Built on Facts


Update: I seriously feel guilty for writing politics in a physics blog. I personally sometimes get annoyed at reading politics on other non-political blogs, and I imagine you do too. That’s why I happily encourage you not to read anything I write tagged with politics unless you like that sort of thing. The election’s only a month or so off. I promise after that the politics will be few and far between, and until then I’ll still try to keep it to only an occasional thing.

The bailout is dead. As congressional acts often do, it may come back to life at a later date. But for the moment, it’s dead and I’m quite pleased.

It’s rare that the ideological left and right make common cause with each other, but here this has to at least some extent happened in both the commentariat and legislature.

Left: No bailout for greedy fatcats!
Right: No bailout with responsible taxpayer money!

And the not-very-ideological middle of both sides have generally shared opinions as well.

Both: The bailout is not ideal but it’s necessary.

Chalk me up with the extremists. The bailout failed and stocks have tumbled, but in terms of percentage it’s not among the big drops of history. We’re surviving fine so far, and liquidity remains quite decent from smaller banks which already provide a very large percentage of total lending, and which didn’t invest riskily with these house-of-cards subprime packages. Could we turn it into a depression? I doubt it; the world is not the same as it was in the 20s, and the US is not a closed system. Assuming congress doesn’t go protectionist on us, global trade and liquidity will be a great asset to the US. In any case I’d put more of my devaluing dollars on a bet that panicky government intervention is more likely to spark serious general economic problems than a natural Darwinian pruning of the near-criminally mismanaged mortgage finance companies. So long as congress and the fed keep an eye on potential developing liquidity problems I think we’ll be fine. And I’m not a disinterested observer: colleges are among the institutions most dependent on credit availability to their students, so my own job would be a canary in the coal mine. But I’m pretty sure we’ll be ok for the reasons above.

In forest management you sometimes have to let small natural fires burn in order to clear underbrush, keep the forest healthy, and prevent fuel from building up for a serious fire later. Let’s let this one burn. The financial forest will be better for it.


  1. #1 Patrick
    September 29, 2008

    Not sure if I agree with your take or not, but a big part of me thinks you’re right.

    And it’s your blog, write what you want 🙂

  2. #2 Nomen Nescio
    September 29, 2008

    a bailout might be necessary, but so far i haven’t seen very many plans i’d accept as being wise.

    oversight and accountability sound like absolute necessities whenever one is slinging around trillions of other people’s money, so that’s a must. just giving that kind of cash away seems more generous than even my mostly-Keynesian layman’s economics will stomach, so receiving some kind of equity in return for all this money would make me a lot happier. (yes, that would mean the government would end up owning some amount of shares in several financial institutions, at least until they could be sold at break-even or better, again. i’m fine with that.) some controls on how this money could be used by the recipients would be nice, too, seeing as how a lack of responsibility in the private market was what got us here.

    so far, the proposed plans appear to be heading in a direction i like, but they’re not there yet. there’s time to improve them still; the economy may be bad, but the sky is not falling. i want to see capitol hill give their plans enough publicity, and enough time, for public discussion and feedback to our representatives. the average taxpayer may not be an economical genius, but using this much of our money all of an unplanned sudden i think gives us some right to debate and comment on how it’ll be used.

  3. #3 Godfrey
    September 29, 2008

    On some level this is true, but you have to remember that there was massive federal pressure to extend loans to poor credit risks (Community Reinvestment Act, etc.). Government intervention is, in large part, responsible for the profusion of bad loans.
    See http://hotair.com/archives/2008/09/29/party-like-its-1999-redux-the-new-york-times-predicted-fannie-mae-failure/

  4. #4 Matt Springer
    September 29, 2008

    I agree, and in fact I’ve talked about that a few posts ago. I do think it’s irresponsible lending that’s the prime (subprime?) culprit, and that lending was at least in part fueled by government mandates.

    Here’s another interesting piece I came across, which has law professor Ilya Somin arguing that in fact Wall Street’s submarine act today isn’t evidence for the necessity of the bailout, by virtue of comparison with other historical drops.

  5. #5 eddie
    September 29, 2008

    The “blame the Community Reinvestment Act” meme is just as bullshit as the “Obama is a muslin [sic]” one.

    One – The CRA only applies to banks and not building societies like fanny, freddie or wamu.

    Two – It has specific terms in it to prevent irresponsible lending.

    three – It’s been running fine for over thirty years so how come it’s allofasudden to blame for this?

    I suspect Godfrey just doesn’t like the idea of financial services being available to black people.

  6. #6 Marckus
    September 29, 2008

    Several European banks were nationalized today. This problem may have originated in the US, but it is now a global problem. Facing a global recession, as the originators, I don’t think we can afford to do nothing.


  7. #7 Paul Johnson
    September 30, 2008

    I dunno I just think that if pouring money into a monetary system to stabilize the markets can be done with a profit for the federal government while not overtly taking over an entire industry then there isn’t much of a problem. Assuming the power the government gets eventually returns to the businesses when the problem stabilizes.

    I agree with you totally though that the bailout plan is unsatisfactory as is.

    I would hope for my small cap stock savings sake that they do fix this problem and soon. I don’t see how it will happen though without federal money. Thank god my European stock is slightly stable today.

    Also the forest analogy doesn’t really apply when you get into how certain seeds work. Granted that the rainforest does benefit somewhat when trees collapse.

  8. #8 Matt Springer
    September 30, 2008

    There will be no ad hominem or strawman arguments, #5. Disagreement is fine, incivility and the above or not.

    Now: The CRA has not been static over its lifetime. That aside, the CRA is only a small piece of the irresponsible lending problem. See my previous post for NYT and LAT cited references for some of the other ways congress created the conditions necessary for this.

  9. #9 Carl Brannen
    September 30, 2008

    The world’s economies do not need to be tied together in order for business cycles to leak from one country to another. All you need is for the people in one country to read the newspapers.

    Banks loan money for long term (mortgages) and borrow money for short term (deposits). They are always subject to runs when people get emotional. They do not keep your money in the little drawer that the cashier puts it in when you deposit cash. They loan it out. They can’t get it back early if too many people want it too quickly.

    In the case of bank failures, they will read that banks are failing in another country. That will naturally make them just a little more worried about their own banks. So they withdraw a little money. Soon they have a run on their own banks. European banks are failing now. Iceland, in particular, is said to have a very toxic derivative problem. (Sounds sort of mathematical, doesn’t it.)

    Humans are creatures of imitation both in panics and in bubbles. The toxic derivatives of the US were also done in other countries, and for the same reason, imitation.

    By the way, those who really want to believe that the Republicans were responsible for mismanaging Fannie Mae and Freddie Mac should visit Rush Limbaugh’s website today. He has a nice collection of Democrats on camera stating that the FMs are doing just fine and do not need oversight, and Republicans demanding a new regulatory agency to fix things (4 years ago). My favorite quote is that mortgages are rock solid and therefore the FMs should be able to operate on 2% margin (as opposed to banks, which are required to keep 4%). Mortgages never go bad.

    It’s a bit much to blame the Republicans for destroying the financial system when they haven’t had control over Congress for years and never had control over anything in Europe, ever.

  10. #10 Oldfart
    September 30, 2008

    Sorry Carl Brannen – anyone who goes to Rush Limbaugh for valid information might as well go to David Kirby. Anyone who states that Republicans “haven’t had control over Congress for years” isn’t living in this Universe. Republicans were in charge of Congress from 1994 to 2006. Where were you during that time? Listening to Rush Limbaugh?
    From 2000 to 2006, Republicans had a rubber stamp congress. No one could expect a Democratic congress which doesn’t have enough votes to invoke cloture to fix in two years (one of which was “used” up in passing appropriations that the 109th (Republican) Congress declined to pass) what the Republican Congress had destroyed in 12 years.

    While there is no argument from me that there is enough blame to go around to both sides of the aisle, I’m afraid the main blame goes to those to destroyed the regulatory system or ignored it. And that was the Republicans.

  11. #11 Davis
    September 30, 2008

    Godfrey @3 and Matt, putting some blame on the CRA seems plausible in principle, but there are some problems with that. Primarily, the data do not support the idea that CRA-covered lenders were more irresponsible — in fact, it appears the exact opposite was true (such lenders had lower percentages of high-cost loans, not higher, and they were less likely to tranch out their mortgage holdings).

    I’d say the data-supported position (the CRA probably played little or no role) is on far more solid ground than the correlation/plausibility argument. If you’ve got some numbers to support your position, I’d certainly be interested in weighing that.

  12. #12 Nemo
    September 30, 2008

    Right now, the neighbor’s house is on fire. You have a choice. You can wait for the free market… or rather, the fire department… to put it out; they usually show up eventually, and they are certainly better than you at fighting fires. Or you can head over with your own garden hose, risk your own life, and give it your best shot, not only for your neighbor’s sake but also to protect your own house.

    Either choice might be right. It is reasonable to debate — quickly — with yourself and your family. But to argue NOW about how the fire started is completely insane. There will be plenty of time for that later, and poisoning the debate with people whose help you may need is borderline criminal.

    That said, I am sympathetic with your skepticism about this bill. But I am not nearly so confident, because an awful lot of awfully smart people are saying this thing is absolutely necessary. See Willem Buiter, for one example. (He wishes you a good depression.)

  13. #13 Matt Springer
    September 30, 2008

    Well, there’s an awful lot of smart people who think the bailout is a bad idea. Here’s a list of two hundred professors of economics opposing the bill. I really think the bailout is bad news, so regardless of the causes I think the best thing now is to keep the bill dead.

    Very interesting data, #11. I think the study sort of compares apples to oranges. Essentially all banks fall under the requirements of the CRA, and so the “CRA / non-CRA” data is delineated in a kind of sketchy way. Let me quote it:

    “CRA Banks CRA-reporting banks making mortgage loans subject to the CRA (i.e., in their
    assessment area) in the 15 most populous MSAs.

    Non-CRA Banks Banks that filed a CRA report but whose assessment areas did not include the
    MSA analyzed.”

    Both kinds of banks had to obey the CRA, but those which didn’t normally operate in urban areas made riskier decisions. Which seems to makes sense, because subprime loans made in not stereotypically risky areas would have looked more attractive to those banks.

  14. #14 CCPhysicist
    September 30, 2008

    Side note:
    I suspect a big part of the problem in the House is that there are few in the middle ground. A generation of Gerrymandering has created a whole host of “safe” districts where the incumbent was chosen by one part of one part of the electorate, either right or left. Senate seats are now more volatile than House seats, the opposite of the original concept, and that may be why there are fewer problems on the Senate side. The leadership in the House does not speak for the membership.

    Main topic:
    According to local businesses, which are borrowing from local banks with sound finances, there is a problem getting the same line of credit they had last year when it comes to such minor details as ordering stock for Christmas shopping season. Stories on respectable conservative business news sites, such as CNBC, warn of dropping limits on credit cards or other consumer loans (cars, students).

    You may not know how the finances of your university are structured, but I know how our college’s finances are structured. If 10% of our students were unable to attend because their student loans were closed off, we would have a HUGE problem next semester. I suspect the same would be true at TAMU and most universities. It might even be worse there than at our college because of the tuition/state ratio we have. Ask a VP what would happen at TAMU if 10% or 20% of its students left in the spring, paying no tuition and leaving dorm rooms empty.

    Our economy runs on credit. The Christmas retail season, in particular, runs on credit. The stock market rebounded today (there were some good deals out there despite the naysayers), perhaps anticipating a deal just like they anticipated no deal on Monday, but the credit markets did not.

  15. #15 Davis
    October 1, 2008

    Matt, I’m not clear on what you object to in that definition of CRA bank. Banks each have geographical CRA assessment areas, which (as far as I can tell) are a subset of the full region in which they operate, and an assessment area for a particular bank is not necessarily one for a different bank also operating in that area (based on what I’ve come up with on the issue, banks appear to have some leeway in setting these areas up). CRA banks are those making loans fulfilling their CRA obligations (i.e., in their assessment areas), whereas the non-CRA banks are making loans that are not in their CRA areas.

    It’s also unclear to me why you think this study does not apply. The claim is that the CRA encouraged riskier lending; this is a dataset demonstrating that lending instituted because of CRA obligations was *safer*.

  16. #16 Donalbain
    October 1, 2008

    Talk of forests and abstract “markets” makes it easier to imagine that PEOPLE are not going to suffer. But sadly, it is always people who end up buggered by these sort of collapses. While I find it hard to imagine things getting that bad again, the Great Depression meant people actually DIED who might otherwise have lived.

  17. #17 JM
    October 1, 2008

    Matt: “Non-CRA Banks …. Both kinds of banks had to obey the CRA”

    Sorry for the ellipis, but please get your logic in gear. A non-CRA “bank” is

    a.) not a bank or a thrift – all deposit taking banks and thrifts have to abide by CRA

    b.) how does a non-CRA “bank” have to abide by a law that doesn’t apply to it?

    Your non-CRA “banks” are alternative lenders (mortgage brokers etc) who have *no* filing or compliance requirements under CRA, or financial institutions (such as investment banks) who *don’t* write mortgages.

    ie. they are completely out of the picture as far as CRA is concerned.

    And as someone else pointed out, CRA complying institutions actually have a lower default rate.

    Further, how come – if CRA is so powerful – subprime essentially didn’t exist pre-2004, went ballistic in 2005/6 and then dissappeared again in 2007 as it became apparent it was so dangerous?

    If CRA was “forcing” these loans, how come there were none of them for nearly 30 years, and now there are virtually none? CRA hasn’t been amended in years. Why aren’t banks being “forced” to write sub-prime even now?

    Just to be clear here, the CRA does not “force” a bank/thrift to make a loan, or even soften normal prudential standards. It simply requires them not to use prejudicial criteria (such as “red-lining” minority areas) in refusing loans

    You’ve fallen for a very misinformed (and I suspect, malicious) meme.

  18. #18 Davis
    October 1, 2008

    Ah, I think JM’s comment is more correct than mine regarding the distinction; mine is based on the (incomplete) information I’ve dredged up thus far, regarding the specifics of CRA assessment.

  19. #19 eddie
    October 1, 2008

    I’m sorry Matt, but the “Clinton made changes” meme is equally broken when you ignore that the Bush regime made changes also in 2004 and that these changes; towards less regulation have immediate relevance to the present crisis. Point three in my previus comment can be modified to “running for over a decade, since ’95” without losing accuracy or relevance. The changes made in 2004 and ’05 are way more relevant.

    Thanks for the link to the wiki article on this, where you will find the above info, but did you even read it yourself? The data posted in comment #11 was there and your reaction to it in comment #13 suggests you did not.

    From the wiki – “Ellen Seidman … observes that CRA banks were particularly warned to make responsible investments…” That they heeded these warnings is shown by the data in #11.

    Also, where is the ad hominem in pointing out that the original and continuing opposition to CRA is from discrimination and not financial considerations?

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