Neoconservative Speculators?

Man, hold onto your wallets …. Do you hear them? The speculators? Surely you hear them … they are coming for your wallets! They are going to be speculating, and the next thing you know your gas prices are going to speculatively leap, the value of your home is going to speculatively crash, your savings will flush down some speculative black hole of insolvent banks that have collapsed into themselves. It’s the Wall Street party man! Regulators asleep at the wheel! Someone has got to do a little sumpin sumpin for the little guy who had two nickels to rub together in the late 90s, got a nice loan to buy a three-hundred thousand dollar starter cottage in the tree-lined American dream suburbs of the great megalopolis and then who, through the cigar smoke-filled room machinations of the partying Wall Street speculators! found himself a dollar short and a day late on the mortgage.

“What can we do, old boys club of nefarious speculators, to augment our profits at the expense of the little guy?”

“Let’s lend him enough money that they will never be able to pay back, so that they’ll default on our loans, leaving a glut of houses in our hands with no buyers, so that we’ll take possession of all of these homes that are worth 75 percent of the cash we fork over to them!”

A brilliantly dastardly idea worthy of the speculator hall of fame! Why, who would ever think of bankrupting their own banks by making loans that wouldn’t be repaid? Sure, the banks have lost billions of dollars in the process, but these first time home-buyers are out $5k a piece on the down payments, and this just shows the lengths, the mind-boggling lengths! To which these speculators (dare I say neoconservative speculators) will go – flushing their own bank equity right down the toilet in order to make your $5k investment go with it. Fiendish!

And of course this is the mindset of the Republican candidate for President, which tells you something about the economic trouble we are headed for no matter which one of these guys gets elected. It is enough to depress the Hatcher. Except it’s only money, and that is nothing to get depressed about.

Here is my completely uninformed opinion on the whole financial mess, which, while potentially factually inaccurate in a number of respects (perhaps all), nevertheless is consistent with how I want to view the whole mess. Because it is more important that my attitude toward the crisis confirm my free market principles than that it be accurate, this spares me the messy task of having to actually check facts or read articles, etc. Where’s the money in that? (For that matter, where’s the money in this?)

In the late 1990s, the Clinton administration pushed for regulations and such that would require banks to extend mortgage loans to people who traditionally weren’t able to get the loans. Banks were fined if they didn’t have a certain amount of these loans in their portfolio. Thus was created the entire category of subprime mortgage loans, which is a term that did not exist before, because all sub-prime mortgage lendees were living in apartments trying to save up a big enough nut to no longer be sub-prime mortgage lendees.

All of these new homebuyers made it great for those already in a starter home looking to move up, because demand was up and with it the price of their homes. This worked its way up the chain – being able to sell their starter homes for more money, people looking to upgrade could spend more one wrung up the ladder, and thus was born the rapid appreciation of home prices.
The banks that initially made these loans created all kinds of new financial instruments by packaging them together for sale so that they could get rid of them as fast as they possibly could. They played hot potato selling them to and fro for years, until they all felt that the risks were spread fairly well across the banking system. But then the loans started to go bust, some banks were caught with more than they could handle, and bam, just like that the value of their assets fell beneath their liabilities, which for a bank is not good, to put it mildly.

Now, to the bailout, of which I admittedly know nothing. In the old days, solvent (healthy banks) often went bust in the midst of banking panics when people lost faith in the banking system. As a result, the Fed was established as a means of lending to these solvent banks in times of need, so that healthy banks could be saved. This was desirable because of the importance of the banking sector to the overall economy – the intermediary role they play in the economy is extremely important. But the intent then was not to lend money to insolvent banks experiencing trouble – if the liabilities outweighed the assets, you couldn’t rationally expect to recollect the loan because you add the same amount to their liabilities (an outstanding loan to the Fed) as you do in cash to their assets. So the best policy is to let the bad banks fail. I don’t quite understand why that isn’t happening, or why that isn’t the preferred course. Any enlightenment on this issue from economists (please, only the economists, the rest of you peasants cannot begin to understand the subtleties of the dismal science!) would be most welcome.

I suppose some of these banks have human resources that, due to their scale, may negatively impact the economy through creating a temporary lack of supply in financial intermediation. Blah blah blah

Ok, enough of that. That is more economics then even I can pretend to be interested in, especially given the real important development in the country; I am talking about the Phillies destroying all would-be competitors in the last two weeks to erase a four game wild card lead, overtake the Mets in first place, and guarantee themselves at least 26 more innings of fall baseball beyond game 162. At to that the fact that the Yankees aren’t even making the playoffs, making the last game in the house that Ruth built a snore-fest with the minor league team from Baltimore, and despite the economic Armageddon headed our way once either Marx or Engels gets elected, you have the makings for a good post-season. I said it before and I’ll say it again – zero World Series wins for the Yankees during the Bush tenure; four during the Clinton years. Nuff said.

On an administrative note, nowadays it seems I have to approve comments prior to their posting, so you don't get the immediate fame you are looking for when you go to comment. At times I am trying to do this remotely on my Blackberry; but times are so tough that my remote connection to the internet via the Blackberry doesn't always seem to process my approvals, making me convinced that there has never been a worse time or a worse place to be alive from an economic perspective, which is a belief I now share in common with most Democrats.