 2011 [5 favorites]

Jack Abramoff...suggests that any regulations put in place will not work because lobbyists are clever and an get around them. he suggests that what needs to be done is to forbid any person who has served in Congress from acting as a lobbyist

Eliminate the money in politics and a lot of the the power of the lobby goes away. This is a huge and complex issue, because today, there are ways to shower painful penalties on entrenched politicians who want to remain in power. I mostly agree with jeffburdges. Record *everything*; permit private meetings between lobbyists and politicians ONLY in recorded surroundings. Tape everything. Sure, some things will slip through, but this kind of surveillance would go a long way toward making it very, very difficult to play with the system. There should also be laws against any more than a fraction of legislators meeting in private among one another, to discuss legislation. Some municipalities have laws like this in place.

We absolutely have to stop election money coming from ANY source, period. That would still leave the power of the lobby, and the pressure to use private money to create massive ad campaigns and/or bring citizen-pressure against an elected politician. We can't eliminate "bad" speech, if "bad" is simply defined as what we disagree with. So, there are possible rabbit holes for corruption to hide in. There needs to be transparency with TEETH, with really severe penalties, enforced, to stop transgressors. I'm talking 5 years, mandatory, minimum, for screwing around with democratic transparency. NO exceptions, and the transgressor does time in a state prison - no "Holiday Inns". For once, maybe a mandatory sentence would make sense.
posted by Vibrissae at 2:24 PM on November 8, 2011 [3 favorites]

"...the big lie is that we need criminal laws for the "little guys" but the market acts perfectly without regulation because people are just so good, nice and kind in the marketplace and so utterly trustworthy that they would never rip anyone off or cut corners."

Not quite. The efficient market hypothesis that Sticherbeast alludes to above is that people are greedy (that is, they act in their own self interest), but when you put everyone's greed together the bad parts cancel out and you end up with the best possible way to distribute goods and services. When considered as a collective entity the market is supposed to be smarter than any individual (like government regulators, say), so leaving the market alone to do its thing is always the wise choice.

This ignores the fact that individuals can be swayed by collective delusions and faddish thinking, often making decisions that benefit themselves in the short term but that are harmful to everyone else.
posted by Kevin Street at 2:42 PM on November 8, 2011 [1 favorite]

Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).

Ritholtz hasn't seen my blog, because he would have tied this statement into the 2004 election. Greenspan had used his influence to benefit Republican presidential candidates the previous 4 elections.

Of course I don't use the word 'cause', it's a complex system, there are lots of causes, as zenmaster notes in my preview
posted by rakish_yet_centered at 2:42 PM on November 8, 2011

Diablevert I agree that it is not true the banks were forced to make the loans by the government. They were being pressured by their customers - the pension funds. I think people don't understand how the investment banks work in the big picture. They listen to their customers.

I agree that most people don't understand how investment banks work. Where I think we disagree is whether investment banks think of themselves as smarter than pension funds. I think they very much do. I'm on my phone so it's hard to link intensively, but the Abacus debacle is a good example. The institutional investors wanted yield, and the banks were looking to give it to them. The way they got there was essentially abandoning traditional underwriting. If that was all they had done, then no one would have invested with them --- or at least those who did would have known that the investments were quite risky (probably far too risky for pension funds, actually). But instead, we got a bunch of financial "innovation" which purported to divvy up the risk and slice it off from the yield --- the tranching system which allowed the funds to buy supposedly AAA securities which they were nevertheless earning 6% on. There were a number of hypotheses underlying those ratings which turned out to be very wrong in 2008 --- the most important and simplest off all being that home prices would never go down nationwide (in individual markets, yes, they diversified for that, but not nationwide). These premises were entirely untested and when put to the test they turned out to be completely wrong. This is the danger. This is the lesson we have to learn and which The Big Lie is preventing us from learning. I don't think that most of the fools who sold these time bombs did so out of conscious malice --- though I'm certain there's lots more where abacus came from --- but the idea that the pension funds browbeat them into breaking their stringent enthical standards is laughable. What happenned was a lot closer to the scene in terry pratchett's Hogfather where the chef at a fancy restaurant realises his ingredients have all been replaced by muddy boots and so he tells the waiter to write up new menus, douses them in cream and starts shovelling out plates of Sole d'un Bonne Femme dans un Coulie de Terre et L'eau.
posted by Diablevert at 2:49 PM on November 8, 2011

fings, that would be a good way to get a constitutional amendment mandating the perpetual future production of American Idol, but not much else. (Presumably the POTUS would be endowed with the authority of appointing judges.)
posted by mek at 3:02 PM on November 8, 2011

Some days, I think the best way to get rid of election money is to get rid of elections. Instead, much like jury duty, congress members would be selected at random from the pool of citizens in each district.

They would just create a thousand one family districts and one district for the rest of us.
posted by srboisvert at 3:03 PM on November 8, 2011

I've seen this bullshit popping up in the comments made by the right wing assholes on my local paper's website.
posted by zzazazz at 3:37 PM on November 8, 2011 [1 favorite]

What's frustrating is that it's so much easier to spread the "Big Lie" than to actually try and understand the factors that lead to where we currently find ourselves as a country. I have coffee many mornings with a group of conservative lawyers and money guys and they love the "Big Lie" because it's so much easier to understand (the poor people are irresponsible) than to actually understand the fundamental issues at hand. Anytime I bring the financial industry's culpability in lobbying, creating complex financial instruments that they didn't even understand and betting against their own investments they laugh at me.

If there was only an easy sound-bite worthy way of explaining things to them they might actually listen. Shit, who am I kidding - its way easier to just blame Obama and the poor people.
posted by photoslob at 3:42 PM on November 8, 2011

If there was only an easy sound-bite worthy way of explaining things to them they might actually listen.

There were just as many poor and dumb people in the 1960s. Why didn't the housing bubble happen then?
posted by benzenedream at 3:54 PM on November 8, 2011 [1 favorite]

Some days, I think the best way to get rid of election money is to get rid of elections. Instead, much like jury duty, congress members would be selected at random from the pool of citizens in each district.

Sortition is how they did it in Athens. It seems like a solid system. On the one hand, running a modern society requires a huge amount of technical know-how that the average person doesn't have. But on the other hand, our current electeds don't have that know-how, either — that falls mostly to the bureaucracy, right?

fings, that would be a good way to get a constitutional amendment mandating the perpetual future production of American Idol, but not much else. (Presumably the POTUS would be endowed with the authority of appointing judges.)

I don't think the American public is anywhere near as stupid and frivolous as most of the members of the American public think we are. We're mal-educated, certainly, but on the whole we're too poor to be that stupid and frivolous. If you want to find genuine wasteful idiocy, you have to look to our betters.

But, anyway. Sortition isn't how we do things around here, and won't ever be, but honestly it's actually not that bad a system.
posted by You Can't Tip a Buick at 4:01 PM on November 8, 2011 [2 favorites]

Of course, then I went and proved myself too dumb to close an italics tag...
posted by You Can't Tip a Buick at 4:02 PM on November 8, 2011

that version is equally specious.

Sure, there are times when the market flat out fails. But I still don't understand where the government was supposed to step in and fix this failure before it happened.

People didn't realize the derivatives were more risky than advertised. Yes, they certainly should have. But if having millions of dollars on the line isn't enough to perform enough due dilligence to see the problem, I'm not sure how additional regulations requiring due dilligence would have made it better.

People are going to make mistakes. I can understand government policy to cushion the blow from the mistakes we make, but I can't wrap my head around how one makes policy with the intent to stop mistakes from happening. Not without a crystal ball.
posted by politikitty at 4:34 PM on November 8, 2011

I'm a little surprised that this idea even needs debunking. It seems so overwhelmingly plain to me (and also just plain overwhelming) that the financial crisis is the consequence of a lot of factors that no one can fully identify, let alone solve. A feeling of certainty that there was a single, articulable cause? Something as relatable as government incompetence? What a nice feeling that would be to have.

Feeling rather helpless in the face of the causes/effects of postmodern life etc. made me reread White Noise recently, and in particular this passage struck me as germane, a bit of foreshadowing of what a lot of people have been feeling lately, I think:

In the morning I walked to the bank. I went to the automatic teller machine to check my balance. I inserted my card, entered my secret code, tapped out my request. The figure on the screen roughly corresponded to my independent estimate, feebly arrived at after long searches through documents, tormented arithmetic. Waves of relief and gratitude flowed over me. The system had blessed my life. I felt its support and approval. The system hardware, the mainframe sitting in a locked room in some distant city. What a pleasing interaction. I sensed that something of deep personal value, but not money, not that at all, had been authenticated and confirmed. A deranged person was escorted from the bank by two armed guards. The system was invisible, which made it all the more impressive, all the more disquieting to deal with. But we were in accord, at least for now. The networks, the circuits, the streams, the harmonies.

posted by dixiecupdrinking at 4:37 PM on November 8, 2011 [1 favorite]

The efficient market hypothesis that Sticherbeast alludes to above is that people are greedy (that is, they act in their own self interest), but when you put everyone's greed together the bad parts cancel out and you end up with the best possible way to distribute goods and services.

That's not the efficient market hypothesis. The efficient market hypothesis is, in a nutshell, that you cannot outperform the market average in financial services in the long run.

You are describing a debasement of the invisible hand theorem, which is that people who act for amoral purposes produce socially beneficial results, i.e. an efficient economy. Note that I say amoral, not greed - as Adam Smith put it, the butcher doesn't sell you meat because he likes you, he sells it because he needs to make a living.
posted by kithrater at 4:45 PM on November 8, 2011 [1 favorite]

People are going to make mistakes. I can understand government policy to cushion the blow from the mistakes we make, but I can't wrap my head around how one makes policy with the intent to stop mistakes from happening. Not without a crystal ball.

The government can't protect us from market failures as a generic phenomenon, that's true. However, just as the government can't protect us entirely from, say, hurricanes, nonetheless the government can take steps to minimize damage. The government can regulate financial institutions so that speculation is controlled and so that risk is spread out appropriately. Tighter enforcement of existing regulations and oversight would also go a long way towards preventing future issues.
posted by Sticherbeast at 5:05 PM on November 8, 2011 [1 favorite]

politikitty: Sure, there are times when the market flat out fails. But I still don't understand where the government was supposed to step in and fix this failure before it happened.

Canada's financial sector hasn't had the same problems as the US; its regulatory regime appears to function more smoothly. Chrystia Freeland, What Toronto can teach New York and London:

[Julie Dickson, head of the Office of the Superintendent of Financial Institutions] points to three specific restrictions: capital requirements, quality of capital and a leverage ratio. “We had a tier one capital target of 7 per cent going back to 1999,” she says, referring to the proportion of the bank’s equity considered to be of the highest grade. “We also paid attention to quality of capital, so 75 per cent of that tier one had to be in common shares [as opposed to preferred stock, which is considered a hybrid of equity and debt]. And our leverage ratio [of debt to equity], of 20 to 1, was very important, we think.”

Mark Carney at the Bank of Canada cited those same three rules, and this nearly word-perfect unanimity between the two speaks to a fourth, structural advantage – Canada’s uncomplicated and well co-ordinated regulatory framework.

... The bank chiefs seem to get the message. According to [Ed] Clark, whose TD bank has significant operations in the US: “The message in the US is it’s your responsibility to meet our rules. In Canada, the responsibility is to run the institution right. Julie says [to the CEO]: you are the chief risk officer of the bank.”

In contrast, here's Sheila Bair's description of her attempt (as head of the FDIC) to regulate sub-prime mortgages:

"The industry was really fighting us. I will never forget [when] a group of mortgage bankers came in, it was probably January, February, 2007, and ... sat down and just vigorously argued against doing anything."

The FDIC and other regulators went ahead and finalized a set of sub-prime mortgage lending standards, but it knew that it had to tackle the huge number of sub-prime mortgage loans that had already been created. The regulator urged the parties behind the risky mortgages to extend the lower "starter" rates on the mortgages, the alternative being that huge numbers of mortgages holders would be unable to make the higher mortgage payments and ultimately default and devastate the housing market.

"We thought the industry was on top of this, ahead of this, and it was going to happen, and then late summer or early fall Moody's.com came out with a report that said less than 1% of these distressed subprime loans were getting restructured, and an overwhelming majority were going into foreclosure."

In the fall of 2007, Ms. Bair spoke at a financial industry meeting and challenged participants to extend the starter rates and deal with the looming threat to the housing market. One unsympathetic participant spoke up and said, 'You can't help these people. You try to give these people a break they are just going to go out and buy a flat-screen TV.'

She recalled that she responded with the question, "Why did you give them the mortgage in the first place?' And I will never forget; his answer was 'Bad regulation.'

"So much for the self-regulating market," concluded Ms. Bair.

Maybe the US banking industry needs different bankers.
posted by russilwvong at 5:11 PM on November 8, 2011 [12 favorites]

Exactly what regulation was the government supposed to act that would identify mortgage backed derivatives as more risky than advertised?

People had a low appetite for risk. It wasn't a case where the market was wildly speculating. They were in fact acting in a very conservative fashion, buying derivatives that seemed incredibly low stake. It just turned out that their conservative asset was not actually conservative. That why this bubble hurt so much more than the dot-com where people understood internet companies might not be profitable. Most investors were able to hedge their bets and determine an adequate amount of risk they were willing to absorb.

The bad mortgages were a problem, and a bubble in their own right. But it was the poorly packaged derivatives that masked the problem and hid it in the most conservative foundations of our banking industry. With the advantage of hindsight, we can say "Oh that was dumb. My god, that was dumb. How did we all think *that* would work?" But I haven't seen any financial regulations that could have reasonably been enacted without that knowledge.
posted by politikitty at 5:21 PM on November 8, 2011

kithrater - I believe you and Kevin Street are dancing around the same concept. If bankers are knowingly bidding up derivatives beyond their worth, some of those bankers will realize they can maximize their profit by shorting the stock. So the derivative will always hover around a price that represents what the cumulative market thinks it is worth.

The market might be spectacularly wrong. But greedy price manipulations tend to aggregate out of the price due to rent-seeking. Same concept, different avenue.
posted by politikitty at 5:32 PM on November 8, 2011

From what I can tell, the risk of mortgages was still pretty damn low. Most mortgages, even the subprime ones, would eventually pay out if you sat on them, and the increased risk was still small compared to industrial or agricultural investments.

The problem was greatly compounded by the fact that everyone was ridiculously over-leveraged to make those derivatives. When those institutions started defaulting on the big loans because they had no wiggle room for any change in risk, it became dominoes all the way up the food chain.
posted by CBrachyrhynchos at 5:43 PM on November 8, 2011 [1 favorite]

Exactly what regulation was the government supposed to act that would identify mortgage backed derivatives as more risky than advertised?

Perhaps have open exchanges, rather than pass anti-regulation laws that prevented any oversight?
posted by benzenedream at 5:49 PM on November 8, 2011 [1 favorite]

politikitty: A specific problem identified by Ritholz and Dickson is leverage. If you pay too much for an asset, you'll take losses on it, but those losses won't wipe you out unless you have too much leverage. Ritholz:

The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very little room for error.

Recently, Jamie Dimon has been claiming that limiting the maximum leverage of the largest banks (the proposal is to require 2.5% more capital than other banks) is "anti-American".

Why are US bankers so hostile to regulations that would limit their ability to take risks, even after the financial crisis wiped out Lehman Brothers and AIG? Doesn't recent history suggest that they aren't as good at managing risk as they thought?
posted by russilwvong at 5:51 PM on November 8, 2011

I believe you and Kevin Street are dancing around the same concept

Not really.

EMH is demonstrably not a theory about how people are greedy/self-interested but when all their actions are combined we end up with the best possible way to distribute goods and services, which is apparently what Kevin Street thinks it is.

EMH is a theory as to how prices are set in financial markets, and how you shouldn't be able to out-perform a financial market in the long run. Does it rely on assumptions of a market full of rational, utility-maximising individuals? Yes. Does it claim that such a market will be the best possible way to distribute goods and services? No.

As for your example, there is no "worth" in EMH. A price is not wrong because it doesn't match the "worth" of the item it is attached to. The market is not wrong because its aggregate of prices doesn't match the aggregate "worth" of items in the market. If there is a sudden drop in prices, weak EMH and semi-strong EMH explains this as a result of new information leading to a new price - it has nothing to do with "worth".
posted by kithrater at 6:02 PM on November 8, 2011 [1 favorite]

Exactly what regulation was the government supposed to act that would identify mortgage backed derivatives as more risky than advertised?

the regulations that were put in place after the Great Depression and repealed under Reagan, Bush and Clinton? The ones that kept banks from being in certain investment areas and taking risks when they were "too big to fail" that required bail outs to prevent them from taking everyone else down with them?

of course they did that anyway because they were able to convince the government that they as soon as their execs got paid, we had to put everyone else on "austerity" and fight the deficit.

Which didn't matter one whit while they were whining... the idea is corporate welfare for them, socialized risk for the rest of us.
posted by Maias at 7:25 PM on November 8, 2011 [1 favorite]

Why are US bankers so hostile to regulations that would limit their ability to take risks, even after the financial crisis wiped out Lehman Brothers and AIG? Doesn't recent history suggest that they aren't as good at managing risk as they thought?

Recent history suggests that no matter how badly they screw up they will not personally lose any money, while if they win their bets they will get to keep the profits. They're not risking anything of theirs, so why wouldn't they want to gamble big?
posted by Holy Zarquon's Singing Fish at 7:28 PM on November 8, 2011 [9 favorites]

Term limits + no congressional pensions . . .

FWIW term limits definitely swing the balance of power in a legislative body in the direction of lobbyists. So you might think that one through. They become the only ones in the system with any institutional knowledge of how the system really works.

My state implemented term limits and the change in the state legislature is very noticeable--towards lobbyists and idiots. Everyone with experience and anything like a long-term view of things is now long gone.
posted by flug at 7:44 PM on November 8, 2011 [1 favorite]

Holy Zarquon's Singing Fish: They're not risking anything of theirs, so why wouldn't they want to gamble big?

Okay, let me put the question differently. Why don't Canadian bankers think like this? What's wrong with US bankers? Why are they so focused on getting rich quick?
posted by russilwvong at 7:49 PM on November 8, 2011

You want deliberative democracy using deliberative opinion polls, fings.

We could implement this by making all laws pass jury trials with enormous juries as I describe here. In effect, ordinary people who watch or participate in a debate vote more intelligently, like 10% to 20% more intelligently.

There are the fingerprints of deliberative democracy ideas all over Occupy Wall St. and Spain's Democracia real YA. Obama has proven himself hip enough to notice, but offered any substantial deliberative reforms.
posted by jeffburdges at 8:04 PM on November 8, 2011

H. Roark wrote: Ritholtz is saying the fed dropping rates to zero resulted in pension funds reaching for yield, and the banks simply facilitated that process.

How is it that something which happened after the housing bubble burst caused the housing bubble? Did I somehow miss the appearance of a little blue police box?

The Fed did reduce the funds rate to 1% for much of 2004, then steadily raised rates right up until the music stopped. Their continued raising of rates did absolutely nothing to stem the tide of cut-rate money coming out of the woodwork. Why? Because everybody wants high-yielding triple-A. May as well buy an MBS instead of depositing the money in a bank account. It yields more and is just as liquid. (at least that was the thinking at the time)

There was also the supply side issue of the big IBs shoving MBS and things built upon it down their client's throats, always failing to disclose the rather material information that most of them didn't actually deserve the AAA, but in reality it didn't actually matter what the fed funds rate was, unless it was raised to something so punitive that private-label mortgage business stopped being written entirely, as nearly happened during Volcker's war on inflation.
posted by wierdo at 12:51 AM on November 9, 2011

politikitty wrote: With the advantage of hindsight, we can say "Oh that was dumb. My god, that was dumb. How did we all think *that* would work?" But I haven't seen any financial regulations that could have reasonably been enacted without that knowledge.

Is this a joke? Are you seriously not aware that there were a fair number of folks who, while they couldn't predict the exact date, were completely on top of the concept that the CDO market was fucked, going back to 2006 at least? Personally, I didn't even know about CDOs before the crisis. Still, it wasn't hard to see that the rise in home prices was unsustainable. When most any asset nearly doubles in price in less than 5 years, you can be almost certain the fundamentals are not in fact there.

That piece of the puzzle wasn't even really a puzzle. It was widespread knowledge. Why are all those folks not rich? Because identifying a bubble does not provide an indication of when it will burst. As was once said, the market can remain irrational longer than you can remain solvent. Billions have been lost on many occasions by a speculator being correct, but two weeks too early.
posted by wierdo at 1:06 AM on November 9, 2011 [2 favorites]

(the "Big Lie") that it wasn't irresponsibility on the part of the banks that caused the crash--it was really misguided government policies!

Well, it was really misguided government policies... the ones that favor Wall Street.
posted by Rykey at 4:42 AM on November 9, 2011 [2 favorites]

Holy fucking apologists batman. Is anyone else reading this thread in astonishment.
posted by vicx at 5:21 AM on November 9, 2011

My solution would be direct democracy with internet voting by all citizens on every major bill.

And then let individuals go ahead and sell their votes.

Then the motherfuckers would have to bribe millions of people, not just a few hundred.
posted by spitbull at 5:54 AM on November 9, 2011

I'm afraid they'd simply buy television commercials, spitbull, plus you witness rather wacky stuff in direct referenda, like in say CA and CO. Imho, such direct voting should actually work for repetitive questions, like some coarse budget allocation, but afaik nobody has done much research there. There has however been considerable research put into deliberative approaches.
posted by jeffburdges at 7:07 AM on November 9, 2011

It seems so overwhelmingly plain to me (and also just plain overwhelming) that the financial crisis is the consequence of a lot of factors that no one can fully identify, let alone solve.

Yes, this. I am fully on board with the idea that, simultaneously, (1) our government's policies were misguided and resulted in unintended consequences, (2) our banking system and wall street traders saw a giant pile of money there for the taking and started gorging themselves without regard to long term consequences, (3) that lobbyists were able to control regulations and laws in a way that benefitted their direct financial interests at the expense of others, and (4) that large large numbers of the 99% were all too happy to take out a loan (or loans) that were bigger than they could responsibly afford on the promise of a bigger shinier house or the promise of easy money with price appreciation in a few years.

To focus on one or two of these only, and imply that they are the reason at the exclusion of the others, won't really help any of us.
posted by AgentRocket at 7:59 AM on November 9, 2011 [2 favorites]

Diablevert: the boom was driven by innovations in securitisation. And that was Wall St. driven

The thing that angers me right now is that the exact same thing appears to be driving the current round of sovereign defaults. AFAIK, all those Greek, Spanish and Italian bonds are leveraged hundreds of times over. Investors can't have afford for these investments to fail because they never had the money to pay for them in the first place. What's crazy is that no one is talking about this, even as elected governments are falling over the issue.
Somebody correct me if I'm wrong.
posted by Popular Ethics at 8:23 AM on November 9, 2011

If you want to know why Canada has not completely collapsed even thought the US is its largest trading partner, go find some of the things Mark Carney has said about banking institutions.

There is a traditional since the late 70s, early 80s to have a Bank of Canada governor that not only holds the government accountable to budgets and spending, but is often in direct opposition with current fads in government economies.

Note that the current government has been quite vocal about dismantling some of the "roadblocks" in place keeping lending institutions from speculating more heavily in risky markets. Let's see how that works out for us, shall we?
posted by clvrmnky at 8:34 AM on November 9, 2011

fings: "36Some days, I think the best way to get rid of election money is to get rid of elections. Instead, much like jury duty, congress members would be selected at random from the pool of citizens in each district."

I believe Clarke's _Imperial Earth_ used just this system.
posted by QIbHom at 8:58 AM on November 9, 2011

AgentRocket wrote: (4) that large large numbers of the 99% were all too happy to take out a loan (or loans) that were bigger than they could responsibly afford on the promise of a bigger shinier house or the promise of easy money with price appreciation in a few years.

Or maybe, just maybe, it #4 might have more to do with the fact that millions of the 99% lost their freakin' jobs in the space of a few months. Or maybe it had to do with the ridiculous numbers of fraudulent appraisals which conned both lenders and prospective homeowners into believing the house was worth more than it actually was, which, incidentally, helped drive up the price of other homes.

Perhaps the blame, if you must assign it on the demand end of the mortgage market, is more fairly allocated to the professionals.

Yes, PE, leverage is a large part of what is driving the widespread screwiness in sovereign debt. Greece and a couple of others have real solvency issues. Were interest rates not through the roof due to uncertainty, Italy, to use one example, would have zero trouble at all. Even now, it'll be several years before things can possibly blow up for them. There are other issues (the austerity bug is actually a big one, as it makes large budget deficits likely to extend farther into the future), but leverage isn't helping,
posted by wierdo at 9:02 AM on November 9, 2011

As for your example, there is no "worth" in EMH. A price is not wrong because it doesn't match the "worth" of the item it is attached to. The market is not wrong because its aggregate of prices doesn't match the aggregate "worth" of items in the market. If there is a sudden drop in prices, weak EMH and semi-strong EMH explains this as a result of new information leading to a new price - it has nothing to do with "worth".

You're ignoring "willingness to pay". People all have various ideas of worth, and will only buy a stock if they think that the price is lower than the worth of the stock. They think eventually investors will realize that this is an under-valued stock, and bid up the price.

The price is an aggregate of investor knowledge, and investor knowledge can be spectacularly wrong. Irrational optimism and pessimism are pervasive in investing, leading to bubbles and bank runs. So perhaps it's not that the price is wrong, but the price reflects irrational viewpoints. So there exists the important point that aggregation of knowledge chases out greed and nefarious intentions. Only stupidity remains.

It is not that I think there are government regulations that couldn't exist to stop this from happening in the future. But the government is made of the same people. The market could have easily bid down these inflated prices, if there was significant population who foresaw the crash. If the population of pessimists was so small they could not make a dent in the market, I fail to see how we could reasonably expect them to make a dent in public policy.

This is not to say that we shouldn't change policy to fit with this new information. But blaming it all on bad actors rather than bad incentives is the wrong way to approach economic policy. And imagining a government that is somehow smarter than the population is another great way to get bad policy.

The rally cry of "we should have known" doesn't change the fact that a vast majority of us did not know.
posted by politikitty at 9:34 AM on November 9, 2011

The Virgin Crisis: Systematically Ignoring Fraud as a Systemic Risk. Clunky title aside, this is a terrific article.
posted by Sticherbeast at 9:37 AM on November 9, 2011 [2 favorites]

The rally cry of "we should have known" doesn't change the fact that a vast majority of us did not know.

The housing bubble wasn't exactly hard to see:

Forbes, 2001 - What if Housing Crashed?
Economist, 2003 - House of Cards
Economist, 2005 - In Come the Waves

For a while in the 2000s, it seemed as if the Economist (hardly a niche magazine) was running a "Please pop the housing bubble" article every six months.

CDOs were less obvious, but in numerous stories, financial players knew that the shit would eventually hit the fan with regard to securitized mortgages, but thought they would be smart enough to pass on the bad debt before the bomb went off. Meanwhile, there was lots of money to be made in shoveling shit down the line. What do I care if Bear Stearns goes down if I just got a $5 million bonus last year for selling time bombs?

Perhaps the average person on the street didn't get it, but anyone paying attention (who did not have a direct financial stake in keeping the scam running) knew the market was going to blow up. I would venture that the financial community underestimated how correlated all the asset classes were, and didn't anticipate liquidity crises at the same time, but there was plenty of anticipation.

The market could have easily bid down these inflated prices, if there was significant population who foresaw the crash.

If you haven't read it, please read Extraordinary Popular Delusions and the Madness of Crowds (gutenberg link available at Wikipedia). It was written in 1841 and covers why bubbles don't get bid down.

I'm not quite sure what you're arguing -- government is made up of fallible people, so economic policy decisions that are useful cannot be made? The population in aggregate is so intelligent that no human economist could possibly do better? These are both demonstrably false. Unregulated markets tend towards monopolies and boom/bust cycles when left to their own devices. Check out the Chinese government lending squeeze, they are trying to slowly deflate their own bubble.
posted by benzenedream at 12:40 PM on November 9, 2011 [3 favorites]

You're ignoring "willingness to pay". People all have various ideas of worth, and will only buy a stock if they think that the price is lower than the worth of the stock. They think eventually investors will realize that this is an under-valued stock, and bid up the price.

I am discussing what EMH is (a theory as to how prices are set in financial markets), and what EMH isn't (as theory as to how social good is created through people pursuing their own selfish interests). What you are describing is not EMH. If you want to argue that my definition and understanding of EMH is not correct, then you will need to reference what EMH actually says to correct me. Inventing aspects that are not in EMH in order to argue what EMH is does not make your argument at all compelling.

The market could have easily bid down these inflated prices, if there was significant population who foresaw the crash. If the population of pessimists was so small they could not make a dent in the market, I fail to see how we could reasonably expect them to make a dent in public policy.

There were significant portions of the market who foresaw the crash. Michael Lewis' The Big Short is hagiographic account of a small portion of these traders who made billions creating much of the demand for swaps and options of synthetic CDOs. A wealth of email evidence from major investment banks reveal that many of the traders knew they were trading rubbish, but due to the agency problem, didn't care - the phenomenon of You'll Be Gone I'll Be Gone.

Swaps and options are not publically traded, and everyone going short on CDOs by purchasing swaps and options wanted the prices to remain as high as possible up to the inevitable crash in order to make more money - with the side effect of making the resulting margin calls on ludicrously leveraged entities all the more disastorous.

Had there been government regulation about the need for oversight and disclosure on swaps and options, like there exists for shares, then the market would have seen that there was a significant amount of people who were betting that CDOs would implode. Maybe the market would have responded rationally to it.
posted by kithrater at 1:36 PM on November 9, 2011 [1 favorite]

Canada's Bank Chief Mark Carney's speech at the G20: "Global liquidity is an amorphous concept. The Usual Suspect for any event or dynamic too complicated to explain, global liquidity is the Keyser Söze of international finance. It has no agreed definition and, as a consequence, there has been no coherent policy approach to tame its more violent tendencies."
posted by Popular Ethics at 3:24 PM on November 9, 2011 [1 favorite]

60 Minutes: Congress: Trading stock on inside information? Steve Kroft reports that members of Congress can legally trade stock based on non-public information from Capitol Hill
posted by homunculus at 7:05 PM on November 13, 2011 [1 favorite]

Secret Fed Loans Gave Banks Undisclosed $13B.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.
posted by Horace Rumpole at 6:09 PM on November 27, 2011 [1 favorite]

Hank Paulson Warned Hedge Funds, Goldman Sachs Pals About Takeover of Fannie Mae and Freddie Mac
posted by homunculus at 1:01 PM on November 29, 2011 [1 favorite]

Federal Judge Pimp-Slaps the SEC Over Citigroup Settlement
posted by homunculus at 1:06 PM on November 29, 2011 [1 favorite]

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