WSJ: Greenspan Added to Subprime Woes by Blocking Crackdown on Predatory Lending and Preventing Further Supervision of Lenders
Under the headline “Did Greenspan Add to Subprime Woes? Gramlich Says Ex-Colleague Blocked Crackdown on Predatory Lenders Despite Growing Concerns” the Wall Street Journal reports the views of former Fed Governor Gramlich – to be presented in a forthcoming book – that Greenspan ”blocked a proposal to increase scrutiny of subprime lenders under the Fed’s broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers.”
The fact that the unregulated subprime boom occurred while federal and state regulators were effectively “asleep at the wheel” is widely known by now. But now the role that the Fed and Greenspan played in allowing this reckless subprime bubble to grow with no control with becoming clearer.
As reported by Greg Ip in the Wall Street Journal:
Alan Greenspan was arguably the country’s most powerful financial cop in his 18 years as chairman of the Federal Reserve. But Mr. Greenspan’s regulatory record has received far less scrutiny than his management of the economy.
That may be changing. A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed’s broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. Democrats in Congress are now turning up the heat on regulators, especially the Fed, for failing to do more to stamp out those practices, and the Fed appears increasingly likely to overhaul its approach.
Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.
“I would have liked the Fed to be a leader” in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.
“He was opposed to it, so I didn’t really pursue it,” says Mr. Gramlich, a Democrat who was one of seven Fed governors.
Greenspan’s Response
Mr. Greenspan, in an interview, says he doesn’t recall a specific discussion of the idea but confirmed his opposition to it.
There is “a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong,” says Mr. Greenspan, who retired in February last year. “For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it’s not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits.”
Mr. Greenspan adds that borrowers might get a false sense of security from a lender that advertised itself as Fed-inspected.
Ben Bernanke, Mr. Greenspan’s successor, told Congress in March that he has asked his staff for “a complete review of our powers and practices” in examining holding-company units. A Fed spokesman this past week said “that review is under way.” The Fed Thursday will conduct a public meeting on steps it could take to strengthen laws governing subprime lending.
On June 29, the Urban Institute will release a book by Mr. Gramlich, “Subprime Mortgages: America’s Latest Boom and Bust.” It argues, among other points, that all lenders affiliated with banks and thrifts could “be brought under the same supervisory conventions as their parents seemingly without major culture shock.” It wouldn’t be a huge undertaking by policy makers, and it would lead to more uniform, stringent practices.
Mr. Gramlich, who is being treated for cancer, says, “There are certain things that unsupervised lenders do that a Fed supervisor would not let you get away with,” such as not escrowing taxes and insurance, not verifying an applicant’s stated income, or assessing the borrower’s ability to repay based on an introductory “teaser” rate. But he said the proposal’s reach would have been limited by the fact that many lenders would still have no federal supervision.
At the time President Clinton appointed Mr. Gramlich to the Federal Reserve Board, he was a University of Michigan academic who had served on commissions studying Major League Baseball and Social Security. Mr. Greenspan put him in charge of the board’s community and consumer affairs committee.
Mr. Gramlich often pushed the Fed to expand fair-lending and consumer-protection rules, winning the admiration of consumer groups that often accuse the Fed of being too supportive of the financial industry. Despite their differing philosophies, Mr. Gramlich says he got along well with Mr. Greenspan, who supported him on most initiatives, especially those involving increased disclosure.
Nonetheless, his remarks represent a rare insider’s criticism of Mr. Greenspan’s regulatory record. Mr. Greenspan says he didn’t get heavily involved in regulatory matters in part because his laissez-faire philosophy was often at odds with the goals of the laws Congress had tasked the Fed with enforcing.
“I basically listened to the staff and tried as best I could to support the staff’s recommendation,” he says. He notes that with one exception, on a highly technical issue, he always voted with the board majority.
Still, Mr. Greenspan’s views did color the regulatory environment, facilitating growing concentration in banking and a hands-off approach to derivatives and hedge funds. That approach, broadly shared by both the Clinton and Bush administrations, is coming under increased scrutiny.
Heat on the Fed
The Fed has taken heat recently for not more vigorously using its power to write consumer-protection rules for the entire industry, not just the lenders it oversees directly. Before it proposed new standards last month, the Fed hadn’t conducted a broad review of its credit-card disclosure requirements since 1981 — six years before Greenspan took office.
In 2005, 52% of subprime mortgages were originated by companies with no federal supervision, primarily mortgage brokers and stand-alone finance companies; 23% by banks and thrifts; and 25% by finance companies affiliated with banks and thrifts, including units of bank holding companies.
According to Inside Mortgage Finance, an industry publication, in 2006 three of the eight largest subprime mortgage lenders were units of bank holding companies. The Fed is one of four federal regulators that supervises deposit-taking banks and thrifts. It also has oversight over bank holding companies, with the discretion to delegate authority over their operating units to other agencies.
Thus the Fed generally leaves regulation of nationally chartered banks to the Office of the Comptroller of the Currency; of securities-dealer units to the Securities and Exchange Commission; and of consumer-finance companies to the states.
However, state regulation is generally considered inconsistent and usually less rigorous than federal oversight. Moreover, 18 states offer some form of exemption from state regulation to bank holding company units, according to the Conference of State Banking Supervisors.
The Fed periodically exami
nes the finance-company units to ensure that they pose no threat to the “safety and soundness” of their deposit-taking affiliates and to assess their controls for things like money laundering. In special situations, it does scrutinize their practices for compliance with consumer-protection laws. In 2004, it fined Citigroup $70 million for alleged abuses by its CitiFinancial unit.
But Mr. Gramlich fretted that extending those standards to holding-company units would create an unlevel playing field unless stand-alone lenders were subjected to the same thing.
Jim Strother, general counsel for Wells Fargo & Co., said oversight of bank holding company units isn’t “where the need is,” noting the Fed does examine Wells Fargo Financial, a major subprime mortgage lender. “The gap is for companies that aren’t in the banking system at all.”
In summary, a lasseiz-faire regulatory policy allowed the subprime bubble to grow with almost no constraint until it burst in the current subprime meltdown. But – as the WSJ showed - now the worst problem is that the regulatory gaps and holes in the US system remain as deep as before.
How did this systematic failure of supervision and regulation occur? Let us elaborate on this issue…
Last March the Wall Street Journal, had another long and excellent analysis on how a web of overlapping – and some times contradictory – regulatory authorities (half a dozen ones at the federal level, and a few dozens at the state level) failed to properly perform their jobs. Part of the problem was that many of the new sub-prime lenders were not under the regulatory jurisdiction of the Fed or the FDIC but rather of state level regulators. But, as the WSJ put it then, federal level regulators cannot just blame the state-level regulators as the climate of the last six years was one of pushing a systematic federal agenda against meaningful regulation and supervision of the financial system. As the WSJ aptly put it:
Federal regulators over the past decade issued rules to tighten standards for making loans to borrowers with blemished credit or low incomes. Yet standards still declined and the volume of loans surged in the past two years. One reason: Changes in the lending business and financial markets have moved large swaths of subprime lending from traditional banks to companies outside the jurisdiction of federal banking regulators…Yet even where federal regulators have jurisdiction, they sometimes have been slow to grapple with the explosive growth in especially risky practices and quick to shield federally regulated banks from states and private litigants. The underlying belief, shared by the Bush Administration, is that too much regulation would stifle credit for low-income families, and that capital markets and well-educated consumers are the best way to curb unscrupulous lending.[bold added]
So, indeed a high level federal attitude that stressed self-regulating market rather than sensible and appropriate regulation and supervision of the financial system is at the core of this regulatory failure.
Specifically, federal regulators and federal policy fostered a permissive – anti-regulatory – attitude that prevented – or reversed – even modest state-level efforts to better regulate the mortgage lenders from being under-taken. So, federal regulators now blaming state regulators for being AWOL on regulation – as the new mortgage lenders were not under the direct jurisdiction of Fed, FDIC and the other slew of federal regulators – should be reminded of the famous Biblical observation: “Why do you notice the splinter in your brother’s eye, without perceiving the wooden beam that is in your own eye?” Or as the WSJ put it in March:
…federal regulators fostered an environment in which Wall Street and other secondary market players were permitted to fund loans made without regard for a borrower’s ability to repay. Both OTS and OCC [Federal regulators] said banks they regulate don’t have to comply with state lending laws, which were frequently tougher on lending standards than federal statutes, a policy called “pre-emption.”
“The OCC’s pre-emption policy really neutered the states’ ability to really aggressively address predatory lending issues,” says John Ryan, executive vice president of the Conference of State Bank Supervisors.
In 2002, Georgia passed one of the country’s toughest antipredatory-lending laws. Among other things, it would have made not just the originator of a loan liable for abusive practices, but any investor who purchased the loan in the secondary market. Numerous lenders threatened to stop doing business in Georgia. Shortly afterward, both the OTS and the OCC said that Georgia’s law didn’t apply to their regulated institutions. The state later weakened the law’s most contentious provisions.
The OTS’s current director, John Reich, says, “We will see to it that the institutions that we supervise abide by the consumer protection laws and regulations.”
In April 2005, Eliot Spitzer, then New York’s attorney general, asked J.P. Morgan Chase & Co., Wells Fargo & Co., and other nationally chartered banks to provide him with information about minority borrowers to see if they were charged unfair interest rates. The banking industry and the OCC successfully blocked Mr. Spitzer’s move in court on the grounds that New York didn’t have jurisdiction over these lenders.
Public disciplinary actions by federal bank regulators are rare. In the past two years, the FDIC has issued four cease-and-desist orders against subprime lenders that required the companies to change their practices. The Fed has issued just one and the OTS none, the FDIC said. The OCC said it has sanctioned one subprime lender in that time. Federal regulators say they spot and correct problems quietly during the examination process before they reach the point where public enforcement action is needed.
Regulators appointed by President Bush often have been more sympathetic to industry concerns about red tape than their Clinton administration predecessors. When James Gilleran, a former California banker and bank supervisor, took over the OTS in December 2001, he became known for his deregulatory zeal. At one press event in 2003, several bank regulators held gardening shears to represent their commitment to cut red tape for the industry. Mr. Gilleran brought a chain saw.
He also early on announced plans to slash expenses to resolve the agency’s deficit; 20% of its work force eventually left. When he left in 2005, Mr. Gilleran declared that the OTS had “exercised increased diligence in its review of abusive consumer practices” while reducing thrifts’ regulatory burden. But his successor, Mr. Reich, a former community banker, has reversed many of Mr. Gilleran’s cuts. Citing “understaffing,” he hired 80 examiners last year and plans to add 40 more this year. A spokeswoman for Mr. Gilleran, now chief executive of the Federal Home Loan Bank of Seattle, said he wasn’t available to comment.
Regulators note that in recent years not one of the banks they regulate has failed or come close to failing because of subprime lending. OCC head John Dugan says, “National banks tend to be more heavily regulated and their underwriting standards tend to be more conservative. It’s not surprising to me that these industry problems we’ve seen have been in these specialist lenders, not federally regulated banks.”
So the de-regulatory zeal took such an extrem
e form that the head of the OTS literally brought a “chain saw” to show his zealousness in slashing any sensible regulation of the banking system. That “chain saw” mentality is a perfect symbol of the butchery of common sense regulation and supervision that took place in the last six years. The sub-prime carnage was then the obvious outcome of this anti-regulation slash & burn and chain-saw mentality.
19 Responses to “WSJ: Greenspan Added to Subprime Woes by Blocking Crackdown on Predatory Lending and Preventing Further Supervision of Lenders”
df • June 11th, 2007 at 7:43 am
“it’s not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits.” what desired availability ? How could a higher debt load be efficient for the economy in the long term ?
Anonymous • June 11th, 2007 at 10:42 am
Ohio AG Dann targets online predators, predatory lenders 2007-06-11 By Jim Phillips Athens NEWS Senior Writer With just over five months in office, Ohio Attorney General Marc Dann said Thursday he’s happy to be going after those who victimize Ohioans, whether as predatory lenders or online sexual predators. ”I’ve got a lot of pent-up excitement among the lawyers in my office,” Dann admitted in a speech to the Athens County Bar Association. As a former private-practice lawyer, he said, he finds it energizing to carry a badge, and help beef up the state’s protections for citizens and consumers. … In the area of white-collar crime, the AG has launched a crackdown on predatory lending and other types of questionable activities related to home financing. In late March, Dann’s office announced an agreement with the New Century Financial Corporation, which suspended all home foreclosures while the agency reviewed its pending foreclosures and loan actions for possible state law violations. In May, following extensive reporting in newspapers including The Columbus Dispatch of serious predatory lending problems in Ohio, the Ohio General Assembly passed Senate Bill 185 to address the problem. The main thrust of the law was to give Dann’s office direct enforcement authority over certain lending activities. In comments to The Athens NEWS before his bar association speech, Dann suggested that the predatory lending problem in Ohio stemmed both from weak laws compared to other states, and from a lack of enforcement of the laws Ohio did have. When he took office, he said, he found “a large backlog of complaints that hadn’t been investigated,” alleging shady lending activity. He also told the local bar that he would like to see such investigations move higher up, to the Wall Street financiers who profit from the bundling of high-risk loans into investment instruments. ”We believe there are people up the chain of money… who knew or should have known that fraud was being perpetrated,” he said.
Guest • June 11th, 2007 at 10:44 am
No Federal help coming to mortgage borrowers facing foreclosure…so home prices may fall more… Federal mortgage reform unlikely in 2007 Staff and agencies 10 June, 2007 By ALAN ZIBEL, AP Business Writer Thu Jun 7, 11:02 PM ET WASHINGTON – Homeowners unable to pay monthly mortgage bills and facing foreclosure shouldn‘t count on help from Washington this year. Regulators and lawmakers seem to be taking a wait-and-see approach as they confront the fallout from several years of lenders making too many home loans to people with inadequate credit. ”We have an obligation to prevent fraud and abusive lending,” Federal Reserve Federal Reserve Chairman Ben Bernanke said in a speech Tuesday. “At the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.” The National Association of Realtors said Wednesday it expects sales of existing homes to drop 4.6 percent this year to 6.2 million while the median home price is expected to fall 1.3 percent to $219,000. It would be the first annual drop since the trade group began keeping records in the 1960s. If the prospect of soaring foreclosures doesn‘t motivate Congress “to take firm and deliberate action, I don‘t know what on this God‘s earth will,” says John Taylor, president of the Washington-based National Community Reinvestment Coalition, which advocates for low-income and minority groups. ”No seismic financial occurrence is about to overwhelm the U.S. economy,” Robbins said in a speech last month. Citing Dodd‘s summit, Mark Adelson, an analyst with Nomura Securities in New York, warns that the housing market would be hurt if some banks overzealously arrange loan workouts. Hedge funds have asked a trade group that regulates their industry to deny a Bear Stearns Cos. proposal regarding banks‘ legal responsibilities if they arrange a workout on a loan that also has a default-risk contract attached. In many cases, banks now owe the hedge funds much more money under the terms of those contracts than the financial hit they take when they help bail out a troubled loan, according to the letters that were sent by more than 25 hedge funds. In an e-mail, a Bear Stearns spokesman suggested that some hedge funds are disappointed that big bets they made on a subprime mortgage meltdown aren‘t paying off. Federal lawmakers and regulators say they are balancing how to make sure high-risk borrowers can still get loans against efforts to rein in abusive lending practices. ”We will try to make sure that we don‘t inadvertently regulate subprime lending to death,” said Rep. Brad Miller, a North Carolina Democrat and longtime proponent of predatory lending legislation. Miller is confident that a bill he and his colleagues plan to introduce will pass the House quickly. The bill will be modeled after consumer protection laws in states like North Carolina and New Jersey, where reforms aren‘t drying up credit, he says. The bill likely faces an uncertain future in the Senate. And though Sen. Charles Schumer, D-N.Y., wants $300 million of government money — matched dollar-for-dollar by mortgage lenders — to be channeled to community groups that help distressed homeowners avoid foreclosure, his proposal has gained little traction. On the regulatory front, the Fed has scheduled a June 14 hearing about whether to take action under a 1994 law that gives it authority over deceptive mortgage practices by any lender, not just federally regulated banks. Rep. Carolyn Maloney, a New York Democrat who heads a House subcommittee that oversees financial institutions and consumer credit, wants the central bank to step in. Dodd wants the Fed to go after lenders that made loans without requiring borrowers to set aside tax and insurance payments. He also wants limits on loans made without income verification, dubbed “liar loans.” In March, five federal agencies that regulate banks, thrifts and credit unions proposed guidelines requiring stricter evaluations of a borrower‘s ability to repay, among other recommendations. The guidelines — which apply only to federally regulated banks — should be completed this month, Sheila Bair, chairman of the Federal Deposit Insurance Corp. said Wednesday. Bair said she hopes Congress and the Fed issue similar rules for nonbank lenders, such as the now-bankrupt New Century.
Anonymous ibid. • June 11th, 2007 at 12:04 pm
df asks how increasing the debt burden could possibly be of benefit. Consider a simple example: a man, working as an engineer, needs to have an emergency appendectomy. However, his insurance requires a co-pay that is $1 larger than his savings. Should he (a) take out a $1 loan and live? or (b) not take out the loan and die? The basic word on debt is: what are you using it for? A lot of the debt incurred by cashing out equity *was* used to improve the house. In other words, the debt is incurred as part of an investment. If successful, the investment increases the size of the economy. But a lot of the debt incurred was used to pay for consumption, i.e., for purposes other than investment. Those purposes may have been worthy or reasonable, but because they are not expected to produce any return, the net outcome cannot increase the size of the economy. It all depends on what the debt is used for.
df • June 12th, 2007 at 3:26 am
Anonymous tries to answer my question and gets it partially wrong Consider a simple example: a man, working as an engineer, needs to have an emergency appendectomy. However, his insurance requires a co-pay that is $1 larger than his savings. Should he (a) take out a $1 loan and live? or (b) not take out the loan and die? 1 there should be a social insurance system that makes it free for all to have emergency appendictomy. 2 the question is nether wether someone should take a loan (people have an incentive to make promise to pay letter and not fulfill them) but on what conditions should loans be made if they are. 3 the bank should loan money when they generate revenues. IF they do so, the debt load DOES NOT rise, since revenue is generated that allows to pay the debts. The debt level rise in absolute level, but it still is the same percentage of GDP. One may debate the value of the GDP measure and of debt and money agregates, but if household debt goes from 50 to 110% of GDP you can be sure that there is a pb. ”The basic word on debt is: what are you using it for? A lot of the debt incurred by cashing out equity *was* used to improve the house. In other words, the debt is incurred as part of an investment. If successful, the investment increases the size of the economy. “ THis is utterly wrong. Because : Could these people afford improved houses ? THose investments did not generate revenues. They would if those people had sold those houses to people not taking loans to buy them. Yet what has happened is that more and more people have taken bigger and bigger loans to buy more and more expansive house, wether the quality of houses has improved is irrelevant because there is no sign that the revenues of households have risen enough to pay that quality. But a lot of the debt incurred was used to pay for consumption, i.e., for purposes other than investment. Those purposes may have been worthy or reasonable, but because they are not expected to produce any return, the net outcome cannot increase the size of the economy. Hence the debt load has risen. So back to the question : how could increasing the debt load (Debt/GDP ratio) be a wise policy ? PHrased other wise, if the FEd was so happy with increasing the money supply by 8% each year, why did not it print the money directly and hand bills to the citizens through lower taxes instead of allowing private banks to create money through loans on which ultimately houseaholds will have to default in a massive deflation crisis ? This is the mistery to me. The fed and other central banks could print fiat money, and instead, they let private agents create debt based money through increased lending activity… It all depends on what the debt is used for.
Stormrunner • June 12th, 2007 at 11:34 am
Why is this a mystery we have been fully warned. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson Eliminate the FED vote Ron Paul
Anonymous ibid. • June 12th, 2007 at 11:44 am
df, ::sigh:: Son, you need to take more time pondering and less time writing. The analogy I provided you, in which a small amount of debt provides a very large return is the precise criterion for when debt creation is good vs. bad: if debt creation is an investment that increases wealth in the future, it’s good. If it’s for consumption, that’s bad. If you take just 10 seconds to think about it, *it’s wealth creation that reduces the debt load.* As for people affording improved homes, that’s a fairly complicated story. (1) The major factor in affordability is wages, which have been stagnant for a generation. If Americans had simply shared fairly in productivity gains, median wages would be–ballpark– about 30% higher. (2) A lot of home improvement is not optional. Suppose that housing has a 30 year lifespan. Then, every year, the homeowner should be investing about 3-4% of the value of the house, just to keep in up. Nowadays, that’s very likely $6,000-$10,000, or more. (3) Expenses don’t come at a smooth rate. Roofs fail and it’s a big expense. Or Dad gets laid off for six months, so repairs have to be put off until household finances recover (a lot longer than six months). So, during good times, people swap equity for home improvement. Anyway, take some time and think about it. Contrary to the media version of reality, most homeowners are reasonable people doing what they think they need to to break even or even come out a bit ahead. Their home, after all, is about all they own.
Guest • June 12th, 2007 at 5:25 pm
Nouriel Do you have any comment as to why the FED appears to be letting the short end of the yield curve fall? 1 month T-bill currently yields 4.60% and the stated FED rate is 5.25%. This is a big spread and it should be closed out if the FED was offering enough to maintain the overnight rate as 5.25%. Are they trying to lessen the shock of the long term bond rising? Are they giving themselves amo to rasie the rates without upseting the market? Are they simply not able to keep up with the demand? Thanks
Anonymous ibid. • June 12th, 2007 at 6:20 pm
Nouriel, any chance of getting the clip of your CNBC appearance? I missed it. Guest asks Nouriel, “Do you have any comment as to why the FED appears to be letting the short end of the yield curve fall?” I don’t know what Nouriel’s answer is, but the short end isn’t falling (a year ago, it was 4.72%). The long end is rising. That probably reflects a consensus that rates will continue to rise, meaning there’s nothing the Fed can do to affect the long end. After three months, all those short end T-bills will be extinct and no one will be willing to buy them at 4.6%. If inflation fears are confirmed, what gets squeezed are the 2-year and especially the 5-year.
AG • June 12th, 2007 at 6:37 pm
Regarding Greenspans latests comments regarding the debt in the American market. Professor Roubini, I am curious if you hold an opinion that Greenspan is protecting his ‘credibility’ when the US goes into a full recession. Dr Mark Faber mentioned on his blog that he suspected that Chairman Beranake should/would cut rates to protect his personal interest, so he (Beranake) could blame (in an indirect way) the coming recession on the Greenspand legacy, or lack of.
Guest • June 12th, 2007 at 7:04 pm
In Febuary and March the 1 month T bill yielded 5.25%. Now it is 4.65%. It is falling. Check out the data. It is like they have already cut the FED rate by over 60 basis points. Their 5.25% rate is a joke. http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
Anonymous ibid. • June 13th, 2007 at 1:26 am
Sorry, Guest, I just don’t see the 1 month falling. Take a look here for historical data. It started the year at 4.79. It peaked in mid March at 5.24, then drifted back down. But in 2006, the fluctuation was even bigger, from 4.05-5.27. It’s just the nature of short rates to wobble a bit.
Guest • June 13th, 2007 at 11:12 am
You may be right as this shows that the rate was rising in 2006. Then wobbling ever since the FED stopped raising rates. We are still at the very bottom of the trading range so I was probably premature in my call though it still may be proven right if the latest wobble does not turn around pretty soon. Thanks four your input. I learned somthing and found a neat new graph. http://research.stlouisfed.org/fred2/series/TB4WK?cid=116
Anonymous ibid. • June 13th, 2007 at 3:07 pm
That’s great to hear, Guest. Learning from one another is what it’s all about.
Anonymous • June 13th, 2007 at 4:11 pm
Nouriel, you need to have more on the inventory rebuild of this quarter and the impact of the future. I think it depends on the consumer, if they give out, the economy will sink by years end. If they don’t, 2008 will be a rebound of growth. My guess is a rebound of growth. The key for having a severe recession is major overcapacity and a prickly Federal Reserve trying to control inflation costs. Obviously if growth rebounds back to 3.5% for 2008 inflation will rise(when it hasn’t fallen that much) and the FED will have to raise rates), also by January 2009, I suspect global overcapacity will probably have taken hold. That usually indicates exhaustion and fatigue. We are nearing the blowoff stage of this cycle. When it appears it will go on forever but in reality all they are doing is causing overcapacity and creating debt risks. I sense tiredness, but not quite exhaustion yet. The 80′s and 90′s expansions died just from pure tiredness. The key is whether the poor financial structure now in place causes several bubbles to deflate at one. That is bad bad news. It isn’t how long this expansion lasts, but how bad the recession is that follows it. The worse it is, the worse it makes the past look.
df • June 13th, 2007 at 4:42 pm
anonymous ibid, I think we agree that debt which creates wealth is good (it does not increase the debt load) and debt for consumption is bad (it does increase it) I thought you were saying it could be wise to increase the debt gdp ratio for ever. I had not said that more debt is bad, only that ever rising debt relative to revenues is bad. I agree that wages have not risen too fast and have risen in a too inequal manner, I had not thought that this could be one of the reason explaning why people were forced to borrow. However you push that point too far, way too far. there are now about 15% more people owning homes than 15 years ago. Those people bought homes through all the toxic mortgages Greenspan did not oppose to. They can not afford those houses, not at present wages, and probably not even at higher wages. Those people some 10 millions households may well be forced to go bankrupt and go back to renting. If people borrowed to repair the house, great, but why did they buy in the first place, how come home “ownership” was so favored by government policies and bank lending practices over the last 15 years ? Why all the tax breaks ? Why all the toxic loans ? Without those, prices would probably not have risen
Anonymous ibid. • June 14th, 2007 at 10:02 am
df asks, “how come home “ownership” was so favored by government policies and bank lending practices over the last 15 years ? Why all the tax breaks ? Why all the toxic loans ?” Home ownership has been official US policy since the GI bill, passed about 60 years ago. For many years, savings and loans provided low-cost mortgages under close regulation. That system broke down in 1980 due to inflationary oil shocks and massive governmental deficits. The adjustable rate mortgage, the first “toxic loan” came out of that era. The primary reason there have been so many unwise loans is that the regulators have failed at their job. They have failed not by chance but because it was profitable for certain people, especially the financial houses that securitized mortgages. Those people bought the political influence in Washington to get relaxation of oversight. Yes, there have been plenty of unscrupulous people in real estate, from petty grifters flipping properties to people willing to use their good name to commit mortgage fraud to top executives using racial targeting to swindle first-time home buyers. But most people are economically rational. They do what seems to make sense. If there are no cops on the beat, burglary can seem to make sense. When there is a system-wide breakdown, one has to look not at the individuals but at the system.
CPR • June 15th, 2007 at 9:38 pm
Nouriel Roubini and Why His Recession Call is a Bust Remember about 8 months ago when NR was predicting that the Fed would lower rates? I remember how I (and several others) posted how ludicrous that would be. How it would only add fuel to the fire of speculative Bubble dynamics at play. Our argument then was the same as it is now: Credit Bubble Dynamics at play will completely ignore all economic data not directly related to credit. In short, housing and other indicators take a back seat to interest rates and the cost of debt. Speculative bubble dynamics has led to counterintuitive reasoning. Negative economic data will only get Wall Street to salivate at the thought of lower rates and easier borrowing to keep inflating the bubble. All the housing recession did was add another leg to this deluge of dollars, yen and Euros into the system. The bubble has just kept inflating and the market and economy with it. NR needs to read some Doug Noland. I recommend him to all. He is a genius. Read this week’s Credit Bubble Bulletin at prudentbear.com to see what I mean. He completely explains the how’s and why’s of how central banks are powerless to stop what is going on and are even complicit in these bubble dynamics. I’ll stop here. Just read Doug Noland. Scroll to the bottom of the page to find the article. You’ll see what I mean. NR is stuck in the same mindset as Bernake where they completely focus on economic data and ignore credit creation and asset prices in their analysis. Understanding the Ponzi scheme is the only way to understand what’s going on. The crash is inevitable but it won’t be in 2007, it seems. http://www.prudentbear.com/articles/show/2040
Dong Yeiser • June 10th, 2011 at 7:39 pm
This page seems to get a good ammount of visitors. How do you advertise it? It offers a nice unique twist on things. I guess having something useful or substantial to say is the most important thing.
