The John Mccain Experience

[pegasus]

You're not very well informed if you thing that the end of the depression came because the government stepped in. It ended because world war II started.
http://en.wikipedia.org/wiki/Great_Depression

all this shit didn't happen because of greed, and the failure of the CEO's. The government tried to increase home owner ship rates, and forced banks to lend to people who they would normally not lend to. it great that the people who fucked everything up are now trying to sort it all out!!

Anyways what is all this bullshit about companies being so big that if they collapsed the whole economy would collapse? did you happen to hear that from one of the experts on fox news?

 

[Ironslave]

i dont think he has said that the federal reserve alone was the cause of the great depression, there were many factors responsible for that depression. the thing is that, yes u are right, depression like situations will occur, the economy will grow less at some point. i just strongly disagree with u that the right thing to do then, is to sit on the fence and let the whole financial market collapse and drag the whole economy with it down. the government waited 4 years before taking action during the great depression, thats why it lasted so long, and then government went in and the economy started growing again. look at the situation now, it was bad but its turning around again now, stocks are up today. if u libertarians had got it ur way we would be facing total collapse right now. imo government could spend less, and be less involved when the economy is growing, but when the downward spiral begins, i see no reason why the government shouldnt provide stimulus by building new projects, that will create more jobs etc.

there is one thing to have an ideology, the problem arises when u follow it to the point where u are almost blind to any other solution. its one thing to say that, hey, let the bad banks go bankrupt, they deserve it. the problem is that almost all banks were involved, and when these banks are dependent on lending to eachother, u will get a total collapse in the economy, when the banks go bankrupt, the liquidity markets dries out, people can no longer borrow, businesses can no longer borrow. i think the people in charge see this, and they decide to take action for the greater good of society. whereas for u it is easy to sit here and say let it all go to hell, especially when u know that its not realistic whatsoever.

also, how is this not a market induced crash? this all could have been avoided if it werent for corporate greed and CEO's on wall street seeking to enrichen themselves. this lending to so called NINJNA(people with no income, no job, no assets) were totally irresponsible, and they knew that the bubble had to burst, when prices stopped going up, and people had to leave their homes. but still it happends because some people see it as an opportunity to enrichen themselves. actually i agree that the government is partly to blame, they are to blame for not having regulated the financial sector enough, and make this kind of activity illegal.

Of course, it didn't happen JUST because of the Fed. But, they were THE major cause. The government didn't help things move up at all, just like today, they aren't.

If us libertarians got our way, we wouldn't be in this mess!! Watch the Jim Rogers video, why should you listen to the people who were wrong for years? Don't you find it at least curious that pretty much EVERYTHING people like Ron Paul, Peter Schiff, Jim Rogers and co predicted about the economy, including specific companies, has come true? Why not listen to them?

This isn't a "market failure" at all because as Pegasus mentioned, the government got involved and influenced banks in their horrible lending practices, allowed them to take stupid risks they shouldn't have, and gave them a safety net to bail them out when they failed. Please watch the video's I posted in the "John Strossel's politically incorrect guide to politics", it explains this VERY well, and completely refutes that this collapse was due to "letting the market run wild". It's inarguable to claim that. Stocks can be up temporarily, but things have a LONG way to go down.

Bulkboy, you should read "economics in one lesson" by Henry Hazlitt, I think you'd find it to be a good read.

 

[Bulkboy]

You're not very well informed if you thing that the end of the depression came because the government stepped in. It ended because world war II started.
http://en.wikipedia.org/wiki/Great_Depression

all this shit didn't happen because of greed, and the failure of the CEO's. The government tried to increase home owner ship rates, and forced banks to lend to people who they would normally not lend to. it great that the people who fucked everything up are now trying to sort it all out!!

Anyways what is all this bullshit about companies being so big that if they collapsed the whole economy would collapse? did you happen to hear that from one of the experts on fox news?

I completely agree that world war 2 had alot to do with it, but i dont think its right to dismiss government intervention as well. the building of infrastructure etc did create more jobs and gave higher demand. i dont think there is any doubt that the government can to a certain point stimulate the economy both through taxes and projects. also, after that last big recession we havent had any such major recessions again, much because, i think, that government started taking a more active role in the economy.

and it did happend much because of greed. i agree that setting interest rates that low laid some of the foundation for the mortage crisis. after the IT bubble in 2000, the economy desperately needed stimuli and at the time it seemed like a good idea. but one underestimated the corporate greed and the willingness to lay the foundation for a crisis in order to aquire short term profit.

Alan Greenspan said in a hearing in the congress that he was surprised to see how his ideology of no regulation and a free market driven financial sector could turn out to have such weaknesses. now when one of the real fighters for a non regulated financial sector says this, then it does have some sense to it.

Yes some companies are so big that allowing them to collapse is irresponsible. by allowing major lending institutions to collapse, u dry out the credit market. banks cant lend from eachother, and then as a result wont lend to private individuals and businesses. this gives a domino effect that sends shockwaves through the whole economy as a whole. in a global economy everything is so tied together that u have to prevent giants from falling. this free market ideology of yours have been tried, and proven not to work. the market is great, but its great combined with government and regulations, not by itself. even conservatives are starting to realize this.

in norway we had a banking crisis during the 80s. now what did the government do? they went in and bought up most of the banks, and then later sold them back to private individuals with a profit. its sensible, its good, and it works, and many countries admire norway for the way we handled that crisis.

look at iceland today, iceland is going bankrupt and is the country that is worst affected by the crisis. now if u look closer at iceland, u will see that they had what u are advocating. a totally privatized financial sector, no regulation, no sentral bank(if i remember correctly) and what is happening? its all falling apart.

morale of the story, a mixed economy with a government that steps up when its needed is the way to go and what works.

 

[Ironslave]

I know Bulkboy won't read this (this isn't meant to be an insult or anything, it's just a common occurrence), but this article released today is a great read.

http://mises.org/story/3165#

In no way did pure capitalism cause this, arguing that the US was purely capitalist is just plain wrong.

Here is one section.

Government Intervention Actually Responsible for the Crisis

Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.

The Federal Reserve and other portions of the government pursue the policy of money and credit creation in everything they do that encourages and protects private banks in the attempt to cheat reality by making it appear that one can keep one's money and lend it out too, both at the same time. This duplicity occurs when individuals or business firms deposit cash in banks, which they can continue to use to make purchases and pay bills by means of writing checks rather than using currency. To the extent that the banks are then enabled and encouraged to lend out the funds that have been deposited in this way (usually by the creation of new and additional checking deposits rather than the lending of currency), they are engaged in the creation of new and additional money. The depositors continue to have their money and borrowers now have the bulk of the funds deposited. In recent years, the Federal Reserve has so encouraged this process, that checking deposits have been created equal to fifty times the actual cash reserves of the banks, a situation more than ripe for implosion.

All of this new and additional money entering the loan market is fundamentally fictitious capital, in that it does not represent new and additional capital goods in the economic system, but rather a mere transfer of parts of the existing supply of capital goods into different hands, for use in different, less efficient, and often flagrantly wasteful ways. The present housing crisis is perhaps the most glaring example of this in all of history.

Perhaps as much as a trillion-and-a-half dollars or more of new and additional checkbook-money capital was channeled into the housing market as the result of the artificially low interest rates caused by the presence of an even larger overall amount of new and additional money in the loan market. Because of the long-term nature of its financing, housing is especially susceptible to the effect of lower interest rates, which can serve sharply to reduce monthly mortgage payments and in this way correspondingly increase the demand for housing and for the mortgage loans needed to finance it.

Over a period of years, the result was a huge increase in the production and purchase of new homes, rapidly rising home prices, and a further spiraling increase in the production and purchase of new homes in the expectation of a continuing rise in their prices.

To gauge the scale of its responsibility, in the period of time just since 2001, the Federal Reserve caused an increase in the supply of checkbook-money capital of more than 70 percent of the cumulative total amount it had created in the whole of the previous 88 years of its existence — that is, almost 2 trillion dollars.[5] This was the increase in the amount by which the checking deposits of the banks exceeded the banks' reserves of actual money, that is, the money they have available to pay depositors who want cash. The Federal Reserve caused this increase in illusory capital by means of creating whatever new and additional bank reserves were necessary to achieve a federal funds interest rate — that is, the rate of interest paid by banks on the lending and borrowing of reserves — that was far below the rate of interest dictated by the market. For the three years 2001–2004, the Federal Reserve drove the federal funds rate below 2 percent and, from July of 2003 to June of 2004, drove it even further down to approximately 1 percent.

The Federal Reserve also made it possible for banks to operate with a far lower percentage of reserves than ever before. Whereas in a free market, banks would hold gold reserves equal to their checking deposits — or at the very least to a substantial proportion of their checking deposits[6] — the Federal Reserve in recent years contrived to make it possible for them to operate with irredeemable fiat-money reserves of less than 2 percent.

The Federal Reserve drove down the federal funds rate and brought about the vast increase in the supply of illusory capital for the purpose of driving down all market interest rates. The additional illusory capital could find borrowers only at lower interest rates. The Federal Reserve's goal was to bring about interest rates so low that they could not compensate even for the rise in prices. It deliberately sought to achieve a negative real rate of interest on capital, that is, a rate below the rate at which prices rise. This means that a lender, after receiving the interest due him for a year, has less purchasing power than he had the year before, when he had only his principal.

In doing this, the Federal Reserve's ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large-scale unemployment.

As matters have turned out, the Federal Reserve got its wish for a negative real rate of interest, but to an extent far beyond what it wished. It wished for a negative real rate of return of perhaps 1 to 2 percent. What it achieved in the housing market was a negative real rate of return measured by the loss of a major portion of the capital invested. In the words of The New York Times, "In the year since the crisis began, the world's financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion."[7]

This vast loss of capital in the housing debacle is what is responsible for the inability of banks to make loans to many businesses to which they normally could and would lend. The reason they cannot now do so is that the funds and the real wealth that have been lost no longer exist and thus cannot be lent to anyone. The Federal Reserve's policy of credit expansion based on the creation of new and additional checkbook money has thus served to give capital to unworthy borrowers who never should have had it in the first place and to deprive other, far more credit worthy borrowers of the capital they need to stay in businesses. Its policy has been one of redistribution and destruction.

The capital it has caused to be malinvested and lost in housing is capital that is now unavailable for such firms as Wickes Furniture, Linens 'N Things, Levitz Furniture, Mervyns, and innumerable others, who have had to go bankrupt because they could not obtain the loans they needed to stay in business. And, of course, among the foremost victims have been major banks themselves. The losses they have suffered have wiped out their capital and put them out of business. And the list of casualties will certainly grow.

Any discussion of the housing debacle would be incomplete if it did not include mention of the systematic consumption of home equity encouraged for several years by the media and an ignorant economics profession. Consistent with the teachings of Keynesianism that consumer spending is the foundation of prosperity, they regarded the rise in home prices as a powerful means for stimulating such spending. In increasing homeowners' equity, they held, it enabled homeowners to borrow money to finance additional consumption and thus keep the economy operating at a high level. As matters have turned out, such consumption has served to saddle many homeowners with mortgages that are now greater than the value of their homes, which would not have been the case had those mortgages not been enlarged to finance additional consumption. This consumption is the cause of a further loss of capital over and above the capital lost in malinvestment.

A discussion of the housing debacle would also not be complete if it did not mention the role of government guarantees of many mortgage loans. If the government guarantees the principal and interest on a loan, there is no reason why a lender should care about the qualifications of a borrower. He will not lose by making the loan, however bad it may turn out to be.

A substantial number of mortgage loans carried such guarantees. For example, a New York Times article describes the Department of Housing and Urban Development as "an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans." The article describes how HUD progressively reduced its lending standards: "families no longer had to prove they had five years of stable income; three years sufficed… lenders were allowed to hire their own appraisers rather than rely on a government-selected panel … lenders no longer had to interview most government-insured borrowers face to face or maintain physical branch offices," because the government's approval for granting mortgage insurance had become automatic.

The Times' article goes on to describe how "Lenders," such as Countrywide Financial, which was among the largest and most prominent, "sprang up to serve those whose poor credit history made them ineligible for lower-interest 'prime' loans." It notes the fact that "Countrywide signed a government pledge to use 'proactive creative efforts' to extend homeownership to minorities and low-income Americans."[8] "Proactive creative efforts" is a good description of what lenders did in offering such bizarre types of mortgages as those requiring the payment of "interest only," and then allowing the avoidance even of the payment of interest by adding it to the amount of outstanding principal. (Such mortgages suited the needs of homebuyers whose reason for buying was to be able to sell as soon as home prices rose sufficiently further.)

Just as vast numbers of houses were purchased based on an unfounded belief in an endless rise in their prices, so too vast numbers of complex financial derivatives were sold based on an unfounded belief that the Federal Reserve System actually had the power it claimed to have of making depressions impossible — a power which the media and most of the economics profession repeatedly affirmed.

Derivatives have received such a bad press that it is necessary to point out that the insurance policy on a home is a derivative. And many of the derivatives that were sold and which are now creating problems of insolvency and bankruptcy, namely, "credit default swaps (CDSs)," were insurance policies in one form or another. Their flaw was that unlike ordinary homeowners' insurance, they did not have a sufficient list of exclusions.

Homeowners' policies make exclusions for such things as damage caused by war and, in many cases, depending on the special risks of the local area, earthquakes and hurricanes. In the same way, the more complex derivatives should have made an exclusion for losses resulting from financial collapse brought on by Federal Reserve–sponsored massive credit expansion. (If it is impossible actually to write such an exclusion, because many of the losses may occur before the nature of the cause becomes evident, then such derivatives should not be written and the market will no longer write them because of the unacceptable risks they entail.) But decades of brainwashing by the government, the media, and the educational system had convinced almost everyone that such collapse was no longer possible.

Belief in the impossibility of depressions played the same role in the creation and sale of "collateralized debt obligations (CDOs)." Here disparate home mortgages were bundled together and securities were issued against them. In many cases, large buyers bundled together collections of such securities and issued further securities against those securities. As more and more homeowners have defaulted on their loans, the result has been that no one is able directly to judge the value of these securities. To do so, it will be necessary to disentangle them down to the level of the underlying individual mortgages. Such tangles of securities could never have been sold in a market not overwhelmed by the propaganda that depressions are impossible under the government's management of the financial system.

Finally, a discussion of the housing debacle would not be complete if it did not include mention of forms of virtual extortion that served to encourage loans to unworthy borrowers. Thus, the online encyclopedia Wikipedia writes,

The Community Reinvestment Act [CRA] … is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods … CRA regulations give community groups the right to comment or protest about banks' non-compliance with CRA. Such comments could help or hinder banks' planned expansions.

The meaning of these words is that the Community Reinvestment Act gives the power to "community groups," to determine in an important respect the financial success or failure of a bank. Only if they are satisfied that the bank is making sufficient loans to borrowers to whom it would otherwise choose not to lend, will it be permitted to succeed. The most prominent such community group is ACORN.

Part and parcel of the environment that has made an act such as the CRA possible, is threats of slander against banks for being "racist" if they choose not to make loans to people who are poor credit risks and also happen to belong to this or that minority group. The threats of slander go hand in glove with intimidation from various government agencies that exercise discretionary power over the banks and are in a position to harm them if they do not comply with the agencies' wishes. The same points apply to mortgage lenders other than banks.

What this extensive analysis of the actual causes of our financial crisis has shown is that it is government intervention, not a free market or laissez-faire capitalism, that is responsible in every essential respect.