Just coincidence...Or do republican policies promote bank failure?

[Don Allen]

http://finance.yahoo.com/banking-budgeting/article/105391/Analysts-Say-More-Banks-Will-Fail

I was in the insurance industry back in the eighties when the savings and loan debacle hit, why, because they ate themselves.....De-regulation.....They were allowed to manipulate their portfolio's with high risk investments or encourage depositers to invest in annuities and other commission driven vehicles in which they kept,,,, the commissions could be as high as 10%...Result: Collapse. Republican ideas...Get big government off the backs of business..

Fast forward 20 years....Deregulate the mort. Industry. Clinton administration Republican congress. Add Bush to the mix Possibly 150 more banks to go under. Why... They ate themselves... "Fuck sound investments, lets give houses to indigents at outrageous interest rates and wait for the money to roll in...."
Again Republican idea,,, get government off the backs of businesses...

The problem....Gordon Gecko was a fucking movie charactor....GREED IS NOT GOOD, for any one but the top few screwing the rest of the country....

Hey, that's my new bumper sticker....

Ladies and gentleman, My first thread in P&C Hardcore.....Lets Kick some ass and take some names.........

[Robert Toy]

Sure...

Ever heard of:

Lloyd Craig Blankfein

Warren Buffett

James A. Johnson

Kent Conrad

Thomas Bertram Lance

Etc.

Etc.

ETA: Can we say, Countrywide, Indymac, Freddie Mac, Fannie Mae?

[whistlelock]

But what's your point about those name, Robert?

But as to the OP- that's why I'm for a regulated free market. People are stupid. They will take short term gains that screw over any sort of long term gain. History has proven time and again that business will screw its customers for a quick dollar and never look back.

People are dumb. on both sides of the deal table.

[Robert Toy]

But what's your point about those name, Robert?

But as to the OP- that's why I'm for a regulated free market. People are stupid. They will take short term gains that screw over any sort of long term gain. History has proven time and again that business will screw its customers for a quick dollar and never look back.

People are dumb. on both sides of the deal table.
my bold

How can you have a regulated free market?

Your last sentence answers the reason why I listed the names; it is far from a Republican OR Democratic FU, both sides have wallowed in the mess for years and years.

[mscelina]

Sorry, Don, but I don't see any link between the title of this thread and the article you cited. Nowhere does it claim that Republican policies are solely responsible for bank failures. I seems to me that our current financial position is due to equal responsibility on both parties throughout the last five administrations.

[clintl]

How can you have a regulated free market?



There are degrees of freedom. And I think there's a good case to be made that when the rules get loosened, the market takes bigger risks. I think Barney Frank was right when he said yesterday that if Greenspan had imposed the new regulations on mortgages ten years ago that Bernanke just imposed, we probably wouldn't have this crisis. And the new regulations are not onerous - they are common sense, good business practices.

I also think that it should be noted that the mortgage industry wants these new regulations. They know they screwed up, and they know they will be tempted to screw up again if they are allowed to.

[dgiharris]

I think the problem is a combination of the Good Ol' boys club policies and an unbelievable amount of faith in the 'invisible hand' theory of economics.

IMO, too many policies are way too lenient with big business without the required accountability that many believe is just common sense.

I don't care what medium you are in, if there is not a proper check and balance, it is human nature to F- everything up.

Absolute power corrupts absolutely.

Mel...

[shawkins]

The problem....Gordon Gecko1 was a fucking movie charactor....GREED IS NOT GOOD, for any one but the top few screwing the rest of the country....

I don't think it's entirely fair to blame Republican policies exclusively for the current hullaballoo, but keeping the prime rate imprudently low for an excessively long time was the proximate cause. Still, there's plenty of blame to go around:

Finger 'o Blame #1: Imprudent use of prime rate by the Fed
Starting in 2000, the Fed began lowering the prime lending rate. This was done in order to stimulate the economic growth in the wake of the tech bubble recession. At the time everybody--Republican and Democrat alike--agreed this was a good idea. To an extent, it almost certainly was. Economic activity did indeed pick up, stimulated by the low cost of borrowing money. So far, so good. However, the Fed kept the rate very verylow indeed until after the 2004 election.

Prime Lending Rate Over Time: http://www.moneycafe.com/library/prime.htm

On the chart linked to above, note the slight bump in the prime rate in July, September and October of 2005, followed by steady increases starting immediately after the elections and continuing through 2007. One might interpret this data as the Fed saying "we need to raise rates" and the elected officials, knowing that this would cause pain at the consumer level, saying "not until the election is out of the way" and a compromise being reached. Or it might be that Alan Greenspan really thought it was possible to keep mortgage rates at historic lows for an unprecedented length of time without long-term consequences. Or it might be a coincidence.

Regardless of motive, the net result was the same.

Finger 'o Blame #2: Irresponsible Lending
Banks, seeing the opportunity to borrow money at a low rate in order to re-loan it at a slightly higher rate, started giving more loans. The supply of well-qualified borrowers was quickly exhausted, but interest rates at the Fed remained low. Consequently, banks still had an incentive to borrow and re-lend money. In order to keep churning out profitable loans, banks then turned to less qualified lenders--people with mildly crappy credit histories--that they would normally have disqualified.

This was doubly attractive to the banks in that they made substantially more money on such loans than they did when lending to the well-qualified borrowers. Banker types are not normally innumerate, and I've no doubt that mortgage brokers knew well that many of the folks to whom they were lending would very likely default on their loans when interest rates rose.

That, however, would be several years down the road. By then, the mortgage would almost certainly be held by someone else. Meantime, there were some very, very juicy commissions to be made on such loans.

All Was Joy...For a While
However, in the low-interest days of the early 2000s, even when the bank tacked on several extra points for a high-risk borrower, that borrower was still looking at a relatively affordable mortgage. So, more people than ever before were able to borrow more money than ever before. Because more people were bidding for the same number of houses, housing prices rose quickly. Regular borrowers were happy because the value of their home rose 50% every six months. Sub-prime borrowers were happy because they'd moved into the McMansion of their dreams. Banks were happy because they were making money on the loans. The government was happy because voters were happy.

Because housing prices were on the rise, builders built more houses.

Inevitably, the number of houses available began to exceed the number of people bidding on them. Price increases slowed, stopped and began to reverse.

Finger 'o Blame #3: Innumerate consumers.
A typical subprime mortgage in 2002 was a 5-year ARM. An Adjustable Rate Mortgage differs from a traditional mortgage in that the interest rate that the borrower pays does not remain fixed for the life of the loan, but rather varies with the prime lending rate. In the early 2000s, the interest rates were as low as they'd ever been, so it was virtually certain that when the adjustment to the borrowers interest rate came, it would cost them a lot more money.

Whether the personal ramifications of this fact were understood varied from consumer to consumer.

At the time the loan was taken out, it was historically true that home prices always rise. It was not entirely unreasonable for the sub-prime borrower to assume that they would continue to do so. If that held true, the borrower could reasonably hope to re-finance their crappy loan 5 years hence with a less crappy loan.

However, as we now know, home prices do not always rise.

Did you hear that bursting sound?
When the adjustment to ARMs began to roll in, mathematically illiterate homeowners who had been struggling to make the payments on the crappy loan sold to them in 2002 by a predatory lender at an artificially low interest rate made possible by the Fed saw their monthly payment go up to a more realistic level. They couldn't absorb the several-hundred-a-month increase in their mortgage payment. They defaulted on the loan, got foreclosed on, and moved back in with Mom or started sleeping under a bridge. Eventually enough foreclosures flooded the market that housing prices dropped substantially.

That led directly to the fall of IndyMac (a notorious peddler of sub-prime mortgages) and indirectly2 to the troubles Fannie Mae and Freddie Mac are currently experiencing.



1Mildly interesting historical side note: the "Greed is Good" speech that Gekko delivered in Wall Street was based on a real speech Ivan Boesky gave at Berkeley in 1986.

2Fannie Mae and Freddie Mac don't lend directly to consumers, and they are pretty good about staying out of the sub-prime market. However, the implosion of the housing market was substantial enough that they have been badly wounded by the ripple effect.

[Don Allen]

Sorry, Don, but I don't see any link between the title of this thread and the article you cited. Nowhere does it claim that Republican policies are solely responsible for bank failures. I seems to me that our current financial position is due to equal responsibility on both parties throughout the last five administrations.

It wasn't meant to be a solid link Mscelina, just a starting point. I agree that both parties share responsibility, but the fact of the matter is that banks seem to go under when republicans hold office.

[Don Allen]

There are degrees of freedom. And I think there's a good case to be made that when the rules get loosened, the market takes bigger risks. I think Barney Frank was right when he said yesterday that if Greenspan had imposed the new regulations on mortgages ten years ago that Bernanke just imposed, we probably wouldn't have this crisis. And the new regulations are not onerous - they are common sense, good business practices.

I also think that it should be noted that the mortgage industry wants these new regulations. They know they screwed up, and they know they will be tempted to screw up again if they are allowed to.


If history teaches us one premise....You cannot allow a free market to operate unchecked. Since the inception of the country we have seen time and time again the excess of free trade from de-regulation or no regulation, let us not forget the rail barrons, and industrial tycoons of the late 19th early 20th century that crippled the nation and gave birth to the trust laws.