October 9th, 2008
It amuses me terribly that Bush/Cheney is forced to turn over to socialism as a result of the present economic mess. 8)
Why? Do you like to see the long-term stability of our economic system damaged as a trade-off to get more votes for the Republican Party in 2008?
Not at all.
I'm amused at the irony. Unlike our mutual friend, I believe it to be a result of laissez-faire economics over the past eight years. The solution ends up being the precise opposite.
The banks were forced by the government to make dubious loans to "minority neighborhoods," and told that the government would back them up if they collapsed. How is this "laissez-faire" economics?
And the bailout is hardly "the solution," it's simply spreading the damage around the whole economy. It might prevent a recession, but it's doing so at the risk of a far worse depression.
It would make more sense to let the failing banks fail, and be bought up by other firms. I fear that what we're doing now, for obvious short-term political gain, could cause a second Great Depression.
Socialism still works poorly, regardless of the motive.
The banks were not forced. This was a simple value proposition for them. With low interest rates, you get people to commit to a mortgage. Instead of waiting around to collect the money or resell the property, you sell it to another firm for something near enough the expected profit. Best of all, you don't have to worry about keeping the staff on hand to chase down defaulting mortgages.
Ultimately, the problem was that mortgages stopped being loans and started becoming property. It worked so well that Freddie Mac was fined around $4 million for making illegal campaign contributions to politicians on the House Committee on Financial Services.
The best proof that it wasn't the HUD's fault is that while the FDIC was equipped to finance the mortgages they backed, they weren't prepared to handle all the other mortgages which were snapped up at the same time to sell off and make a quick buck.
I think testing4l is right on this one--the subprime mortgage meltdown was fueled in large part by the unregulated banking practices of the private sector which had unforeseen consequences. Basically, the banks mismanaged the risky mortgages and had greater incentives to grant risky mortgages because, as testing4l pointed out, mortgages started becoming property. This was not a decision made by the government but by the private banks. There are things the government could have done to prevent the situation from getting further out of hand, but unfortunately it was only recognized too late that the markets were suffering from low credibility rather than low liquidity and so efforts were put into restoring liquidity which ultimately failed for the predictable reason that they did not restore confidence. You could also blame the federal government for changes in bankruptcy laws (they were de-liberalized). So really this was a failure on the part of both the private and public sector; everyone pretty squarely messed up, but it was to some extent unavoidable because it couldn't have been easily predicted.
And I would also like to point out that, because of FDR's "socialist" policies, my grandfather got a job and the economy recovered from the Great Depression. I think it's simplistic to suppose that socialism always works poorly or that free market capitalism always works poorly; these things have to be decided case by case.
THANK YOU FOR SOCIALIZING EATING THE STICK BUT NOTHING ELSE YOU EVIL FUCKERS
Didn't FDR do something similar during the Great Depression?
I'm seeing a lot of fingers being pointed at a lot of different people and policies. It seems like there is a lot of blame to go around, not just to Bush and Cheney, although I do remember seeing a campaign ad in 2004 for Bush/Cheney which touted the high rate of home-ownership as a success of the current administration. Needless to say, they're not really owning up to that one now.
It is kind of funny that the trumpeters of free market capitalism are now socializing the banking system; except that it's actually pretty horrific how people are losing their shirts.
Yep -- and if you look back at the accusations of the time, FDR was very much branded a socialist. Of course, we know now that Hoover had a similar plan and FDR was mostly cribbing from his notes.
Basically, the need to socialize the industry is proof that it won't manage OK on its own. Paulsen really tried to just let banks fail -- Lehman Bros. is an example of that.
Ultimately, some financial institutions are going to come out on top of all this. JPMorgan Chase and Bank of America were able to purchase extensive holdings for relatively small amounts because Washington Mutual and Merrill Lynch were trying to avoid bankruptcy.
(Edit: crap! I said Truman! Duh!)
Edited at 2008-10-10 11:40 pm (UTC)