Current economic/market events - a view from the playing field

[Handprints]

For comedic effect, I often start posts by trying to remind myself whether I'm on the right or the left. Since I'm not American and don't hold political beliefs that match either the Dems or Reps very cleanly, there's at least one geographic context in which that's open to debate. Whether or not I'm a capitalist, in the functional sense, is less murky: 100% of my earned income is derived from my ability to raise and allocate capital and the largest proportion of my income comes from past earnings that are now at work in the capital markets. Right now, in football terms, that means I'm a left guard with a lot of mud on his ass hoping his quarterback's eyes are going to uncross sometime soon...

A long time ago in another post, I wrote that all capitalism lets you do, as an economic system, is price things and allocate capital towards them on the basis of your pricing beliefs. That's it. Nothing more. It doesn't sound like much when you put it that way but, if everyone takes it up, like cooking and democracy, a really incredible range of human achievements become possible, from the universal franchise to chocolate eclairs.

Success in capitalism results pretty much exclusively from forming beliefs about pricing that prove to be correct over time and allocating capital to back your beliefs. Since there are (usually) no limits on your ability to do this in a free market, there is a constant search for new ideas which can be put into practice. Depending on what other beliefs you hold, you can tie this to a broader political agenda: libertarians like Schumpeter's creative destruction theory; science guys like the idea of technological advances punctuating economic disequilibria; social welfare types like the idea that capitalism can ensure the (chaotic) progress of those elements of the social infrastructure that are insufficiently important to merit direct state control. You can make up your own mind the extent to which capitalism is useful to achieving other social goals; you can believe that there are no valid social goals other than amassing more capital; you can even believe that capitalism, if applied without constraint, will eventually eradicate all socially undesirable things. What you can't do, in my view, is argue that capitalism guarantees anything other than the two things I listed: the ability to price anything and the ability to allocate capital based on your pricing beliefs.

The inevitable result of this freedom to price and allocate is that capitalism will break things: if enough people decide something is worthless (or near it), it becomes worthless (or near it), sometimes for a very long time. Sometimes it breaks things that ought to be broken. Sometimes it breaks things that were perfectly sound, then rediscovers them years later. What some of capitalism's most ardent cheerleaders (regrettably, this includes a number of people who work in markets for a living and who should, as a result, know better) sometimes don't get is that capitalism is perfectly capable of breaking itself and regularly breaks some of the key capabilities that keep it functioning. Recognising that fact, every country that employs capitalism tends, to a greater or lesser extent, to limit capitalism's ability to fool around with things it considers really, really undesirable to break, such as food safety laws, building codes and the government's ability to influence economic policy. That last example is the pertinent one to today's news.

It looks like a number of different things are broken right now but, in truth, there's really only one that's important: capitalism, free and unfettered, by exactly the same processes it breaks monopolies, bad ideas, debt-crippled companies and buggy whip manufacturers, broke the balance sheets of the majority of America's (and a great many of Europe's) lenders. Enough people decided that mortgage-backed securities were worth a lot - and carried very little risk - that they became important elements of these lenders' balance sheets and very important parts of their income-generation activities. When enough people changed their minds, two things happened: the chunk on the balance sheets went poof, and they became potentially liable for huge payments based on a big part of their income generation for the past five+ years. In simpler terms, their assets dropped suddenly at the same moment their liabilities jumped. That's half the problem. The other half of the problem is that we can't actually count how much of the assets are now gone and how much liability was added.

As a practical matter, it's not actually possible to assign a definite fair value to a mortgage-backed security. The only way we could price them accurately is if the government passed a law making it illegal to refinance your mortgage or pay it off early: what you've got now you have to stick with until it is fully paid off, one month at a time. Fat chance. The best we can do is form a guess that will usually be more or less right under normal market conditions. (If you're really desperate to understand why that's true, it will be covered in the Options, Warrants and Derivatives courses at your local university's Master of Finance programme.) Before 2006-ish, people who understood this fact perfectly well were willing to put a price on the things under certain conditions: only small amounts of volatile or exotic debt could be combined with a large quantity of mainstream debt, market conditions had to be benign (ie better than normal), the economy had to be growing, and there had to be insurance available in case the bet went wrong. Under current conditions, none of those safety nets are available. As a result, the conservative value of these mortgage-backed securities is fluctuating between near-zero and not-a-whole-lot-more, depending on their provenance. Those prices are opinions - that's why they're so volatile. Currently you hear a lot of nonsense (especially from politicians) about how "we can stabilize their value" or "they're fine if they're held to maturity." The part of this that isn't pure ignorance is a sales pitch. It isn't true. We don't know what it's worth right now, we don;t know what it will be worth if the government buys some of it, and we don't know what it will be worth if held for a longer period - up to and including maturity. There isn't any way to know.

As a result, we don't really know how badly the asset column of lenders' balance sheets was hit by the drop in value of the securities and, since many of these same lenders offered insurance against mortgage-backed securities going bad, we also don't know how much their liability grew. Helpful, ain't it?

So what do you do if you're a government faced with this problem? You know, if you have the remotest idea how markets work, that lenders are far, far more important to your economy than, say, stocks. You know if they can't (or won't) lend, your economic growth will start going backwards at speed. And you know that if you lose even a reasonably-sized number of lenders to bankruptcy, a roughly similar proportion of non-lenders will be out of business within a year or two. What do you do?

There are currently two approaches being put into practice. In Europe, governments are either buying broken lenders outright or buying very large blocks of new shares in them in order to recapitalise them. They will hold these shares (or the lenders themselves) and inject more capital into them when needed until a more normal market condition prevails (likely not for a few years until time and repayments begin to give us a sense of the scale of the mortgage-backed problem), then sell them back to private investors. Call this the direct approach.

In the US, there's an indirect approach being attempted. The Paulson plan calls for the government to buy the mortgage-backed securities from the lenders at some price to be named later but high enough to at least partly improve their balance sheets. The government will also lend money to any lender who has to meet liabilities resulting from MBS exposure. The idea is that taking a (for now) USD700bn bite out of this multi-trillion dollar market will calm things enough that the remaining MBS won't tip the whole ship over. Call this the indirect approach.

My own view, for what it's worth, is that the US approach is much higher risk without offering anything tangible as a likely reward. It's a purely political choice. For reason probably better understood by Americans than me, the republican party can't publicly admit what its more market-savvy members know for a fact: that capitalism is perfectly capable of breaking itself. (Note: the break isn't permanent, it just stops functioning for a few years.) Add to that the relatively extreme version of the state/market relationship that the republican party current advocates - that it is always and irretrievably worse for the country for a government to own a market participant than not to own it - and, for political reasons, you can't take the European approach. Instead, even though you can't really be sure which MBS the government ought to buy, what lender liabilities the Fed might have to fund, or whether or not the USD700bn will make any difference to market stability or inter-lender trust, you've got to start throwing your money around.

So what's the likely outcome? It's going to be a rough few years for the US. The structural damage to US lenders' balance sheets, as far as we can tell, is at least twice as bad, on average, than in Europe and more than ten times as bad, on average, than in Asia or the rest of the world. That's a guess, but it's a guess based on very good knowledge of which regions own what proportions of the MBS in issue. If the US bailout works spectacularly well - which it might, nobody can be sure - you're probably looking at two or three years of stagnant-to-negative economic growth that migrates very quickly from Wall St to Main St. Equity markets globally are going to be very volatile, although it will probably seem worse in the US because you're not nearly as used to this kind of sea change in economic conditions as the rest of the world. Global growth in GDP is probably going to decline by a point or two for at least the next two or three years, with most of the decline attributable to slowdowns in North America and Western Europe. If your bailout doesn't work as well as Europe's, pretty much the same thigns will happen with the US absorbing a greater share of the punishment. If neither bailout works, you can double (at a minimum) both the length and the severity of the consequences.

That's how it looks from one capitalist's viewpoint inside the market. I hope it's of use.

H

 

[starrkers]

Thank you, Handprints. For the first time I think I actually have half a clue as to what is going on.

 

[rgraham666]

Thanks Handprints. Always good to hear your view.

My own is the same it has always been. Capitalism is just a tool. As you pointed out it can be used to make things or break things.

The problems begin when capitalism stops being a tool and starts being an ethical system. As it is for the most part in the States.

 

[JAMESBJOHNSON]

Good explanation.

 

[dr_mabeuse]

It's America's phobia about socialism and communism that kept the US from pursuing the more direct option in intervening in the banking failure, and even so a lot of Republicans are still screaming that this is creeping socialism. On the other hand, it looks like this bastardized bail-out isn't going to do it and they're going to have to go in there and take over in the long run.

Meanwhile, if things don't stabilize here soon, isn't there a good chance that the US will lose it's pride of place as the world's financial center? Everyone's looking to Washington for leadership and they're not seeing anything.

 

[JAMESBJOHNSON]

DOC

I think youre wrong on both counts.

Americans like socialism and eagerly bite every free lunch scam that comes along. IF ITS FREE, ITS FOR ME is the American motto. But Americans intuitively know there are no free lunches, and that someone has to pull the wagon if it moves. So, Americans accept something a little less lethal than socialism, they stick someone else with the bill. Which happens to be what the bailout is all about: Fuck your buddy!

America wont lose its place in line because we play Poker, rather than build houses of cards like the Eurrabians.

 

[Pure]

Nice posting, hand!

I particularly admire the second part, assessing the Republican approach, which declines to assume ownership and control of entities such as banks (even if temporarily).

I have a few bones to pick with your initial characterization, though it's well stated and somewhat free of ideology and 'rah rah' Wall Street elements.

handA long time ago in another post, I wrote that all capitalism lets you do, as an economic system, is price things and allocate capital towards them on the basis of your pricing beliefs. That's it. Nothing more. It doesn't sound like much when you put it that way but, if everyone takes it up, like cooking and democracy, a really incredible range of human achievements become possible, from the universal franchise to chocolate eclairs.

Pure: This seems fairly ahistorical, in its discussion of "capitalism." Who is the "you" that does this allocating? Everyone? The rich? Those favored by the king? What you are talking about, essentially, is the beliefs of (certain) private persons, who act without being subject to direct government control. Further, "beliefs" sounds rather bland; actually it's private _interest_ we're talking about. My beliefs about what will get me ahead, esp, as regards my capital.

The basic question though, is WHERE does this allocation obtain? to what degree? influenced by what government? who exactly is doing it? What are the specific circumstances.?

It's good that you say "become possible," for i think you are acknowledging that there is no guarantee, e.g. of democracy.


handSuccess in capitalism results pretty much exclusively from forming beliefs about pricing that prove to be correct over time and allocating capital to back your beliefs. Since there are (usually) no limits on your ability to do this in a free market, there is a constant search for new ideas which can be put into practice. [...]

Again, we are dealing with an ahistorical "capitalism", hence the success is purely abstract or ideal. "Success" in fact results from any number of things, for instance if said capitalist has a friend in Dick Cheney's office, or Senator McCain's or Obama's. We have to look at actual capitalism [variety of] and actual situation.

handYou can make up your own mind the extent to which capitalism is useful to achieving other social goals; you can believe that there are no valid social goals other than amassing more capital; you can even believe that capitalism, if applied without constraint, will eventually eradicate all socially undesirable things. What you can't do, in my view, is argue that capitalism guarantees anything other than the two things I listed: the ability to price anything and the ability to allocate capital based on your pricing beliefs.

There is more than a grain of truth, here, but the argument ignores empirical investigation. "you can believe" makes it sound arbitrary; well, yes, it _can be_ like a religion; that's what you suggest. But production of socially desirable things is to be looked at by empirical investigation. Then beliefs legitimately formed.

Hence the last sentence, while biting and intriguing, is also somewhat misleading. You're saying capitalism as defined and implemented simply guarantees that capitalism exists as defined. OK. But I see no reason to rule out arguments about its conduciveness to human betterment, *in a variety of circumstances.* Your sentence is a bit like saying "when there's a plague, all we can be sure of is that disease is spreading." true, but....


handThe inevitable result of this freedom to price and allocate is that capitalism will break things: if enough people decide something is worthless (or near it), it becomes worthless (or near it), sometimes for a very long time. Sometimes it breaks things that ought to be broken. Sometimes it breaks things that were perfectly sound, then rediscovers them years later. What some of capitalism's most ardent cheerleaders (regrettably, this includes a number of people who work in markets for a living and who should, as a result, know better) sometimes don't get is that capitalism is perfectly capable of breaking itself and regularly breaks some of the key capabilities that keep it functioning. Recognising that fact, every country that employs capitalism tends, to a greater or lesser extent, to limit capitalism's ability to fool around with things it considers really, really undesirable to break, such as food safety laws, building codes and the government's ability to influence economic policy. That last example is the pertinent one to today's news.

This is an excellently stated para., esp in light of current events. The broken things include banks and investment houses. What you might note, however, is that this suggests that internal contradictions may destroy "capitalism" [current form in the US] as we know it. So your alleged 'belief based' allocation may destroy itself, as the allocators' banks collapse, for example; or get taken over, as in Sweden in the 1990s.

handIt looks like a number of different things are broken right now but, in truth, there's really only one that's important: capitalism, free and unfettered, by exactly the same processes it breaks monopolies, bad ideas, debt-crippled companies and buggy whip manufacturers, broke the balance sheets of the majority of America's (and a great many of Europe's) lenders.

OK, the is an admirable characterization of the 'free market.' It DOES solve all problems. e.g. overextended companies, including those making shakily secured loans, go bankrupt and disappear. Hoever the term, "free and unfettered" here is entirely misleading. "Capitalism" as existing in the US in the year 2000 went towards crisis, and it was NOT unfettered; various collusions with government were taking place, e.g around Fannie May. regulations were being lifted or not enforced.

handEnough people decided that mortgage-backed securities were worth a lot - and carried very little risk - that they became important elements of these lenders' balance sheets and very important parts of their income-generation activities. When enough people changed their minds, two things happened: the chunk on the balance sheets went poof, and they became potentially liable for huge payments based on a big part of their income generation for the past five+ years. In simpler terms, their assets dropped suddenly at the same moment their liabilities jumped. That's half the problem. The other half of the problem is that we can't actually count how much of the assets are now gone and how much liability was added.

Nicely put, and has more than a little "truthiness." OTOH, you focus far too much, IMO, on subjective assessments of "people." There are a number of analyses of complex derivatives; they were compared by Buffet, to 'weapons of mass destruction.' In any case the complex network has inherent vulnerabilites basically unrelated, in a fundamental way, to "beliefs." To take a simple example, why do Ponzi schemes fail? IMO, because of internal and external constraints, e.g. access to new suckers. The failure IS immediately preceded by lots of people "changing beliefs" and saying, "Oh my, this whole thing is a house of cards." But the beliefs are not the fundamental causal agents. The collapse will occur regardless; the negative beliefs merely speed it up.

In an article i posted in the "bailout" thread, a mathematician compares the problem to the St. Petersburg Paradox (which he calls "martingale")

http://www.slate.com/id/2201428/
We're Down $700 Billion. Let's Go Double or Nothing!How the financial markets fell for a 400-year-old sucker bet.
By Jordan Ellenberg

One CAN, according to a proposed hypothesis, ALWAYS win money on the toss of a coin, simply by doubling your bets, at each loss. The bailout, in a similar way--says the author-- injects funds into the market that's averse to lending. But, says the author, *having a backer* does not insulate you from failure in using St Petersburg. You cannot beat the coin toss through having a backer, so that your personal limitations re funds, are not felt.

In short, the effects in a complex systems have their own logic; some trends MUST come to an end. yes, the beliefs of those who sense the imminent end are relevant, but their 'negativity' is not the basic factor that brings the trend to a close. pollyanna-ism, as examplefied in GWB's admonition "go out and buy" cannot solve the problem, but merely postpones reckoning with it.

Apart from complex systems, the probabilities [and problems!] of winning 'long range' under various schemes is admirably discussed in an old paper of P. Samuelson:

http://history.behaviouralfinance.net/Samu63.pdf

Great posting, handprints. Lucid and convincing!

Best,
J.

 

[BlackShanglan]

Ah, lovely. Haven't read it yet, but this is just the person I've been wishing to read on this topic. Thank you for posting, Handprints. *settles in for a good read*

 

[BlackShanglan]

Very interesting reading, Handprints. I particularly like your point on the ability of capitalism to break itself. I think that that's what I've felt missing from some of the more dogmatic approaches - a recognition that it's just a method, not a panacea.

I found the article below very interesting reading, and of course wondered at the time what you'd make of it.


http://www.reason.com/news/show/129158.html

The Roots of the Crisis
How did Wall Street get into this mess?
Michael Flynn | October 1, 2008

The unexpected 228-205 defeat of the housing bailout in Congress Monday threw a curveball across Wall Street. It contributed to a large sell-off on Wall Street, where the bailout had already been "priced" into the market. The Dow shed just over 6 percent, the 18th largest drop in its history. But given the dire warnings about financial chaos that would result unless there were a bailout, this seems fairly modest.

Let's be clear: This is a Wall Street crisis, not a national economic crisis. The overall economy, while a bit weak, is still growing. Some politicians are comparing the current environment to the Great Depression. But in 1932, when the federal government last moved to bail out the banking sector, economic output had fallen 45 percent and unemployment was a staggering 24 percent. Today, economic output is actually up and unemployment is a historically modest 6.1 percent.

The overall economy doesn't even face a liquidity crisis in the current turmoil. Consumer, commercial/industrial, and real estate loans are all up over last year. Main Street is doing fine. The liquidity crisis is confined to Wall Street, between and among investment banks, insurance and securities firms, and hedge funds. There is the possibility that the contagion could spread, but in a global capital market, this is hardly certain.

It is the intersection of several underlying trends that have brought us to this point, not a breakdown in any specific part of the financial sector. The fundamental flaw with the bailout approach is that it ignores these trends and simply seeks to shore up the finances of certain Wall Street institutions.

Mortgage-backed securities (MBSes) are the principal source of pain in the current environment. Investment houses would bundle individual mortgages from several banks together into a bond-like product that would be sold to individual investors. Mortgages have historically been seen as among the safest investments. In an era of rising house values, "safe" became "guaranteed returns."

One of the major factors pushing investors into these securities was the Federal Reserve's weak money policy. Immediately after the terrorist attacks of 2001, the Fed began a sustained period of easing interest rates. Its efforts went so far that, at one point in 2003, we had effectively negative interest rates. Institutional investments needed a place to park money and earn some kind of return. Mortgage-backed securities became a favorite investment vehicle. Under traditional models, they were very safe and, because of Fed policy, even the most conservative fund could earn better returns than they could on treasury notes.

In the early years of this century, mortgage-backed securities exploded. Their growth provided unprecedented levels of capital in the mortgage market. There was a lot more money available to underwrite mortgages. At the same time, investment houses were looking to replace the healthy fees earned during the dot com bubble. MBSes had fat margins, so everyone jumped into the game.

The additional capital to underwrite mortgages was a good thing...up to a point. Homeownership expanded throughout the decade. Over the last few decades, the American homeownership rate has been around 60 to 62 percent. At the height of the bubble, homeownership was around 70 percent. It is clear now that many people who got mortgages at the height of the bubble should not have. But Wall Street needed to feed the MBS stream.

At the same time, Fannie Mae and Freddie Mac were going through a crisis. In 2003 and 2004, an accounting scandal was revealed. The two public-private partnerships were cooking the books to show phantom profits. The Bush administration and its allies on the Hill pushed a strong bill to reform how these institutions operated. The measure came very close to passing, but Fannie and Freddie cut a deal. They would refocus on expanding mortgages for low-income borrowers if the feds kept out of their operations. The bargain worked. Virtually all the Democrats and a few Republicans backed the two companies and the reform effort failed.

Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees. The rating agencies, thinking they were simply dealing with traditional mortgages, didn't look under the hood.

Unfortunately, after several years of a housing boom, the available pool of households who could responsibly use the more exotic financing products had dried up. In short, there were no more people who traditionally qualified for even a subprime mortgage. However, Fannie and Freddie were still signaling that they wanted to buy these products. At the same time, activist groups were agitating for more lending to low-income families. Banks realized they could make even more exotic loan products (e.g., interest-only loans), get the activists off their backs, and immediately diffuse their risk by selling the mortgages into MBSes. After all, Fannie and Freddie would buy anything.

Everything worked as long as housing prices continued to rise. The most pessimistic scenarios on Wall Street showed a leveling off of housing prices; no one foresaw an actual decline in prices. Suddenly, though, there weren't enough buyers. In hot real estate markets, builders raced to bring inventory to market that they thought was inexhaustible. But at this point everyone (essentially) who could possibly qualify for a mortgage had received one. At the same time, the first wave of the more exotic mortgages began to falter. Interest rates on adjustable rate mortgages moved higher—the Fed was finally tightening the money flow—and mortgages that were initially interest-only were close to resetting, with monthly payments jumping to include principal. A not insignificant number of these mortgages moved into default and foreclosure.

The overall numbers moving into foreclosure were small. Someone simply looking at housing stats could be forgiven for wondering what all the fuss is about. Nationally, the number of mortgages moving into foreclosure is just around 1 to 2 percent, suggesting that 98 to 99 percent of mortgages are sound. But the foreclosed mortgages punched way above their weight class; they were laced throughout the MBS market.

Then the MBS market collapsed. The complexity of these financial products cannot be overstated. They usually had two or three "tranches," different baskets of mortgages that paid out in different ways. Worse, as they moved through the system—being bought and sold by different firms—they were sliced and diced in varying ways. A MBS owned by one firm could be very different when it was sold to another.

No one fully understood how exposed the MBS were to the rising foreclosures. The market for them dried up. No one traded them. The market became effectively "illiquid." American accounting standards, however, required firms to use "mark-to-market" to value their assets. This means that you value your assets based on what you could sell them for today. Because no one would trade MBSes, most had to be "marked" at something close to zero.

This threw off banks' capital requirements. Under U.S. regulations, banks have to have a certain percentage of assets to back up the loans they make. Lots of banks and financial institutions had MBS assets on their books. With these moving to zero, they didn't have enough capital on hand for the loans that were outstanding. They rushed to raise capital, which raised fears about their solvency and compounded into a self-fulfilling prophecy.

We should pause here to note that two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (you could use a 5-year rolling average instead, for example) would have shored up the balance sheets. And a temporary easing of capital requirements would have provided banks breathing room to sort out the MBS mess. Although it is hard to fix an exact price for these in this market, they aren't worth zero.

Alas, the Fed and the Treasury decided simply to provide the capital to meet the regulatory requirements. They moved into crisis mode, making a series of tactical moves to deal with specific, present challenges. The first misstep, in March, was to force a hostile takeover of Bears Stearns. The Fed put up $30-40 billion to back JP Morgan's takeover of the investment bank. In the long term, it probably would have been better to let the bank fail and go into bankruptcy. That would have set in motion legal proceedings that would have established a baseline price for MBSes. From this established price, banks could sort out their balance sheets.

It is worth noting that immediately after the collapse of Bears Stearns, rumors quickly circulated on the Street of trouble at Lehman Brothers. Lehman went on a PR offensive to beat back those rumors. The company was successful, but then did nothing over the next several months to shore up its balance sheet. Their recent demise was largely their own doing.

The collapse of the MBS market now started to pollute other financial products. (The Fed moves did nothing to deal with the MBS market, but simply provided temporary means to cope with it.) Credit default swaps and derivatives, both of which amount to hedges against the risk of bonds defaulting, came due. Suddenly, stable firms like AIG were overexposed. Insurance companies regularly sell these swaps, as an insurance policy against bonds defaulting. Traditionally they are fairly conservative investment products. These developments threw off the accounting in one division of AIG, threatening the rest of the firm. Given a few days, AIG could have sold enough assets to cover the spread, but iron-clad accounting regulations precluded this. So the government stepped in.

The one-two punch of Lehman's failure and the government's $85 billion bailout of AIG on September 16 seriously spooked the Street and the Bush administration. With Fannie Mae and Freddie Mac already in government receivership, there were fears that the MBS weakness would spread through the entire financial system. There was a big sell-off on the Dow. The next day, the government announced there would be a bold rescue plan. The market rebounded. Details emerged over the weekend. On Monday, the Dow had another sell-off. But, the most important signal was the rise of oil. The spot price for October delivery of oil jumped $25 a barrel. Some of this was covering trades, but a sizable amount of this appreciation was probably a "flight to quality," a place to park money while everything was sorted out. It was also a signal that the government's plan might not work.

The original plan crafted by Treasury would authorize the department to spend up to $700 billion to buy MBSes and other "toxic" debt and thereby remove them from banks' balance sheets. With the "bad loans" off the books, the banks would become sound. Because it was assumed that the MBS market was "illiquid," the government would become the buyer of last resort for these products. There is a certain simple elegance to the plan.

Except that no market is truly illiquid. It just isn't liquid at the price you want to sell. This summer, Merrill Lynch unloaded a bunch of bad debt at 22 cents on the dollar. There are likely plenty of buyers for the banks' bad debt, just not at the price the banks would prefer. Enter the government, which clearly intends to purchase MBSes at some premium above the market price. That was the nature of the bailout that failed on Monday.

Congressional leaders have vowed to bring a new proposal for a vote, possibly as soon as Thursday, proving yet again that Washington is fertile ground for really bad ideas. But with the market rebounding—as of this writing the Dow was up almost 300 points—and public opposition hardening, signs are emerging that banks are starting to clean house. The crisis may have already peaked. Of course, Congress' ability to further screw this up can't be overstated.

 

[JAMESBJOHNSON]

Flynn is wrong.

When the 1929 Market crashed there was little unemployment and business was booming. Flynn is comparing apples with oranges. For his point to be correct he needs to compare 2011 with 1932.

 

[trysail]

Any asset that can't be valued isn't an asset. Some people who should have known better bought a bunch of computer-generated statistical nonsense. They bought the garbage from salesmen employed to move product. The garbage was created by financial alchemists whose job it is (or was) to manufacture dross— which is, of course, the raison d'être of investment bankers. The sausage factories (i.e., the mortgage assembly factories a/k/a investment and commercial banks) got in trouble because they got caught holding too much inventory of rotting fish.

The entire episode was inevitable, yet predictable and predicted by intelligent people. Intelligent people are always ignored and helpless (if not actually murdered) when confronting mobs.

http://farm4.static.flickr.com/3145/2828652318_2aa9d1b9ec_o.gif

 

[amicus]

Very hesitant to step in here, especially as Handprint's contributions are always interesting and extremely complex.

Experts in any field become that way because they devote the majority of their energy and time into becoming expert and proficient, however, as with every discipline, one does so at the price of diversity and universality of knowledge which often leads to huge gaps or vacuum's in the fundamental understanding of how disciplines are truly inter-related on a philosophical basis.

What HP describes as, 'making or breaking' the system itself, the market place, is simply described by economists as 'natural cycles in the business world', that act to dedivert capital and investment vigor into more productive areas. In other words, an useful event within the market as a whole.

The market place, like human life itself, is dynamic and vital, always growing, always changing and always challenging the boundaries of current limitations.

Many do not appreciate the necessity of change, either in life or business and seek, or dream of a more safe and secure scenario or prediction device for their future, the future of their investments and indeed, the future of nations and mankind in general.

What HP and others fail to acknowledge is that capitalism, the free market, is not just an economic system, it is a reflection of the nature of man, created, structured and nurtured by men and is, within itself, both a moral and an ethical system of human bevavior.

It is also a 'values' system, one that rewards success and efficiency and punishes failures and inefficiencies, and it does so automatically, without guidance or direction and is identified as that 'invisible hand', that so many ignore and abhor.

Sine the 1930's, as some have noted and commented on, governments all over the globe, in one way or another, have attempted to manipulate the market to meet their own specific needs. Such are the roots of the current crisis as this government, with Fannie Mae and Social Security and all the later social goals began to impact the market place on an increasingly wider scale.

This is not intended to critique or criticize HP or anyone else who has offered commentary and/or opinion, and each does, knowingly or not, include that moral and ethical factor, although it usually remains unspoken, as if it did not exist or apply.

The alternatives to the free market place have all pretty much been tried before and found lacking in all aspects of performance and in the provision of desired social effects.

Thus, my question remains a rhetorical one, in a sense, how can you dismiss the moral and ethical aspects of an economic system as you strive to offer solutions and/or explanations to events as they occur?

The entire history of the world has been a partially successful attempt to find and define human individual freedom and then to enjoy the benefits; yet the impetus seems always, at least on this forum, to gleefully offer to give it up for the safety and security of a 'guaranteed' lifestyle.

It does make one wonder.

Amicus...

 

[Selena_Kitt]

We should pause here to note that two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (you could use a 5-year rolling average instead, for example) would have shored up the balance sheets. And a temporary easing of capital requirements would have provided banks breathing room to sort out the MBS mess. Although it is hard to fix an exact price for these in this market, they aren't worth zero.

Alas, the Fed and the Treasury decided simply to provide the capital to meet the regulatory requirements.

This is VERY interesting. Why don't taxpayers know that they could have been spared footing the bill for this by two simply regulatory tweaks to the market!?

 

[trysail]

We should pause here to note that two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (you could use a 5-year rolling average instead, for example) would have shored up the balance sheets. And a temporary easing of capital requirements would have provided banks breathing room to sort out the MBS mess. Although it is hard to fix an exact price for these in this market, they aren't worth zero.

Alas, the Fed and the Treasury decided simply to provide the capital to meet the regulatory requirements.

This is VERY interesting. Why don't taxpayers know that they could have been spared footing the bill for this by two simply regulatory tweaks to the market!?

Mark-to-market accounting arose in the first place after the S&L fiasco when untrained readers of financial statements (read politicians and Grade D "investors") had their ignorance thrust in their faces. Assets valued at "cost" turned out not to be worth their stated values on balance sheets. The pols and the ignorant protested that they'd been bamboozled (when, in fact, all they had to do was actually read footnotes which, naturally, they hadn't bothered to do). They demanded the introduction of mark-to-market accounting as a result. FASB, which has always favored the approach, was only to happy to accomodate them. It's not mark-to-market accounting that's the problem. Markets fluctuate; they always have and they always will. It's leverage that's the problem— that's what makes it impossible to withstand inevitable market fluctuations.
http://forum.literotica.com/showpost.php?p=28873467&postcount=29

Mark-to-market accounting is the current canard of the blame-sloughing crowd— ALL of whom failed to read and take to heart the admonitions appearing on pp. 14-15 of the 2002 Berkshire Hathaway annual report. The same crowd had been gaming "held to maturity" and "available for sale" designations for decades and went on to abuse and game mark-to-market accounting. It is, ultimately, a problem of character and integrity.

It is equally impossible to write legislation mandating honesty as it is to write accounting rules that will constrain persons intent on committing accounting fraud or predisposed to "accentuate the positive." One of the cardinal rules of lending and investing is "character." J. Pierpont Morgan put it best in his response to Samuel Untermyer during his testimony to the 1912 Pujo Committee:


Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir, the first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it. Because a man I do not trust could not get money from me on all the bonds in Christendom.

 

[BlackShanglan]

We should pause here to note that two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (you could use a 5-year rolling average instead, for example) would have shored up the balance sheets. And a temporary easing of capital requirements would have provided banks breathing room to sort out the MBS mess. Although it is hard to fix an exact price for these in this market, they aren't worth zero.

Alas, the Fed and the Treasury decided simply to provide the capital to meet the regulatory requirements.

This is VERY interesting. Why don't taxpayers know that they could have been spared footing the bill for this by two simply regulatory tweaks to the market!?

You picked precisely the part I was most wishing to hear elucidated by the Handed one. I live in hope.

 

[Handprints]

This seems fairly ahistorical, in its discussion of "capitalism." Who is the "you" that does this allocating? Everyone? The rich? Those favored by the king? What you are talking about, essentially, is the beliefs of (certain) private persons, who act without being subject to direct government control. Further, "beliefs" sounds rather bland; actually it's private _interest_ we're talking about. My beliefs about what will get me ahead, esp, as regards my capital.

The basic question though, is WHERE does this allocation obtain? to what degree? influenced by what government? who exactly is doing it? What are the specific circumstances.?

I really didn't set out to divorce capitalism from other systems concurrently in use for any reason other than to set out the minima that capitalism provides. The extent, I suppose, to which you accept that an individual's own labour is a form of capital (we didn't think up "sweat equity" for nothing) defines who can and can't participate in the process of capital allocation. "Beliefs," I'm sure, could be improved although it's probably equally fair to say that groups, nations and even the human species can, to some extent, use capitalism to assess the value of those things capable of being expressed by monetary values/returns. (Like you, I don't think that set of things encompasses everything a person, group, nation or species should want.)

Again, we are dealing with an ahistorical "capitalism", hence the success is purely abstract or ideal. "Success" in fact results from any number of things, for instance if said capitalist has a friend in Dick Cheney's office, or Senator McCain's or Obama's. We have to look at actual capitalism [variety of] and actual situation.

Again, my minimalist definition wasn't intended to suggest that the practice of capitalism can be divorced from other political systems in concurrent use. That's another reason those concurrent political systems tend to draft laws that limit how capitalism can be practiced - levelling the playing field, for lack of a better term. To be fair, I think you see better equality of opportunity to succeed at capitalism within democracies than you do within other systems, where the political structure is more likely to define who can and can't succeed at capitalist endeavours.

There is more than a grain of truth, here, but the argument ignores empirical investigation. "you can believe" makes it sound arbitrary; well, yes, it _can be_ like a religion; that's what you suggest. But production of socially desirable things is to be looked at by empirical investigation. Then beliefs legitimately formed.

Hence the last sentence, while biting and intriguing, is also somewhat misleading. You're saying capitalism as defined and implemented simply guarantees that capitalism exists as defined. OK. But I see no reason to rule out arguments about its conduciveness to human betterment, *in a variety of circumstances.* Your sentence is a bit like saying "when there's a plague, all we can be sure of is that disease is spreading." true, but....

Fair points all and a reminder that I'm no threat to Bertrand Russell for clarity of thought or expression. That said, were we able to subject all capitalist systems to a rigorous empirical investigation, I suspect the only characteristics that would be true of them in all circumstances are the abilities to price and allocate, subject to whatever constraints concurrently running systems impose.

This is an excellently stated para., esp in light of current events. The broken things include banks and investment houses. What you might note, however, is that this suggests that internal contradictions may destroy "capitalism" [current form in the US] as we know it. So your alleged 'belief based' allocation may destroy itself, as the allocators' banks collapse, for example; or get taken over, as in Sweden in the 1990s.

I don't know what capitalism could do to permanently and fatally destroy itself. I can think of a number of things it can do, has done and appears to be doing now that might cause it to resemble a spectacularly inattentive chainsaw juggler. Were no-one to do anything from outside - ie, no bailouts, no tax breaks, no changes to the current system, no alteration of the relationship between markets (capitalism, if you like) and other social structures - capitalism will still work, it will just make the majority of places it is practiced much less pleasant to live in for most people for a very long time. Doing nothing, right now, is the equivalent of trying to walk off a broken leg. We know from skeletons that any number of people have done this in the past but I'm not willing to try it myself.

Capitalism's "internal contradictions" don't bother me as much as they do the Marx-inflected left because I have no faith at all in internally-consistent political systems (and very little in logical ones, either.) I will note, and I suspect you'd agree with me, that these contradictions appear to be significantly less relevant in places where capitalism is not the dominant social model, just one of many that might be used for a given purpose...

OK, the is an admirable characterization of the 'free market.' It DOES solve all problems. e.g. overextended companies, including those making shakily secured loans, go bankrupt and disappear. Hoever the term, "free and unfettered" here is entirely misleading. "Capitalism" as existing in the US in the year 2000 went towards crisis, and it was NOT unfettered; various collusions with government were taking place, e.g around Fannie May. regulations were being lifted or not enforced.

"As free and unfettered as the form recently practiced in America" would have been better.

Nicely put, and has more than a little "truthiness." OTOH, you focus far too much, IMO, on subjective assessments of "people." There are a number of analyses of complex derivatives; they were compared by Buffet, to 'weapons of mass destruction.' In any case the complex network has inherent vulnerabilites basically unrelated, in a fundamental way, to "beliefs." To take a simple example, why do Ponzi schemes fail? IMO, because of internal and external constraints, e.g. access to new suckers. The failure IS immediately preceded by lots of people "changing beliefs" and saying, "Oh my, this whole thing is a house of cards." But the beliefs are not the fundamental causal agents. The collapse will occur regardless; the negative beliefs merely speed it up.

With respect, I think it's a false analogy. There are, by definition, no circumstances under which a Ponzi scheme can make money for all the buyers. There were a great many under which every buyer of a CMO could have walked away happy. There were just a vastly greater number of conditions under which they wouldn't, and we're now in one.

In an article i posted in the "bailout" thread, a mathematician compares the problem to the St. Petersburg Paradox (which he calls "martingale")

http://www.slate.com/id/2201428/ snip...

In short, the effects in a complex systems have their own logic; some trends MUST come to an end. yes, the beliefs of those who sense the imminent end are relevant, but their 'negativity' is not the basic factor that brings the trend to a close. pollyanna-ism, as examplefied in GWB's admonition "go out and buy" cannot solve the problem, but merely postpones reckoning with it.

Apart from complex systems, the probabilities [and problems!] of winning 'long range' under various schemes is admirably discussed in an old paper of P. Samuelson:

http://history.behaviouralfinance.net/Samu63.pdf

Analogies like the one in Slate don't seem to me to bear much resemblance to the real thing: they're lucid, they're amusing, they resonate emotionally with readers because they suggest that hugely-paid professionals did something predictably stupid that even a journalist can see the problem with... But they aren't true, in my view. No-one's doubling down. Very little good money appears to be being thrown after bad (well, maybe in Iceland...). You're absolutely right to say that simple (and simplistic) prescriptions aren't going to help. The problem in play, however, is actually pretty simple: a very great many lenders have seen their capital bases destroyed. They need money, now.

Thanks for the praise and hope that's of use,
H

 

[Handprints]

Very interesting reading, Handprints. I particularly like your point on the ability of capitalism to break itself. I think that that's what I've felt missing from some of the more dogmatic approaches - a recognition that it's just a method, not a panacea.

I found the article below very interesting reading, and of course wondered at the time what you'd make of it. (snip)

Let's be clear: This is a Wall Street crisis, not a national economic crisis. The overall economy, while a bit weak, is still growing. Some politicians are comparing the current environment to the Great Depression. But in 1932, when the federal government last moved to bail out the banking sector, economic output had fallen 45 percent and unemployment was a staggering 24 percent. Today, economic output is actually up and unemployment is a historically modest 6.1 percent.

The overall economy doesn't even face a liquidity crisis in the current turmoil. Consumer, commercial/industrial, and real estate loans are all up over last year. Main Street is doing fine. The liquidity crisis is confined to Wall Street, between and among investment banks, insurance and securities firms, and hedge funds. There is the possibility that the contagion could spread, but in a global capital market, this is hardly certain.

Shang, I'm delighted you're back and I devoutly wish you had picked up any other story for comment. At this point in Flynn's text, I just don't want to go on. My first reaction on reading this paragraph was to wonder how utterly ignorant of basic economics one can be and still find employment as a journalist specialising in the subject.

This chap appears not to have noticed that at least 100 companies have had to make emergency stock offerings at rock-bottom prices in the past fortnight - diluting the value of their existing shares and punishing existing stockholders - because the commercial paper (short term loans) market is no longer functioning. If that's not a liquidity crisis, I'm a custard tart. If it's not spreading out from Wall St, I've got little sugar sprinkles on top.

He also appears not to have noticed that lending volume on the interbank market - the place banks go to raise short-term money to lend to someone else for a short time - has also dried up (and what's still going on is going on at eye-wateringly high interest rates.) When banks can't lend - even to each other - because they don't have enough capital to lend against, capital formation to support Main St's activities is seriously compromised. This isn't maybe going to happen; this is happening right now.

Please, please, don't ask me to read the rest: there's no way to salvage the logic of an argument that uses that as its first point.

Best,
H

 

[Handprints]

We should pause here to note that two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (you could use a 5-year rolling average instead, for example) would have shored up the balance sheets. And a temporary easing of capital requirements would have provided banks breathing room to sort out the MBS mess. Although it is hard to fix an exact price for these in this market, they aren't worth zero.

Alas, the Fed and the Treasury decided simply to provide the capital to meet the regulatory requirements.

This is VERY interesting. Why don't taxpayers know that they could have been spared footing the bill for this by two simply regulatory tweaks to the market!?

None of this is true, in my view. Suspending mark to market would just make us more suspicious of these banks' balance sheets and more paranoid about who's likely to go bust, who's likely to default on a loan, and who's hiding the biggest problems. None of things and going to make people more willing to lend, nor is having fantasy capital to lend against better than having not enough capital to lend against. Plus, hiding the dirty laundry by not forcing firms to disclose it just opens up the field to the short-sellers and rumour mongers. Why would anyone want legislation that conceals truth from investors and lenders? The only people who really want this are the ones who know they're likely to go bankrupt and the only people who support it are fantasists - specifically, fantasists who aren't in the lending business.

Easing capital requirements would essentially guarantee that a greater number of debtors will be inconvenienced, if not destroyed, by bank failures: why would you want to increase the number of borrowers from a failing bank?

Best,
H

 

[ishtat]

Bits and pieces

I found the article below very interesting reading, and of course wondered at the time what you'd make of it.


http://www.reason.com/news/show/129158.html

The Roots of the Crisis
How did Wall Street get into this mess?
Michael Flynn | October 1, 2008



Let's be clear: This is a Wall Street crisis, not a national economic crisis. The overall economy, while a bit weak, is still growing.

I couldn't respect any comment of Flynns after that. It's a long time since I read it but JK Galbraith in his 1954 book on the 1929 crash clearly stated that in his view it is the economy that drives the market not the other way round.The market may for a while mask problems in the economy but only for a while. I'll back Galbraith against Flynn on this one.

Thus far Government has only dealt with the superficial (but crucially important) issue of the banking crisis. Poor regulation(enforcement) and ridiculous conduct in the market have clearly caused major problems in themselves but ultimately the home grown problems in the US economy have to be addressed.

One small point. Has anyone noticed how the UK government proposal appears to be based on the Warren Buffett preference share model.

 

[ishtat]

Any asset that can't be valued isn't an asset.

http://farm4.static.flickr.com/3145/2828652318_2aa9d1b9ec_o.gif

I'm going to be a bit picky Try. These toxic mortgages cannot perhaps be valued now but it is fair to say they have a value which may be determined in the future, albeit with difficulty.

For my sins I know a fair bit about insurance company accounts particularly the ones dealing with long tail liabilities. Casualty insurers particularly Professional indemnity and third party insurers produce accounts every year which historical analyses will normally show to be spectacularly wrong - because the asset/liability valuations over time are proved to be wrong.

Taken over ten years or more the results are much more reliable but we have to acknowledge that in many large businesses the valuation of assets/liabilities on an annual basis is a very inexact science. But that doesn't mean that volatility necessarily must always be discounted to zero. It's difficult.

 

[xssve]

At the same time, Fannie Mae and Freddie Mac were going through a crisis. In 2003 and 2004, an accounting scandal was revealed. The two public-private partnerships were cooking the books to show phantom profits. The Bush administration and its allies on the Hill pushed a strong bill to reform how these institutions operated. The measure came very close to passing, but Fannie and Freddie cut a deal. They would refocus on expanding mortgages for low-income borrowers if the feds kept out of their operations. The bargain worked. Virtually all the Democrats and a few Republicans backed the two companies and the reform effort failed.

Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees. The rating agencies, thinking they were simply dealing with traditional mortgages, didn't look under the hood.

This reflects the "blame Barney Frank" party line, and the entire article is nothing but thinly disguised agitprop - in fact S. 190, the bill referred to here died in the banking committee which is comprised of 11 republicans and 9 democrats - and nobody seems to want to talk about H.R. 2622 which overrode all state lending regulations and effectively threw fuel on the fire by removing any restrictions at all on making loans - FNMA was indeed accelerating it purchases well after the departure of Raines, but more by design than by accident w/regard to republican administrative policy, the spin to the contrary notwithstanding - and why not? This is the same Texas cabal behind Silverado and the S&L fiasco in the Eighties, they're no strangers to pump and dump scams, in fact, it's their specialty - they don't seem to know how to do anything else.

 

[xssve]

So, Prints, you're skeptical of the Paulson doctrine?

Speaking of the S&L boondoggle, we're still picking up the tab on that one.

You have to go back to the Eighties for the real root causes of this, the regulatory laxity that began under Reagan:

An incomplete and bungled deregulation of S&Ls in 1980 and 1982 lifted restrictions on the kinds of investments S&Ls could make. In 1980 and again in 1982, Congress and the regulators granted S&Ls the power to invest directly in service corporations, permitted them to make real estate loans without regard to the geographical location of the loan, and authorized them to hold up to 40 percent of their assets as commercial real estate loans. Congress and the Reagan administration naïvely hoped that if S&Ls made higher-yielding, but riskier, investments, they would make more money to offset the long-term damage caused by fixed-rate mortgages. However, the 1980 and 1982 legislation did not change how premiums were set for federal deposit insurance. Riskier S&Ls still were not charged higher rates for deposit insurance than their prudent siblings. As a result, deregulation encouraged increased risk taking by S&Ls.

Clearly, nothing has changed.

 

[xssve]

Earlier this year, FNMA became essentially another tool in the Fed's plan to shore up banks extended on MBA's, that would be private banks:

Herein lies the real meaning of Bernanke’s big bet — it’s not that the financial world has suddenly gone broke, but rather because the financial world has suddenly become scared. Everybody’s slammed on the brakes at once, leading to both financial gridlock and financial pileups.

Stock markets soared after the announcement, with the Dow Jones industrials gaining 260 points before falling back to 11,925.85, a 185-point gain, at 12:30 p.m. as brightened investors snapped a three-day losing streak.


The Feds aren’t just opening the bank petcocks, they’re turning on all the liquidity taps:


The government will also accept mortgage-backed securities issued by government-sponsored companies like Fannie Mae and Freddie Mac.


We’ve previously seen that the GSEs enjoy awfully big advantages, which lets them rapidly grow or even turbocharge their balance sheets. That brings a lot of risk, but it also brings benefits, one of which is on display here: the GSEs can be open 24/7 if the Fed lets them.


The Fed will lend the Treasuries through weekly auctions that begin March 27.


Stepping up and buying with hard cash while everyone around you is selling is the mark of folly, wisdom, courage, or self-delusion.

If Ben Bernanke and the Fed are right, their moves will unjam the gridlock and get capital moving again.


If they’re wrong, the consequences could be disastrous for all of us.


I hope they’re right. Fortunately, I think they’re right.

Banking on value

That's what you get for thinking.

 

[BlackShanglan]

Shang, I'm delighted you're back and I devoutly wish you had picked up any other story for comment. At this point in Flynn's text, I just don't want to go on. My first reaction on reading this paragraph was to wonder how utterly ignorant of basic economics one can be and still find employment as a journalist specialising in the subject.

[...]

Please, please, don't ask me to read the rest: there's no way to salvage the logic of an argument that uses that as its first point.

Best,
H

I shan't press you to any such painful duty, and I'm awfully grateful that you made it that far. The article had a sort of easy smoothness, but as an utter lay-horse I couldn't work out whether that came from knowledge or the sort of absolute confidence available only to the ignorant. Thanks very much for explaining which it was. I'm delighted that I can rely on your analysis instead, as it's much more interestingly written.

Shanglan

 

[BlackShanglan]

I couldn't respect any comment of Flynns after that. It's a long time since I read it but JK Galbraith in his 1954 book on the 1929 crash clearly stated that in his view it is the economy that drives the market not the other way round.The market may for a while mask problems in the economy but only for a while. I'll back Galbraith against Flynn on this one.

Thus far Government has only dealt with the superficial (but crucially important) issue of the banking crisis. Poor regulation(enforcement) and ridiculous conduct in the market have clearly caused major problems in themselves but ultimately the home grown problems in the US economy have to be addressed.

One small point. Has anyone noticed how the UK government proposal appears to be based on the Warren Buffett preference share model.

Thanks for the thoughts, Ishtat. I was wondering similar things after reading Ron Paul's editorial in which he argued, in summary, that the only problem was the Fed's determination to keep interest rates low. I recognize that this may have increased the temptation to people to look to riskier investments for higher returns, but I had some difficulty believing that it was the only problem there, and that if we'd just had even less regulation, all would have been well.