Whoopsy!
"We misread the economy," admits Biden on George Stefanopoulos' blog on ABC.com:
Biden acknowledged administration officials were too optimistic earlier this year when they predicted the unemployment rate would peak at 8 percent as part of their effort to sell the stimulus package. The national unemployment rate has ballooned to 9.5 percent in June -- the worst in 26 years."The truth is, there was a misreading of just how bad an economy we inherited," said Biden, who is leading the administration's effort to implement it's $787 billion economic stimulus plan.
"Now, that doesn't -- I'm not -- it's now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we're in? And we believe it is the right package given the circumstances we're in," he told me.
The vice president argued more time is needed for the stimulus to work.
"We misread how bad the economy was, but we are now only about 120 days into the recovery package," he said. "The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."
As for the economy they "inheirited," there's this, from a Meghan Loftus piece at America.gov:
Barth, during an America.gov webchat November 12, explained some of the problems that precipitated the downturn in the U.S. financial markets, in particular the subprime mortgage crisis. These mortgages, which were extended to individuals with questionable creditworthiness, often were securitized, meaning they were pooled into securities and then were sold internationally. When the loans declined in value due to the inability of homeowners to pay their loans, the securities declined in value also, spelling trouble for investors.
Perhaps it's my fragile eggshell memory on the blink again, but wasn't there something about forcing banks to give loans to people who couldn't really afford them, in the name of housing for minorities? And wasn't that spearheaded by people in Biden's party? No capitalist (except maybe one with a serious head injury) would give a loan to a person who shows little means of being able to repay it.
On this same topic, Reynolds linked to this. Note that tagline to the blog title! Love that. See also their hall of fame. (That's me, the one with the smile!)
Don't be fooled by those whippersnappers and their Twittering Iphones... We're doing the Lord's work in here, with our blogs and Netscape browsers on Windows 98.
Crid [CommentCrid@gmail.com] at July 6, 2009 12:14 AM
There's no question that banks were armtwisted into making bad loans by "community redevelopment" programs. But when these loans were pooled, why didn't the resulting securities immediately drop to a value which reflected the underlying risk? Surely the big institutional investors who were buying these packages were sophisticated enough to understand the concept of discounting for risk. The bad loans should have impacted the balance sheets of the originating banks the moment they pooled and sold them, instead of snowballing and taking down the whole economy.
I don't pretend to know what it is, but there had to be another factor operating.
Rex Little at July 6, 2009 1:00 AM
> why didn't the resulting securities
> immediately drop to a value which
> reflected the underlying risk?
That's the question of the decade, bigger than "Where's Osama?"
The answer seems to be that nobody wants to have too much information about what's in these CDO's... Meaningful data would make them harder to sell. I haven't heard anyone in the finance or government suggest that in the future, these instruments should be properly measured by their contents.
Apologies for posting the link yet again, but this has the best description of how gruesome this process had become. The failure of the ratings agencies has, at this date, been neither explained nor excused.
Six months on, the Obama administration is working as hard as any ever has to prevent these assets from finding their price.
Crid [CommentCrid@gmail.com] at July 6, 2009 1:33 AM
When, exactly, do we get to hear them STOP blaming Bush for their problems??
momof4 at July 6, 2009 5:48 AM
"When, exactly, do we get to hear them STOP blaming Bush for their problems??"
Are you kidding? Blaming Bush is the gift that keeps on giving. You get all the credit if things turn around, and none of the blame if they don't. I don't remember for sure, but I imagine some of the Bush folks blamed their problems on the Clintons as well.
old rpm daddy at July 6, 2009 5:55 AM
Crid:
simple explanation - there are only four of them, and you must go to them to get your securities rated. And they have to rate them. And you have to pay them for the privilege. How easy do you suspect it would be to "convince" one to give you that triple-A rating?
Never. The entire Obama administration, on account of their total lack of ability, has nothing to offer but "Bush did it."
brian at July 6, 2009 5:56 AM
No capitalist (except maybe one with a serious head injury) would give a loan to a person who shows little means of being able to repay it.
You'd think, except that they were able to package and re-sell these loans (sometimes multiple times) so that no blowback from any defaulting would hit the original lender. You should check out an edition of "This American Life" that aired a while back. They interviewed some of these mortgage lenders who said that the whole industry kind of went insane for a while, and they were pressured by top levels of their banks/companies to keep writing mortgages without even verifying income because mortgages were profitable instruments to sell, and everyone was making money hand over fist. Most of the subprime problems had nothing to do with guaranteeing loans to minorities.
deja pseu at July 6, 2009 6:17 AM
I'm glad you posted this one too Amy. Especially as Congress-with-a-man Barney Frank has recently proposed *easing* lending requirements again to "revive" the economy.
Why does Massachusetts keep re-electing these unutterable morons? Once, I understand. Everyone makes mistakes. But not everyone keeps repeating them expecting things to get better.
BlogDog at July 6, 2009 6:29 AM
The ratings agencies deserve a huge amount of blame. No doubt about it. This American Life recently did a piece explaining how Moody's and standard & Poors came to have so much power, how they fucked the ratings in the CDOs, and how their (too late) lowering of the ratings of those bonds precipitated the massive sell-offs that brought down so many of our big financial institutions. I don't always dig TAL but their work on the financial crisis has been great. The Planet Money team they're affiliated with is solid, too.
Cheezburg at July 6, 2009 8:32 AM
Part of the problem is that for years there has been the assumption in banking and finance that people will endure almost any hardship and make almost any sacrifice to keep their homes.
That attitude made mortgage bets safe ones. The old default rate on mortgage loans was less than 2%.
That assumption was in place before people thought of their houses as investments. Before they bought houses with the idea of flipping them for profit.
That assumption was in place before personal bankruptcies became routine. That was made in an age when people were careful about their credit ratings and about their financial reputation.
With the blase attitude toward personal bankruptcy, could a blase attitude toward foreclosure be far behind?
And what will that blase attitude mean for the default rate on mortgage loans? What will that higher default rate mean for interest rates on mortgage loans?
And, yet, Barney Frank wants to force lending institutions to lend even more money to high credit risks.
If they cannot make money at it and there is no non-government secondary market for mortgage loans, how long before banks get out of the mortgage industry?
How long before the interest rate on a mortgage loan is as high as the interest rate on a car loan? Or a credit card? If the risk is the same....
Conan the Grammarian at July 6, 2009 9:13 AM
We Guarantee It: The Credit Rating Agencies
Along with pressuring banks to make risky and outright bad loans, the government pressured the credit rating agencies to put AAA on that debt. Fannie Mae (and Freddie Mac) thoroughly confused the housing bond market for 20 years. Fannie Mae had the implicit guarantee of the government and many explicit privileges that connected it to the government, unlike any truly private company. The ratings agencies respected that implicit guarantee to put AAA on Fannie Mae debt. Then, they put AAA on all similar debt, because how could they say that the other debt was bad when they were saying that Fannie Mae debt was good? It would have blown the cover off the entire operation.
An "implicit guarantee" is when powerful politicians are pushing a program and clearly are not going to let it default. They will spend any amount of money to avoid bearing personal responsibility for a failure. This is how it has worked out.
Here is a quote at the above link.
( easyopinions.blogspot.com/2008/10/we-guarantee-it.html#bardo )
==================
Craig Bardo:
The failure of the ratings agencies has had consequences that are out of proportion. It should not be dismissed as a simple regulatory mistake.
I represented bond issuers and designed entire programs based on getting better ratings as well as better tax treatment for non profit issuers. Why did the ratings agencies get the mortgage securities so wrong and not the debt of hospitals, colleges, and universities I represented? Why did purchasers do better buying lower-rated health and university bonds than the higher-rated mortgage bonds?
The answer lies in political pressure. My issuers had very little power over the rating agencies. But, the federal government effectively provided the charter for the ratings agency, and the federal government tacitly backed the bonds being rated.
Even the most seasoned, hardened analyst working for the ratings agency would have a hard time stating that those bonds were not worth the paper used to print the offering document
==================
A lot of banks lost money because they bought debt that they did not understand. The government lost money through its housing policy implemented through Fannie Mae and Freddie Mac, who bought $1,400 billion ($1,400,000 million) of this subprime debt, and pressured the bond rating agencies to stamp AAA (safe investment) on all of the sub-prime debt. Fannie and Freddie were government programs pretending to be private companies. They had the implicit guarantee of the federal government.
Housing itself was pushed as a government program. Housing is a highly leveraged investment. The homeowner borrowed 80% of the money to buy the home (4:1 leverage). Great when prices are going up, and disastrous in any downturn. The leverage was more like 10:1 for the sub-prime loans. All encouraged by government policy and programs.
Andrew_M_Garland at July 6, 2009 9:19 AM
The bonds, backed by pools of mortgages, received high ratings from Moody's etc. Sophisticated buyers bought the bonds. Banks had incentive-- free market incenmtives -- to sell more bonds. Banks were never "forced to lend"--read up on Countrywide. They were aggressively lending without income verification--they knew they could sell the bonds. Until they counldn't.
That's just a right-wing canard that minorities caused our banking system to collapse.
You know what has really boosted over-investment in housing in America? The mortgage interest tax deduction. Why do "libertarians" not resist this element of the nanny-state?
Because they are not libertarians. They are Republicans who like to smoke pot.
i-hole at July 6, 2009 10:12 AM
"And wasn't that spearheaded by people in Biden's party?"
The Democratic party of the 90s shoulders some blame, but I think ultimate responsibility for the mortgage meltdown lies with Korean automakers.
XWL at July 6, 2009 11:02 AM
Biden reminds me of Colonel Klink.
Feebie at July 6, 2009 11:53 AM
You know what has really boosted over-investment in housing in America? The mortgage interest tax deduction.
True, but you can't blame it for the mortgage meltdown or the housing boom which preceded it, because the tax deduction has been in place long before. I don't remember how long, exactly, but it was there before I started working, and I'm retired now.
Why do "libertarians" not resist this element of the nanny-state?
Because libertarians don't object to any tax deduction. It's taxes we don't like.
Because they are not libertarians. They are Republicans who like to smoke pot.
I wish. If Republicans were at all sympathetic to libertarianism, Ron Paul would have been the nominee last year instead of McCain.
Rex Little at July 6, 2009 12:11 PM
The Communiyt Reinvestment Act has been a staple of banking since the 1970s, and I never liked it. But to blame it for the collapse of our banking system in the 2000s is silly, and a little bit ugly when the minorities angle is gratuitously tossed in.
Real libertarians want no tax deductions, but rather a lower overall tax rate, instead of a panoply of (usually politically derived) nanny-state tax "deductions."
Better yet, no corporate or income taxes at all, and a national sales tax. Why tax productive activity?
If we radically reduced the military, eliminated the Dep't of Agriculture, HUD and the Department of Education, we could probably run the federal government on a 15 percent national sales tax, and perhaps a gasoline tax. Also, I did not say Republicans were libertarians who liked to smoke pot, I said American "libertarians" are usually just Republicans (with usually extensive baggage) who want to smoke pot.
A very convenient version of libertarianism.
i-hole at July 6, 2009 1:03 PM
If we radically reduced the military, eliminated the Dep't of Agriculture, HUD and the Department of Education, we could probably run the federal government on a 15 percent national sales tax, and perhaps a gasoline tax.
I completely agree, and if we could achieve all that at the cost of eliminating the mortgage deduction, any libertarian would jump at the deal. But if we just got rid of the mortgage deduction in isolation, all we'd do is increase taxes for homeowners.
I did not say Republicans were libertarians who liked to smoke pot
I know that. What I'm saying is your comparison of libertarians to Republicans is ridiculous. If you take a McCain or Bush or Giuliani or Romney Republican and make him a pot smoker, you do not have anything resembling a libertarian.
Rex Little at July 6, 2009 1:44 PM
I’ll tell you what I am really driving at, not that it matters. American libertarians spend their public time caterwauling about the minimum wage, national health insurance, and minorities and the community reinvestment act—no wonder the general public regards libertarians as just a fifth column for plutocrats or worse.
If, in contrast, libertarians devoted “equal time” to, say, an incredibly bloated Cold War military, the ongoing annual subsidy of rural America by urban America (about $100 bil a year), the incredible array of special tax deductions (all for the better off, poor people don’t pay much in taxes), or why even have an SBA or Department of Commerce—then maybe libertarianism would have a chance. Right now, due to the extremely narrow and compromised nature of public whining by libertarians, most people regard libertarians as pot-smoking poltroons. Accurately, I might add
i-hole at July 6, 2009 2:30 PM
The 1970s CRA is not to be blamed. The amended CRA (amended in the mid 1990s), however, is a different law and gets a share of the blame...and rightfully so.
The original CRA required that FDIC insured banks be evaluated by federal agencies to determine if they offered credit, in a manner consistent with sound operations, to all communities from which they took deposits.
In 1989, the law was amended to include a four-tiered CRA rating for banks. This gave activist groups the ability to review banks' operations.
The FHEFSSA of 1992 required Fannie and Freddie to devote a percentage of their lending dollars to "affordable" housing.
The 1994 act that legalized interstate banking listed the CRA rating as a consideration in allowing a bank to establish interstate branches.
In 1995, Clinton asked Congress to reform the CRA. As a result of this reform, detailed information about a bank's CRA rating was made publicly available (more than just the score).
The 1999 Gramm-Leach-Bliley Act's ensured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System (i.e., wishing to expand beyond demand deposit banking) would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.
Community activist groups now had a weapon they could use against banks. And they did use it. Groups threatened to sue banks and hold up any proposed mergers or expansions unless the banks increased their CRA commitment. And the additional commitment just happened to be administered by the group threatening to sue. This was a favorite tactic of ACORN.
The CRA had good intentions and should not be scrapped in total. But it should also not be a means for activist groups to enrich themselves at the expense of a bank's depositors and shareholders.
Conan the Grammarian at July 6, 2009 4:09 PM
No capitalist...would give a loan to a person who shows little means of being able to repay it.
Yes, but a fair number of people who call themselves capitalists are actually just well-connected, rent-seeking scum. They didn't think that they needed to worry about the borrowers' ability to pay, because they thought they were guaranteed by the government. And they were right.
Andrew_M_Garland at 9:19 AM - thank you for that informative post.
Shawn at July 6, 2009 7:42 PM
i-hole: "If, in contrast, libertarians devoted “equal time” to, say, an incredibly bloated Cold War military,..."
Go and actually spend some time studying that which you are complaining about, and get back to us. You are exposing your ignorance by making a statement like this. The military has moved well beyond the Cold War, and its percentage of the federal budget is far less than it was in the Cold War years. Who hasn't moved beyond it are the leftists who are still fighting against thing like missile defense because it upsets their precious Russia.
Cousin Dave at July 7, 2009 8:27 AM
Conan: thanks.
But when these loans were pooled, why didn't the resulting securities immediately drop to a value which reflected the underlying risk?
Because the US had never experienced a country-wide drop in property values.
Not a good reason, perhaps, but it is easy to imagine getting sucked into believing something will never happen because it has never happened.
You know what has really boosted over-investment in housing in America? The mortgage interest tax deduction.
How is that so? I am no expert in tax law, but SFAIK, owners of rental properties deduct loan interest (and depreciation, and a great many other costs) from their income.
Eliminating the mortgage interest deduction would merely have the result of favoring rentiers over homeowners.
Hey Skipper at July 7, 2009 11:55 AM
Shawn,
Thanks for the compliment.
Andrew_M_Garland at July 7, 2009 1:40 PM
But when these loans were pooled, why didn't the resulting securities immediately drop to a value which reflected the underlying risk?
Because the US had never experienced a country-wide drop in property values.
I wasn't talking about the risk that property values would drop; I realize no one saw that coming except the stopped-clock types who are always predicting disaster. I meant the risk that the less credit-worthy borrowers would default on their mortgages. Some commenters above addressed this question, pointing the finger at the rating agencies.
Also, is it really true that the U.S. never had property values drop all over before? I know values in my part of the country (southern California) dropped somewhat in the mid-nineties (just before the big run-up began). Nothing like the recent crash, of course, and I don't know what values elsewhere were doing at that time.
Rex Little at July 7, 2009 1:59 PM
Wish property values would drop here...
NicoleK at July 8, 2009 3:26 AM
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