This Could Get Very Ugly

by hilzoy

The news about Fannie Mae and Freddie Mac sounds terrifying to me:

"Shares of Fannie Mae and Freddie Mac, the beleaguered mortgage finance companies, plummeted again on Friday morning, as senior Bush administration officials consider a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, according to people briefed about the plan.

Fannie Mae stock was down 36 percent in early trading compared with Thursday’s closing price; Freddie Mac stock was down 41 percent."

And that was after big previous losses. As of right now, Freddie Mac is down over 87% from a year ago; Fannie Mae is down over 85%.

The FT has a nice, short summary of the problem:

"As house prices have fallen and foreclosures have soared across the US, the two institutions have suffered deep losses, which they have tackled by raising more capital. Many observers believe that a collapse of Fannie Mae and Freddie Mac could bring the US mortgage market to a complete standstill, with severe repercussions for the financial sector and the economy as a whole.

Many investors in Fannie Mae and Freddie Mac have come to assume that the government would eventually come to their rescue because of their importance to the system. However, concern has risen recently that contingency plans for a government bail-out might involve wiping out public shareholders to minimise the cost to taxpayers, while confidence that senior debt would be protected has held up."

Bringing "the US mortgage market to a complete standstill" does not sound like a very good idea. What are the alternatives? One is a conservatorship:

"Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers."

The shares that would be wiped out presently amount to about $18billion. But the liabilities we, the taxpayers, might have to assume are staggering:

"What Americans need to know is how damaging such a failure would be. This wouldn't merely be a matter of the Federal Reserve guaranteeing $29 billion in dodgy mortgage paper, a la Bear Stearns. Fannie and Freddie are among the largest financial companies in the world. Their liabilities – mortgage-backed securities (MBSs) and other debt – add up to some $5 trillion.

To put that in perspective, consider that total U.S. federal debt is about $9.5 trillion, compared to a total U.S. GDP of $14 trillion. About $5.3 trillion of that debt is held by the public (in the form of Treasury bonds and the like), while $4.2 trillion is intragovernment debt such as Social Security IOUs. This is the liability side of America's federal balance sheet, and its condition influences how much the government can borrow and at what rates.

The liabilities of Fan and Fred are currently not on this U.S. balance sheet. But one danger is a run on the debt of either company, putting pressure on the Treasury and Federal Reserve to publicly guarantee that debt to prevent a systemic financial collapse. In an instant, what has long been an implicit taxpayer guarantee for both companies would be made explicit – committing American taxpayers to honoring as much as $5 trillion in new liabilities. U.S. debt held by the public would more than double, and the national balance sheet would look very ugly."

$5 trillion dollars in liabilities is a staggering amount, even when you consider that not all many of the loans we would guarantee would not go bad*, and so we would almost certainly not be on the hook for the entire amount. But if Fannie and Freddie become insolvent, it would beat the alternative, which is, as best I can tell, more or less shutting down the market for mortgages.

***

Which leads me to an important point. Unlike Bear Stearns, Fannie and Freddie really are too big to fail. What this means, as far as I'm concerned, is that we need to take steps to ensure that they won't fail. This, to me, was one of the huge lessons of the S&L crisis (and, for that matter, of plain common sense): when the government is on the hook when things go bad, the government should take steps to ensure that things don't.

Mark Thoma quotes Robert Reich:

"Here we have another example of socialized capitalism. The executives of Fannie and Freddie have been among the best paid in all of corporate America. We're talking tens of millions a year in CEO pay alone. Fannie and Freddie are treated like giant investor-driven entities as long as they're healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, the rest of us have to bail them out."

And adds:

"If failure of these firms endangers the broader economy, and hence threatens to impose large costs on people who had nothing to do with creating the problems, then policymakers need to step in and do what they can to prevent a downward economic economic spiral. In addition, they need to change the rules and regulations that allowed the problem to emerge in the first place, and add new rules and regulations as needed to lower the moral hazard worries going forward."

Exactly.

(NB: it's worth noting that the housing bill, which the Senate is considering today, would do just this. Better late than never. But it should have been done years ago.)

Footnote: this originally read: not all the loans we guaranteed would go bad. I was trying to find some estimate of how many might, hoping that it would provide support for some phrase like "many loans would not go bad" -- though which phrase would depend on what I found.

Alas, I didn't find much, so I went with what seemed like the very noncommittal 'not all would go bad'. But after reading comments, I realized that while I was basically trying to stay away from making any strong claim, it read like a rather apocalyptic statement. Thus, the correction. And this note is mostly because I wanted to indicate what it had originally said: you can see that 'not all' has changed to 'many', but without this note, the insertion of 'not' wouldn't be clear.

Comments

[Eric Martin]

Nah.

Don't be silly.

This is all in your mind.

[Observer]

hilzoy:

Backstopping Fannie and Freddie would be a very, very big deal. But the $5 trillion figure just isn't meaningful. Our national debt is just that - money that we've borrowed from other people, and will have to repay. Fannie and Freddie hold other people's debts, by contrast, and the fear is that they won't be repaid. They're simply incommensurate quantities.

In practical terms, if the government has to place Fannie and Freddie in a conservatorship, it will probably have to cough up billions - in the worst case, tens of billions - to cover their losses. That's bad news; don't get me wrong. But it's not trillions - in fact, it'd probably be less than funding the War in Iraq for a few months. It is, in other words, something the federal government can handle if it needs to.

That doesn't mean the present situation isn't scandalous. We have an entire regulatory agency whose sole purpose in life is to prevent, well, something like this. Others should have been paying attention, too. And Fannie and Freddie's executives and shareholders for years got rich off of a bad business model. If they sold their shares in time, they'll keep their filthy profits, while taxpayers get stuck with the losses. That's not how free markets are supposed to work. So there's plenty to be mad about. But fiscal disaster isn't in the cards. Not from this, at least.

[Zifnab]

And now we play a little game called "Fuck you, I don't care about mortgages, I'm a Republican."

The Democrats will pitch a bill to clean up the mess. The Republicans will review the bill, declare it laden with pork or fiscally irresponsible or whatever dumbass notion floats across their heads, and present a hundred sweetheart amendments that further deregulate the industry (Hurray! More Bear Sterns!), cut taxes (Hurray! Money for rich people!), and throw money at various major campaign contributors (Hurray! Blatant Corruption!).

If the Democrats don't ratify a significant number of these amendments, they won't have the votes to overcome the inevitable GOP Filibuster followed by the even more inevitable Bush Veto. Our nation will, once more, be held hostage so that rich people can profit from middle class people bailing the poor people out.

[Morat20]

No offense, but that article's discussion of 5 trillion in liabilities is...misleading, to say the least.

That 5 trillion dollars represents 5 trillion in mortgages that Fannie and Freddie have securitized. Those are actual mortgages, tied to actual properties, which actual people, businesses, or whatnot own and pay taxes on.

There's absolutely no way -- not even Great Depression type of collapse -- that even a substantial fraction of those mortgages collapse. And even if they did, it would just mean Fannie and Freddie owned a great deal of property that they (effectively) overpaid for.

Right now Fannie and Freddie are down 11 billion. A complete and utter collapse -- Great Depression or massive market failure to dwarf the current one -- and you'd run up to 200 billion or so in losses. A lot, although Fannie/Freddie would now own a lot of useless property.

So by "unfunded liabilities" what the paper effetively means are "5 trillion dollars worth of property that Fannie Mae/Freddie Mac owns while someone else pays them for it over a period of time".

Yeah, their collapse would suck. It'd savage an already strained liquidity market. And frankly, something really needs to be done about this whole socializing the losses thing -- it's not like the market is making sane choices to begin with.

But no, even if the government took over Fannie or Freddie, we would not be adding 5 trillion in debt to the books. We'd be taking on 5 trillion dollars worth of loans, which were being paid back at some interest rate over a period of 15 to 30 years, some miniscule (even under the worst conditions) amount of which would default, leaving us with property to auction off.

[Incertus]

The real problem is that even if those rules pass and are enforced, in five years or so, the banking industry will start complaining about overly tight regulations, will pass a lot of campaign donations around, and will get the very same relaxation of standards and enforcement we've had every other time. And why? Because we're too freaking short-sighted to realize that given the opportunity to overreach, we will do just that, every time. We don't learn from our mistakes, and enough people believe it every time some smart person claims to have beaten the system that it screws over the rest of us.

[Z. Mulls]

I started out as a Republican, when I was a just-out-of-college young man in the early 80s.

The first indication that I had gotten it totally wrong was the Savings and Loan bailout of the mid-80s.

I said to myself -- hey, deregulation doesn't lead to a more efficient market -- it seems to just lead to a bunch of people getting obscenely greedy until the system collapses, and I have to pay for the mess with my taxes....

I keep expecting that very, very, very simple lesson to penetrate the electorate.

But it doesn't.

[now_what]

I agree with Morat20, as does Steven Pearlstein who did one of his excellent Q and A sessions on the topic today.

Yes, this is all bad news for the shareholders. So what. Stocks are risky. Say both Fanny and Freddy declare bankruptcy. The US steps in to guarantee their debt, and sells off their assets when the market recovers, and life pretty much goes on as normal.

I'm not as convinced as Pearlstein that there would likely be no hit to the taxpayer, but the only way that it would be a major one is if a sizable percentage of the fairly high quality mortgages the agencies issue go into foreclosure. And if 20% of prime mortgages start going into foreclosure, we've got bigger problems to worry about.

As far as punishing the evil corporate executives and greedy investors, hey, I'm all for that. Let the company go bankrupt, replace all of senior management, and do a very severe legal investigation of any possible improprieties over the last few years at the two companies. Maybe increase their capital requirements and lending standards.

But right now, things are pretty much functioning as the designers of the system intended. Without implicit government backing of Fanny and Freddy, pretty much nobody in the US would be able to get a mortgage loan right about now. Now if you are a conservative I guess you should argue that if the free market says nobody in the country can borrow money to buy a house then we should let the free market work. Any conservatives out there?

[John Thullen]

Well, yes, it is true that the "real" number of mortgages at risk is small relative to the entire pool of Fannie and Freddie securitized "assets".

The risk however is systemic. The financial system (that Ponzi scheme of promises and confidences we've all made to each other) could just seize up.

Wall Street is frantically looking around for one last promise-maker, which happens to be the Federal Government, against Wall Street's ideology, of course.

There is a huge debate going on between Bernanke at the Fed and Paulson at Treasury. They want to shore the promises up by supplying bottomless liquidity AND they want to hold fast and true to their preferred philosophy of weaning the country from the "too big to fail" mantra.

Thing is, if failures of this size are permitted to satisfy the highly principled, the Fed can throw all the money it wants in the air and the market is just going to snatch it up and run home to put it in the mattress.

Bush has made his mark by sticking to his guns (gummint mustn't get in the way of failure; it certainly hasn't gotten in his way), but I see fear in his eyes. He keeps drawing lines in the sand and daring the markets to step over them.

The markets just keep coming at him.

[Ugh]

Bush has made his mark by sticking to his guns (gummint mustn't get in the way of failure; it certainly hasn't gotten in his way), but I see fear in his eyes. He keeps drawing lines in the sand and daring the markets to step over them.

The markets just keep coming at him.

He just has to hold out six more months, then Bernanke and Paulson can pull the rug out from under the market and the President, who can conveniently be blamed when all the really horrible stuff happens. Enter: GOP romp in 2012.

[Bernard Yomtov]

Thoma is correct of course.

But before we can do that we need to accept the fact that there are financial institutions that really cannot be allowed to fail, with all that follows - government backstopping accompanied by regulation.

I am dubious that this reality will easily penetrate our political system.

[MH]

But if Fannie and Freddie become insolvent, it would beat the alternative, which is, as best I can tell, more or less shutting down the market for mortgages.

Forgive me if this is the most ignorant thing you've heard all day, but why exactly would shutting down the mortgage market be worse? Also, for how long would it need to be shut down? I'm assuming it could stand being down for a week or so, but I really don't know anything about this kind of high-finance.

[dmbeaster]

This is not as bad as it looks, but it can be made that bad based on whatever political deals are actually struck in this matter. It is critical to understand that the extent that government is hurt by this in order to maintain the market is directly related to the extent that insiders get preferential treatment for the Fs.

If the goal was assure market liquidity for mortgages, the government could simply step into the industry as a direct player using its own capital to maintain the liquidity of the market. It lets all of the losses of the Fs fall on the shareholders and debt holders, just as in any other restructuring. The precise terms of the deal is that the federal government steps in as new money post-receivership with first priority of repayment from the assets of the Fs. The existing debt holders would get paid only from the remains, and the equityholders would get zero.

This is done all of the time in bankruptcies for businesses. There is zero reason why the government should take a loss while protecting the existing debtholders of the Fs in any way. Under the plan I have described, the government would take a loss only if there is zero value in the assets held by the Fs, and the chance of that happening is pretty much zero.

Without question, the Fs are so important to the economy that they should not be permitted to fail outright. But the notion that the loss would get passed to the government is wrong -- it happens only if the corporate friendly politicians allow it.

[novakant]

Excuse my nonchalance, but does anybody know were the two companies got their cutesy names from?

[dmbeaster]

MH:

Here is what the Fs do that is so useful.

Before they were created, mortgage money was hard to get and expensive (higher interest rates). The real estate lending market was largely like the current hard money lending market today, with minor exceptions.

The point is that the typical mortgage is not a particularly good investment if you hold cash and are looking to make money from interest. Each mortgae is typically "small" in relation to the typical investment in the capital market. The expense to process a mortgage loan is a lot per transaction. So, do I buy $10,000,000 in corporate bonds from a Fortune 500 company (or provide it with a similar line of credit), or make 100 $100,000 mortgage loans with the same money? I am going to have to get a lot more interest from those mortgage loans to match the net yield obtainable the other capital markets, and this is due to the much greater expense to originate and service 100 mortgage loans rather than one giant corporate obligation.

The Fs regularized mortgage lending so that a large pool of loans can be expected to perform in a predictable manner. They do this by mandating underwriting standards to the originators of loans if they are to be resold to the Fs, which all lenders want to do (none carry their own paper). The Fs then issue their own "corporate bonds" (mortgage backed securities) backed by pools of mortgages as well as whatever guarantees the Fs provide concerning the performance of the underlying mortgages. Now I can invest the same $10,000,000 with the Fs at the same lower capital rates for that lending market, which flows down for the benefit of the mortgages.

This has enabled large sums of capital to be available for the mortgage market at interest prices comparable to those found in the large capital markets.

The demise of the Fs would seriously disrupt the availability of money for mortgage lending, as well as substantially drive up the interest rates for such loans. Housing prices would drop further as the scarcity and expense of mortgage money drives down demand.

Replacing this market arrangement would happen over time, but only with serious short term disruptions.

[dmbeaster]

Excuse my nonchalance, but does anybody know were the two companies got their cutesy names from?

They are nicknames based on the original names of the entities, The Federal National Mortgage Association ("Fannie Mae") and the Federal Home Mortgage Corporation ("Freddie Mac"). The entities themselves now use the nicknames to describe themselves.

[Nombrilisme Vide]

And now we play a little game called "[Fnck] you, I don't care about mortgages, I'm a Republican."

Zifnab: explicit profanity is in contravention of the posting rules. Try to avoid or deform it.

[Brick Oven Bill]

The current correct number is $3 trillion. At the peak there was $10 trillion in home equity and $10 trillion in mortgage debt. The markets, on average, are probably down 30%. Meaning a $6 trillion loss, probably split more or less equally between home equity and mortgage holders. So the number is $3 trillion for the mortgage holders. It could go much higher, but still pales in comparison with the $70 trillion in unfunded promises made by social programs.

Families should be stressing food security, financial security, and physical security.

[J. Michael Neal]

The US steps in to guarantee their debt,

Even this is problematic. One of the causes of what has happened is that there was too much debt, and too much risk. The government needs to do what it didn't do in the case of Bear Stearns: force the debt holders to take a haircut. The counter-parties to all of this craziness need to take a hit.

[novakant]

Thanks, dmbeaster.

[now_what]

There is zero reason why the government should take a loss while protecting the existing debtholders of the Fs in any way.

There is a reason. The Fs, as you call them, have been able to issue notes at the relatively low rate they have because investors believe the US government will back them up. And this is the reason why mortgage rates have been as low as they have. The spread between conforming loan interest rates (which the Fs buy) and jumbo loan interest rates (which the Fs do not buy) is about 1.3%. Also, there have been period in the last year where jumbo loans have been difficult to get at all in some markets. These differences are a direct result of the market's belief in an implicit government guarantee.

Allowing Freddy and Fanny to default on their debt would make interest rates higher and more volatile, driving housing prices lower at a time when they are already plummeting.

The government needs to do what it didn't do in the case of Bear Stearns: force the debt holders to take a haircut.

That's fine, but you realize that doing that is going to also hurt:
1) Everyone who buys a house, through higher mortgage rates and less availability of loans.
2) Everyone who rents, since many people unable to finance new houses will rent instead, forcing up the cost.
3) Everyone who has an interest in the US economy, since the further decrease in housing activity will prolong the current recession.

So it might be wise to find a smarter way to give that haircut.

[Amos Newcombe]

for how long would it need to be shut down?

It would be shut down for months or years, until all the banks figure out which of themselves and their fellows have mostly income-producing investments on their books, and which have piles of about-to-become-garbage as all the dodgy loans default.

Except political pressure will never allow it to get that far. Especially since the Feds just prevented a similar seize-up on Wall Street, last March. They can't fail to do it now for Realtors and people trying to sell their house.

cutesy names

Federal National Mortgage Association, FNMA, became Fanny Mae. The Federal Home Loan Mortgage Corporation, FHLMC, became Freddie Mac. Your guess is as good as mine. There's Sally Mae for student loans, and possibly more. These Wall Street boys are so much fun at parties.

[Brick Oven Bill]

Local governments became addicted to the building permit fees and increased revenues from higher property assessments during the boom. Those shiny new buildings and smiling government workers were funded in large part by loans made on the assumption that those funds would go on for ever and ever.

Next up are municipal bonds and cascading bankruptcies of local governments. Bondholders will push their municipalities to enter bankruptcy sooner than later, in an effort to get some insurance money before MBIA and Ambac become insolvent.

Cheers;

[The Conservative Deflator]

Those Bush tax cuts for the wealthy and tax breaks for the oil companies really got the old American economy going, didn't they? Woo-hoo!

[Michael Cain]

Next up are municipal bonds and cascading bankruptcies of local governments. Bondholders will push their municipalities to enter bankruptcy sooner than later, in an effort to get some insurance money before MBIA and Ambac become insolvent.

IANAL but many of you are; what's the case law about state and local governments declaring bankruptcy? Can a federal bankruptcy judge say, in effect, "It doesn't matter what your state or local laws or constitutions say about tax rates; set your rates high enough to generate the revenue to pay your obligations"?

[dmbeaster]

now_what:

The Fs, as you call them, have been able to issue notes at the relatively low rate they have because investors believe the US government will back them up.

I have heard this, but realize what this actually means. The government should allegedly take a loss because investors believe that even though there is no legal obligation for the government to bail them out of their gamble, it probably will anyway. They therefore invested at the low interest rates in reliance of this probable bailout.

That is hardly a reason why the government in fact should do so, which is my point. The market expectation of a probable bailout is not based on a legal expectation, but a political one that we would be better off to shed from our business world.

As for your other point in response to
The government needs to do what it didn't do in the case of Bear Stearns: force the debt holders to take a haircut,:

This will not impact the overall mortgage market. It will roil the world of those who have invested in the Fs, but this would occur in conjunction with the Feds bankrolling the future capital needs of these mortgage markets.

Funny thing is, wiping out the old investors makes the Fs more attractive to the new investors who would fund its ongoing future activity. It eliminates uncertainty as to its ability to perform in the future.

That is one of the funny things about bankruptcy -- frequently the operating business is just fine and makes ample profit, but just not enough to cover debt service. So you rearrange on paper who owns what and what is owed by the business, and the losses are booked. Thereafter, the operating business continues in full health. In fact, in a properly run bankruptcy for such a business, the disruption to ongoing operations is minimal.

[dmbeaster]

Can a federal bankruptcy judge say, in effect, "It doesn't matter what your state or local laws or constitutions say about tax rates; set your rates high enough to generate the revenue to pay your obligations"?

No. The more interesting question is when some bond lawyer added language to the bonds that attempted to impose such a contractual burden on the government entity. It still does not work.

[Bernard Yomtov]

The more interesting question is when some bond lawyer added language to the bonds that attempted to impose such a contractual burden on the government entity. It still does not work.

dmb,

Why not?

You mean if the indenture says they have to raise taxes if necessary to meet the payments that's a meaningless provision?

That seems to border on fraud.

[Adam]

This is a bit late to the party and slightly OT, but the the">http://www.nytimes.com/2008/07/12/business/12indymac.html&OQ=_rQ3D1Q26hp&OP=4f9c187dQ2F(i4Q3C(TQ257Q2FQ5DQ25Q25uQ2B(Q2BNNn(NJ(hQ2B(Q3CZQ2Feg4Q2FQ2F(hQ2BegT1dy7Q5C8udQ24">the second largest bank failure in history happened today. (Warning: NYT link.) The FDIC took over the IndyMac bank in California after a bank run. (Not a catastrophe in and of itself, but not good news, of course.) (Also note that IndyMac is not Freddy Mac. Just a bank.)

[now_what]

That is hardly a reason why the government in fact should do so, which is my point.

It depends on what you think the purpose of the GSEs is. If it is to do what they were originally set up to do, which was to make mortgage loans easier to get and cheaper, then that implicit guarantee is important. It knocks almost a point and a half off the interest rate that consumers end up paying when getting a home loan, and that makes homes more affordable. Take that away and you are making homes more difficult to get for middle and lower income people. That's the main justification the government has in acting.

Other than that implicit guarantee and the lower capital requirements that the GSEs have, there's not a whole lot of reason for the GSEs to exist. Anyone can borrow money to make home loans, then securitize them and sell them while providing insurance on them in case they go bad. The only real market advantage the GSEs have is the belief that the government won't let them default on their debt. And that's why they own or guarantee half of all US mortgages, by dollar value. That liquidity is important.

Sure, you can say let the market do what it will even if that means more expensive and harder to get loans. That's going to hurt a lot of people though, and the people being hurt the worst are not going to be the people that loaned money to Fanny and Freddy. Bankruptcy or no, they will get most of their money bank. The GSEs were not the ones making the junk loans, for the most part.

[dmbeaster]

now_what:

I wish I knew to what extent it is true that the market provides money to the GSEs at that much of an interest break based on the assumption that the government will back the debt. It may be true, but it seems speculative to me, and unlikely. Your point is correct if the link is true -- the government will undermine the long term benefit of future activities by these entities if it dashes this expectation.

[bleh]

Z. Mulls indirectly brings up a point that occurred to me at once: the taxpayers bailed out the S&Ls (which, recall, traditionally were heavily invested in real estate mortgages) after Republican-led ideological deregulation allowed them to run wild, privatizing profit and socializing risk, and basically screwing things up for everybody.

It really is very Great Gatsby. You just can't trust Republicans with money.

Unfortunately, as many comments upthread have observed, there is no realistic alternative. We must bail them out, because they serve a socially and financially valuable function. The next (Democratic) administration will get the blame, because it will happen after they take office, technically speaking, and as every red-blooded American and hair-sprayed television commentator knows, if it happens when X is in office, then it's X's fault.

Anyway, as McCain's senior economic advisor and spokesman would say, stop whining.

[Bruce Baugh]

Bleh: It's true, seriously - Republican administrations can't be trusted with money. They whine about the need for responsibility, and then run amok. This is the habit of decades and they certainly show no sign of reform right now. Every Democratic administration has to do double or triple work to compensate.

[mikkel]

Adam about IndyMac: "Not a catastrophe in and of itself, but not good news, of course."

I hate to say it, but this is potentially a far bigger deal than Fannie Mae/Freddie Mac. While I am significantly more pessimistic than the above posters (due to the fact that I don't foresee people just sitting around in homes worth 20-40% less than they paid and making the mortgage payment diligently), they have correctly identified that even if the government picks up all the mortgages then most of them should be OK because they aren't terrible for the most part.

By contrast, Indymac went down because of Alt-A loans and those are just starting to reset. As Naked Capitalism notes the FDIC was unable to sell off the assets at this point (I thought it was weird when I read the release that said it was under FDIC control, not sold off like bank failures are supposed to be) and the fund is going to take a big hit. A full 20% of the fund has been wiped out.

Most people don't know how the FDIC actually works. I sure didn't until I read this. Customers are actually way down the list. I hate to put it this plainly, but the entire structure of the FDIC assumes that the underlying asset values will roughly hold at some point if sold to a bank that is responsible. Many of these Alt-A pools are literally worthless. When Washington Mutual, Wachovia, etc. go under, the FDIC will most likely be unable to sell those off. There is a growing risk that the entire insurance system may fail without intervention.

The Fed has already tied up over 50% of its assets providing liquidity by taking in "AAA" stuff (yeah right). As Naked Capitalism notes, the treasury might have to get involved. I should say that I'm not well enough versed in all this to comment on what the consequences mean, but I do know enough to recognize that our entire system is in danger of failing and may need massive redesign and enactment on very short notice. Almost no one seems to appreciate this. This is very troubling because the route that is picked if this happens will have enormous effect on the economy for the next several decades.

[Slartibartfast]

You just can't trust Republicans with money.

True. You should trust it with a Democrat who will keep it on ice.

Now, back to the substantial part of the discussion, k?

[now_what]

Mikkel beat me to it, the IndyMac thing is uglier than what is going on with the GSEs.

I mean, bank runs? You shouldn't ever get bank runs in a system with depositor insurance. But the regulators have not been stepping up to make the financial institutions value their assets at the amount for which they can be sold. They have chosen the Japanese model of allowing bad debt to hang around for years while everyone tries to pretend it isn't there.

So we get bank runs. How many months until Hoover leaves office?

[bleh]

You should trust it with a Democrat who will keep it on ice.

??!!

It's been shown quite clearly, and repeated ad nauseam in the blogosphere, that both return on investment -- including but not limited to stock market performance -- has historically been better under Democratic administrations than under Republican ones, and that -- no surprise here -- wealth disparity has lessened under Democrats while increasing among Republicans (the current administration being one of the more egregious examples of this).

Republicans serve their constituency -- the wealthy and corporations -- very well, and fair enough; politics at root is about dividing up the pie, and if that means the middle class gets screwed and the integrity of the economic system is undermined, then arguably that's due to the political failings of those who represent the middle class and care about the integrity of the economic system. But it's certainly inaccurate in any case to say that Democrats "keep it on ice."

[Bruce Baugh]

It matters whether the people advising us on firefighting are firefighters or arsonists, and even if they are firefighters, whether they're competent enough to have ever put out a blaze. When it comes to fiscal soundness, the Republican coalition is arsonists and incompetents mocking the only folks in town who've ever actually put out blazes.

It's been a long, long time since Republican initiatives were anything but monetary and social disasters. I've long since given up expecting any regret or shame about it, but the rest of us don't have to respect the history. The simple fact is that Republicans and their fans are not qualified right now to offer diagnoses or cures for the problems facing our economy.

[hilzoy]

Slarti: there was a serious part to the "can't trust Republicans" thing, I think. Namely:

Since about 1980, we have seen several crises that take the following form: there is something that taxpayers will be left holding the bag on if things go wrong. (S&L deposits, Fannie and Freddie.) Historically, the government has, for that reason, regulated those things: since we will be left holding the bag, and since the fact that people feel more secure about deposits/investments knowing that we will in fact make good on them helps these entities make money, it stands to reason that we should do things to make sure that they will not, in fact, need our help.

Republicans come in, and decide that regulation -- apparently, all of it -- is Bad. They get no argument from me on the claim that some of it is bad, but they carry it to extremes. People say: this is a bad idea; they say: hahaha, don't you believe in the free market? (To which my answer has always been: the free market requires a set of rules that we all play by, and those rules are not best left to the free market.) And, having political power, they then set about dismantling those rules.

Things go swimmingly for a while, and then -- oops! they don't, and we are, predictably, left holding the bag.

One could add more crises that take the form: something new is dreamt up (Enron's various trades), and it is the sort of thing that for most of the last century would have been regulated, but as before, Republicans don't regulate it, and it goes south. Also: things that have been around in sleepy, unimportant forms suddenly get much bigger and more important, to the point where they could take the system down. Normally, these would be regulated. But .... see earlier. (Hedge funds.)

There is a pattern here. It would be good to recognize and learn from it. I don't think the lesson is "Republicans are bad" (now and forever.) I do think the lesson is: some amount of regulation is needed to keep this sort of thing from happening, and as long as Republicans are the party of unregulated finance, their policies will produce these sorts of crises regularly.

[Slartibartfast]

Slarti: there was a serious part to the "can't trust Republicans" thing, I think.

But only part. It's the unserious part that I take issue with.

Again, we're faced with the disparity between the conservative electorate, and the conservative elected. Granted, it's a self-inflicted wound, but I would say that even if I were any longer registered Republican, I am a great deal less inept with my money than any given Republican, or Democrat, or even Independent, in government.

Which in no way is intended to persuade anyone to trust me with their money. Please.

[dmbeaster]

hilzoy:

The more apt lesson is what others call crony capitalism -- that Republicans look at government functions with the goal of manipulating them for a profit advantage for private business, rather than any concern for regulatory purpose. That sometimes involves increasing government regulation such as federal pre-emption to rid business of pesky state regulations. Or it involves increasing government functions that are privatized since the end result is a greater profit opportunity from business interests profiting from government business. Blackwater is a classic example of this.

[Slartibartfast]

that Republicans look at government functions with the goal of manipulating them for a profit advantage for private business

Yep, your average Republican is certainly manipulating the government for personal profit! Because they're all rich!

Predictable, tedious, inaccurate labeling, here.

[Bruce Baugh]

Yes, because "average Republican" is such a good description of Republican Congresspeople and high-ranking members of the executive branch during Republican administration, and of Republican-appointed justices.

[OCSteve]

dmbeaster: Great contributions to this thread. Thank you.

now_what: Now if you are a conservative I guess you should argue that if the free market says nobody in the country can borrow money to buy a house then we should let the free market work. Any conservatives out there?

Nope. I’m waiting in line at the bank to withdraw all my cash. Trying to decide the split between potatoes and ammo… Duh. You can never have too much ammo…

[hilzoy]

OCSteve: two words:

Potato gun.

[rdldot]

I'm still trying to figure out how I'm going to get those potatoes into my gas tank.

BOB - where are you in my hour of need?

[dmbeaster]

I second mikkel and now_what -- the Indy-Mac thing is very scary.

Typically, the FDIC packages and sells a failed bank before formal announcement of the failure (it rarely straight liquidates, and then almost always for small institutions). Banks bid on the asset package of a failed bank and agree to take over 100% of the deposit liability -- they bid on how little the FDIC has to give them as a lump sum to take over the assets and the deposit liability. This has the effect of protecting all deposits without regard to the FDIC insurance limitations, but it also decreases the FDIC exposure if the bank was simply liquidated and the insured amounts paid out. That is because the amount typically realized in a straight liquidation is a lot less than the value realized by this auction, which preserves going concern value.

But the FDIC has not found a buyer for Indy-Mac, and I wonder whether it will be able to. The FDIC had the same problem with Continental Illinois back in 1984. Read this if you want to know details on this (FDIC history of Continental Illinois and other 80s banking disasters).

Maybe it is just the size of IndyMac that is preventing a more orderly resolution, or maybe the sudden crisis created by the bank run outpaced the regulators more orderly processes, but maybe it reflects a larger banking crisis yet to come.

[OCSteve]

So obvious! Now I just feel silly.

OK – so mostly potatoes, and some PCP pipe.

And lighter fluid.

Oh, and lots of beer…

[ral]

I didn't know you smoked PCP. I'm so out of touch.

Oh, is that PVC? Never mind.

[dmbeaster]

Bernard Yomtov:

The more interesting question is when some bond lawyer added language to the bonds that attempted to impose such a contractual burden on the government entity. It still does not work.

dmb,

Why not?

You mean if the indenture says they have to raise taxes if necessary to meet the payments that's a meaningless provision?

These provisions are legal, and municipal bonds are classified into categories based on whether or not this obligation is built into the instrument (known as general obligation bonds). Adding the provision can lower the interest rate for the loan.

But in a bankruptcy, the rules change. The first big problem is Tenth Amendment to the US Constitution which limits the power of bankruptcy courts over the states and its lesser entities such as municipalities. It has been interpreted to mean that the bankruptcy court cannot make orders interfering with the discretion of states and municipalities in conducting their affairs.

The second is the general concept of "executory contracts" in bankruptcy. It is not just debts that are discharged in bankruptcy, but also obligations to perform future acts. Otherwise the debtor cannot get a fresh start. I am not a bankruptcy specialist, but my understanding is that this is the principle the underlies the ability to alter pension plans and other ongoing commitments. The classic executory contract that can be terminated in the discretion of a bankrupt debtor is a lease.

Is this "fraud" as you suggest? Well, think of it this way. If I am a creditor making lending decisions, I have in mind what the law allows me to do to enforce collections if the debt goes unpaid. I have no reasonable expectation to rely on provisions that will not be enforced in the event of bankruptcy. So how is it fraud if I put them in anyway and cannot enforce them against the debtor?

[now_what]

or maybe the sudden crisis created by the bank run outpaced the regulators more orderly processes, but maybe it reflects a larger banking crisis yet to come

Why would it be a sudden crisis though?

A bank run - well, a destructive one - can only happen, now, if the bank is insolvent, and IndyMac did not suddenly become insolvent. It was not a sudden crisis. What's going on here? I'm betting on "a larger banking crisis yet to come" because I think lax regulators have allowed banks to misstate the value of their assets, particularly, mortgage backed assets. If you can't sell it, it isn't an asset.

That's the thing I fear way more than Fanny and Freddy - we've got a bunch of insolvent banks and everyone is trying to pretend that everything will be just fine as long as no one notices that they are insolvent.

PCP pipe indeed!

[Adam]

A bank run - well, a destructive one - can only happen, now, if the bank is insolvent, and IndyMac did not suddenly become insolvent.

IndyMac's cashflow was tanking. (factsheet PDF)

Isn't it possible that the FDIC wasn't able to find a buyer because of the size of IndyMac? It seems like shopping around would have telegraphed their intent to seize the bank.

[now_what]

IndyMac's cashflow was tanking

From your PDF:

Over the past nine months, IndyMac incurred significant losses, severely depleting capital and jeopardizing the institution's continued viability.

The past nine months is a sudden crisis?

IndyMac moved $10.7 billion of loans intended for sale to the category of "held for investment" in the fourth quarter of 2007.

They couldn't sell their loans last year and they couldn't mark them to market since there was no market for them. They held them for "investment". Nice.

This was not a sudden crisis. The people responsible for regulating this are going to look for scapegoats anywhere they can find one. Don't be suckered.

[Gary Farber]

"Yep, your average Republican is certainly manipulating the government for personal profit! Because they're all rich!"

Slart, since I started reading you, lo, these many years ago, you've seemed to, perhaps, consistently identified "Republican" as referring to average Republicans, such as your former self, and folks like you, rather than to the people in charge of the Republican Party, whom you used to frequently never even have heard of. (No, can't forget when you asserted you'd never heard of Grover Nordquist, and what did he have to do with the Republican Party, more or less.)

This seeming predilection, which of course may not exist, tends to go a ways to possibly explain your seeming appearance of a consistent dynamic in this direction, in which people point out stuff that the leadership and interests behind the Republican Party do, saying it's "Republicans" or "the Republican Party" who do it, and you then write that people who allegedly do that don't represent your neighbors and fellow voters, and aren't anyone you know, and you perhaps give the appearance of suggesting that the criticism seems completely inappropriate. Sometimes you even wax sarcastic about this, as if it's obvious.

That's perhaps because you and the folks engaging in this criticism are talking about two entirely separate sets of people when we talk about "Republicans." You the people you know, and us the people who run the Republican Party and set its policies, and whose interests the Republican Party is run for. (Cui bono?; not Cher.)

It's a theory, anyway, and of course it's quite likely to be wrong, and you're apt to suggest that it is, and who could gainsay you?

It's still a theory. It seems to possibly fit observable facts, anyway. If it doesn't, no offense intended.

[gwangung]

That's perhaps because you and the folks engaging in this criticism are talking about two entirely separate sets of people when we talk about "Republicans." You the people you know, and us the people who run the Republican Party and set its policies, and whose interests the Republican Party is run for. (Cui bono?; not Cher.)

This is a tenable theory.

But that raises the question...if the people are running the Republican party are so objectionable in the financial responsibility...why are the rank and file Republicans so complacent in allowing that to happen?

[Adam]

now_what: This was not a sudden crisis. The people responsible for regulating this are going to look for scapegoats anywhere they can find one. Don't be suckered.

From the factsheet:

Deposit inflows in the three days prior to June 27, 2008: $31.2 million
Deposit outflows beginning June 27, 2008: $730.2 million through July 7 and $1.3 billion through July 10

$730M going out last week and $600M this week, compared to ~$10M/day coming in just prior, seems to me like it could be characterized as a crisis situation. I'm not the one to ask, though.

[mikkel]

One of the Fed's main missions (that I whole heartedly approve of) is to prevent a liquidity squeeze bringing down a bank. The $1.3 billion might have been the final blow, but the Fed could have easily loaned them much more than that for short term operations. The fact that they didn't tells me that Indymac didn't have much of value that the Fed would take and even if they did, that their long term prospects were awful.

So in that I have to agree with now_what in that only insolvent banks should fail because they are the only ones the Fed won't backstop.

It is possible they didn't really look for a buyer because they're not sure what assets are actually good. I have to agree with now_what that the big mess is that tons of the stuff isn't marked anywhere close to what it's worth...if it was then we'd be talking about what banks haven't failed yet. It is why this is just the beginning.

[now_what]

$730M going out last week and $600M this week, compared to ~$10M/day coming in just prior, seems to me like it could be characterized as a crisis situation

Once again, if an insured bank is solvent, every single dollar deposited can walk out the door and there is no issue. There's no problem at all. The insurer stands ready to pay off every depositor because the long term assets the bank holds can cover them.

The only problem with depositor insurance is when the bank's assets aren't worth enough to pay back the depositors. Like when, and I'll just take a random example here, the bank has as its "assets" junk loans that can't be sold on the market at any price.

Now if those loans magically transformed into junk loans a couple weeks ago, you would have a point. (I'm sure you can see where this is going - you don't have a point). If those loans were loans that couldn't be sold in the last quarter of 2007, and then were "held for investment", you might think that sometime between the last quarter of 2007 and say, June 27, 2008, some very polite yet inflexible auditor for the entity responsible for insuring IndyMac might have asked the simple, but pertinent, question, "WTF"?

You keep trying to shift the question to when the bank's depositors caught on to the fact that junk loans aren't worth anything. That's not a pertinent question. They shouldn't have to worry about that - they're insured. You're pointing to the symptom of the disease as proof the disease was inevitable.

[Adam]

You keep trying to shift the question to when the bank's depositors caught on to the fact that junk loans aren't worth anything.

Not at all -- as mikkel point out, no one expects banks to be liquid in the first place. That's the point of FDIC insurance and the problem presented by a bank run.

The FDIC has had IndyMac on notice all year and told them this last week that they were no longer well-capitalized (after their week of $730M in losses), and IM was laying off half its workforce.

The question of whether they were insolvent this morning when the FDIC walked in isn't really the point; it's clear that they were about to become insolvent -- if so, why would the FDIC wait around while the problem got worse? That's contrary to their purpose.

Again, I can't see the entire deposit inflows/outflows for the YTD, so I don't know how big of a relative dip the last two weeks represents, but I'd expect that it crushed some volatility threshold that gave the FDIC all the reason they needed to pull the trigger. That seems to be corroborated by the move pulling their "well collateralized" status this week.

And yes, now_what and mikkel are right that this could happen at many banks, because liquidity's never perfect -- but as with IndyMac, the FDIC certainly isn't going to jump in until the cashflow goes negative; and a bank run is by nature a panic phenomena that indicates that the bulwark provided by insurance has apparently failed and action is warranted.

I don't see what the equivocation is about except what threshold we set to determine insolvency. This is an FDIC seizure, not Credit Lyonnaise; the debt subordination works differently from standard bankruptcy and it seems perfectly reasonable to take a preemptive approach here.

[dmbeaster]

Slarti:

Predictable, tedious, inaccurate labeling, here

True, and there are Democrats with the same philosophy. So let me say it is the defining ideology of a lot of the Republican leadership and some Dems.

[crionna]

The danger of bank runs is actually quite real, especially early next week. I've spoken with a number of people today and had to warn more than a few of them that you cannot liquidate a bunch of stock and leave the cash in one or even multiple Schwab accounts and expect it to be insured. You have to spread it around to new banks. So the runs may not be about putting money in the mattress, rather spreading it around to other banks in $100K increments (which may or may not mean you'll actually get your money if the underlying assets are bad as has already been pointed out. The key is to put it in banks with deposits backing those deposits.

The difficulties of IndyMac, Countrywide and many others (heck some large private lenders died over a year ago) show why the securitization of loans is so important. Without it, you'd depend on deposits to fund mortgages and neither the funds, because we don't save, nor the appetite for risk is there.

I personally don't believe that it was the risky loans per se that caused all this trouble. Risky mortgage products only existed because there was money that needed to be invested. No one starts making Alt-A loans to maids if there aren't expected to be buyers, buyers willing to take on risk, which is why this finger-pointing by people who bought the securities is so maddening to me.

While my biz should be fine, since we're government backed and supported by relatively well proven asset values, I'm crossing my fingers because we're literally pulling senior citizens out of foreclosure. We need the mortgage markets to work to continue to do that.

[CharleyCarp]

Funny thing at my office happy hour last night. As each of my real estate colleagues came in, they'd ask 'OK, who bought Fannie Mae stock today?'

A couple hands went up, and a couple more real estaters answered with 'Everyone I know.'

Obviously, this doesn't say anything about the long haul. There were definitely some folks who thought the market got talked a little lower than necessary yesterday.

[Bernard Yomtov]

dmb,

Thanks.

I didn't realize you were talking about what happens in bankruptcy rather than in the normal course of events.

[mikkel]

"Once again, if an insured bank is solvent, every single dollar deposited can walk out the door and there is no issue. There's no problem at all."

now_what that is a vast exaggeration. Banks have a tiny fraction of deposits available at any time and it doesn't take that much of a run to wipe them out. That's why it's up to the Fed to give them money *if* they determine that the run is temporary.

As Adam says, solvency isn't merely about asset value but about expected ability to take losses going forward and capital is extremely important for that. So it's a catch-22. If a bank suddenly becomes under capitalized then it should be given short term loans (backed by good assets) until the problem goes away if they are solvent. But part of the solvency equation is how well capitalized they are in the first place.

So I guess my first thought was a bit simplistic because really at some point it is a guessing game since it is very hard to measure the difference between a "credit crunch" and "insolvency" (and why the Fed is scared to death). A short term shock could make the Fed panic and not support a bank they would if they had perfect information.

I guess it's fair to say that any specific event might be from panic, but that the panic isn't unjustified given long term systemic problems...although each event does make those worse.

[Nell]

now_what: lax regulators have allowed banks to misstate the value of their assets, particularly, mortgage backed assets

But that's what's at the heart of the whole crisis across the board, isn't it? That all kinds of financial entities have been allowed to pretend that the mortgage-backed securities were worth many times what they really were worth.

The desperate game now is to avoid being the one who ends up holding the bag. As usual, I expect that will be the U.S. government, i.e. the U.S. taxpayer.

[Slartibartfast]

Yes, because "average Republican" is such a good description of Republican Congresspeople and high-ranking members of the executive branch during Republican administration, and of Republican-appointed justices.

Yes, because "Republicans" encompasses and is encompassed by Republican Congresspeople and high-ranking members of the executive branch during Republican administration, and of Republican-appointed justices.

Granted, the latter is rather freighty to be throwing around in casual comments, but surely there's some way of more tersely distinguishing between the collection of assholes in office, and individual people of the Republican persuasion that just may be honest enough that they haven't earned the blanket contempt that's just been heaped on "Republicans".

So let me say it is the defining ideology of a lot of the Republican leadership and some Dems.

Fair enough. Thanks for clarifying. I shouldn't have to say this again, but these kinds of blanket descriptors are insulting no matter who they're directed at.

Hopefully some of the above also addresses Gary's comments. I have to add, though, that I completely deserve all past and potential future verbal drubbings of the Grover Norquist variety, but that the sting would be more memorable if they weren't quite so predictable in coming.

[bobbyp]

For those of you who are puzzled about the implications of the housing (read asset) crash, I suggest going to the blog "Naked Capitalism", and, of course, anything by Dean Baker.

[hilzoy]

I'm with Slarti on the blanket descriptors: "Republicans" and "Democrats" normally refer to the members of those parties. Tiny modifications, like "Democratic Congresspeople", or "the Republican party leadership", go a long way towards avoiding problems.

That said, sometimes context makes everything clear.

[Slartibartfast]

That said, sometimes context makes everything clear.

Gently admonishment gently taken, with my thanks, hilzoy.

[Slartibartfast]

"Gentle admonishment", that ought to have read. Typically, I'm doing a couple of other things while commenting; not conducive to good communication.

[russell]

I personally don't believe that it was the risky loans per se that caused all this trouble. Risky mortgage products only existed because there was money that needed to be invested.

There's only something to this because of the words "per se" and "all". The gist of it, IMO, is nonsense.

Mortgages were sold to people who had no hope in hell of repaying them. Those mortgages were packaged into securities that made it difficult if not impossible to discover the value and risk level of the underlying mortgage.

I call both of those things fraud. In My Perfect World, the folks that engaged in them would go to jail. End of story.

There will always be some joker somewhere who is perfectly happy to burn the whole system down as long as he gets a nice vacation home out of it. What prevents folks like that from doing so is the law, which is to say regulation.

If you want to play around with other people's money for a living, you should damned well expect to live under a regulatory microscope. If that doesn't suit you, find another line of work.

With apologies in advance to Slarti, the leaders of the charge against federal regulation of any industry, including the financial industry, have been conservatives, and in particular Republicans. I'm sorry if that bugs anyone, but it's just a fact.

If there is justice in the world, this mess will cost a rack of Republican office holders their seats.

The nation can't afford to keep bailing out Wall Street smartasses every time one of their brilliant ideas flames out.

Thanks -

[Anarch]

As an aside, Slarti, this:

I am a great deal less inept with my money than any given Republican, or Democrat, or even Independent, in government.

to me, fundamentally misses the point. Most of the Republicans of whom others were speaking -- that is, the GOP leadership, etc. -- are perfectly ept with their own money. That is not, nor has it ever been, the issue. The question is whether they are competent to deal with governmental, which is to say with public, money. In that respect, I'm going to go further than perhaps the kitten would like and say that most Republicans -- not just the leadership, but the rank and file -- are not responsible stewards of public monies. This is deeply unfortunate, because there are certainly some Republicans who I think would be; but both the ideology and the voting preferences (i.e. the practices) of the majority of Republicans simply don't warrant any other conclusion.

[Note that I'm not saying the Democrats are particularly great, but they're light-years ahead of the current (mass of) Republicans.]

[mikkel]

russell I'm all for smart regulation but I have to say that I think Austrian economics followers are right on this one. If there is a ton of easy money then things are going to get bad because humans are idiots. It's that simple.

The mortgage/commodities/tech stocks/etc. bubbles are ultimately mere symptoms of underlying monetary policy. Sure, deregulation had a huge part because they allowed the creation of SIVs, CDOs, etc. that led to massive leverage and in a rational world they'd just be all WTFs. So sure the complete disregard for mortgage and commodity regulation has had huge consequences, but it's a lot easier to regulate the banks that are the source of all the troubles, and you know...not have interest rates far below inflation so people don't mind parking their money. I think history will judge the Fed and Bank of Japan extremely harshly (the latter because of their refusal to properly take the hit and their 0% policy leading to the massive carry trade and explosion of debt).

The global debt has doubled in the last 8 years...that is the source of all the problems.

[bob mcmanus]

Nah, there are people who voted for Nixon, Reagan, and Bush II (and Delay, and Helms, etc) and I don't feel required to give them a pass. I don't get my Ideal Democratic leadership, but I still feel just a little responsible for which democrats gain power and what policies are followed. And the gulf between the quality of the Democratic & Republican leadership for forty years is just too generally great for me to give the rank-and-file party member a pass.

If the Republican rank-and-file claim impotence, well, the Democratic base grabbed the party this year to an degree, and I seem to remember the Republican base doing the same in 1964 and 1980.

They got exactly what they wanted, and with a few exceptions that have already gone independent or libertarian, there really isn't a dimes worth of difference between the base and the leadership, except when the going gets rough, when the base tries to distance itself. What was Bush's poll numbers among Republicans in 2004?

Who are we, like Abraham arguing with God for the one good Republican? Go for it. Not my style.

[Brick Oven Bill]

Re Republicans, Democrats, and Wall Street

Rumor has it that the majority of Wall Street money is going to the Democratic Party this year. I personally don’t see much difference between the two anymore when it comes down to the nuts and bolts of governance. I’m beginning to think the whole thing is rigged.

The model appears to be Central America.

[bob mcmanus]

Chairs have four legs and a back. Only a philosopher would think it was morally required to mention beanbags and Barney Frank when decorating your dining room.

[Adam]

I call both of those things fraud. In My Perfect World, the folks that engaged in them would go to jail. End of story.

The reason it's not necessarily accurate to call this fraud is that it's not always intentional, especially in recent years. No bank wants to go under. Financial professionals don't want to have these things go on their records or their conscience.

That's not to say that there's not some bad eggs out there. But you don't need malice where arrogance will do -- a bunch of people thinking they've found some value where no one else saw it. Some genius realizes that you can apply a Li cupola or whatever to squeeze a few fractional points out of a CDO, then some other genius decides hey, if we leverage that process 50 times over and apply it to a couple billion dollars worth of securities, then we're talking real money, etc., etc.

It's not that anyone's necessarily trying to hide the money so much as the right hand not knowing what the left hand's doing -- nor really caring, which is probably where the negligence, if any, is to be found.

In my mind there's really two models for financial mismanagement. Neither is really tied to a political party, I think, though a lack of oversight facilitates both.

On the scummy side, there's Salomon Brothers cornering the mortgage-backed securities market and screwing their clients on a vast scale -- any situation where the spreads on multi-million-dollar trades is above a basis point is probably fraud or close to it. I think there's a good argument to be made that this sort of behavior is more compatible with rent-seeking in a regulated market.

On the arrogant egghead side, there's Long-Term Capital Management thinking they can outsmart the market. Scholes and Merton weren't out to screw people, but their overestimation of their own abilities may have amounted to the same thing in the end. This pattern seems more amenable to a deregulated market.

On yet another hand, John Meriwether was in charge of both. So take that for what you will.

One thing that feels disingenuous is that many of the people pleading blissful ignorance are adherents of fairly strong rational capital market theories -- and yet they're willing to bet billions of other people's money on the notion that they can beat the market, which is supposed to be manifestly impossible. But in the end, there's always going to be someone willing to roll the dice.

[Sebastian]

"The question is whether they are competent to deal with governmental, which is to say with public, money. In that respect, I'm going to go further than perhaps the kitten would like and say that most Republicans -- not just the leadership, but the rank and file -- are not responsible stewards of public monies. This is deeply unfortunate, because there are certainly some Republicans who I think would be; but both the ideology and the voting preferences (i.e. the practices) of the majority of Republicans simply don't warrant any other conclusion.

[Note that I'm not saying the Democrats are particularly great, but they're light-years ahead of the current (mass of) Republicans.]"

The last comment alludes to the economic insight that almost no one is very good at dealing with the money of other people unless they have a strong PERSONAL incentive to do so. For the most part things like 'public good' or 'national welfare' do not provide a strong PERSONAL incentive to be good with public money. In actual practice they tend to spend things on projects in which they have a personal incentive--things like pork projects for their districts (helps them personally get reelected in a way that supporting national X project does not) or it crosses over into misappropriation of public funds (hiring your otherwise unsuitable family member to some position) or a little further into near bribery or actual bribery situations.

That is why I think it is perfectly ok to start from a position of fairly extreme skepticism when new spending is proposed. It isn't that I can't be talked into it. But you have to show that there is A) a serious problem, B) that government can in practice usefully address the problem, C) that there aren't better practical ways to address the problem, and D) that you acting to strongly control the personal/public stewardship problems.

[crionna]

Mortgages were sold to people who had no hope in hell of repaying them.

He said with perfect hindsight.

Those mortgages were packaged into securities that made it difficult if not impossible to discover the value and risk level of the underlying mortgage.

Whoa, Whoa, wait a minute. So investors are the victims here? Please, rates of returns for specific loan packages differ based on their risk. You're telling me that investors couldn't tell just from the rate of return alone that they were heading into risky territory? They don't read the papers about how nice it is that Mary the Maid got into a new home in the hills and think "Gee, I wonder if that's why that security is paying so well?", Talk about nonsense.

IMHO, what's really underlying this whole thing is our, humankind's, twin desires to 1) not place limits on people and 2) affix blame when things go bad.

99.9% of the people in trouble are not victims of anything more than their own confidence in the future. Sure, we could regulate things down to the point where only those with 20% down and 750 FICOs get fixed rate loans that equal just 25% of their gross incomes, but I for one would rather live with the consequences (and we certainly shall) of giving those that can't a shot at getting into their own home once in a while. I'll live with giving more benefit of the doubt rather than less any day.

Heck, I'll have to do that if I plan on voting for either presidential candidate this year.

[ThatLeftTurnInABQ]

russell I'm all for smart regulation but I have to say that I think Austrian economics followers are right on this one. If there is a ton of easy money then things are going to get bad because humans are idiots. It's that simple.

This strikes me a debate between supply-side (liquidity) and demand-side (bad regulation) explanations. I'm not a big fan of unicausal explanations for large historical events, so I'm inclined to assign blame to both. In fact the combination of both factors strikes me as posing far greater risks than either one in isolation.

The flood of liquidity unleashed by Greenspan and Ben B. would have posed a challenge to even a healthy regulatory environment. I see it as analogous to a river cresting in a flood, with regulations acting like levees to try to constrain the flow in a constructive manner. The problem is that a levee system has to work in total, not just locally, or there will be a problem. Water that is contained in one spot will seek out weaknesses eleswhere in the system until it finds a place to break through. I think a regulated financial system is similar - if one part of it is well regulated to prevent abuses, excess liquidity will seek out other channels until the weakest point of the system is found and exploited to the max.

For the Fed to pursue a monetary policy of negative real interest rates for as long as they did was to place an enormous strain on our regulatory environment. To do so during a period of time when some of our political leadership have chosen for ideological reasons to actively undermine and dismantle that regulatory system was criminally negligent, which in no way diminishes the guilt of the people (*cough* Phil Gramm *cough*) who thought that going around blowing up regulatory levees with dynamite was either a public service, or more likely thought "Après moi le deluge".

[Bruce Baugh]

Yeah, this "everybody does it" explanation doesn't hold. The fact is that demonstrably some sorts of people, those who vote for Republican candidates, keep supporting a limited set of people, Republican elected officials, who keep drawing on the same limited pool of advisors and keep making the same "mistakes" which enable those at the top and their buddies to make a lot of money while screwing the general public. Conversely, those who vote for Democratic candidates keep supporting a somewhat wider and more diverse set of people, Democratic elected officials, who draw on a slightly wider pool of advisors and keep cleaning up those "mistakes" and (when they're allowed to) establishing fiscally sound programs that sometimes manage to remain viable in the face of Republican-created losses and waste.

Someone born in the year Ronald Reagan took office and first unleashed this crew of violence-loving wastrels on the federal government could be retiring from the military this year as a 20-year veteran. That's enough of a lifetime to talk about an established pattern. Republican voters who would like something better than more waste and cruelty really need to get their act together and start voting people with a scrap of decency and competence, and who'll appoint people who also have scraps of decency and competence. It's only been the glory years of people like Phil Gramm and his ilk because Republican voters keep supporting the men and women who support those creeps. Your leaders think they can keep getting away with it as long as they make sure to appease the racists and zealots among you, and so far they've been right. It'd be great to see some actual challenge to that - not just individuals standing by and waving their hands apologetically while the loot flows one way and the misery flows the other, but groups running decent candidates and supporting them as long as it takes to win some victories.

Democrats are in the midst of doing it. Heck, even the Libertarian Party, a bastion of sanity and prudence by nobody's standards, has managed to work some changes in how it gets candidates. Republicans can do it too, as soon as enough of y'all decide you want to. And in the meantime, the rest of us will all do what we can to fix the damage done by the guys y'all keep putting into power.

[mikkel]

ThatLeftTurnInABQ I like your analogy. I think it's worth focusing on the supply side because with the backdrop in place, it would be a superhuman effort to actually have a strong enough "levee system." That said, I'll never agree with the people that are pointing this out about the solution. The 1800s were no picnic...

I don't think it's too much to ask to have a strong regulatory system and a central bank that doesn't try to actively squash every recession and lets excess bleed out of the system. Greenspan admits that there is a pretty low cap on actual productivity gains and that any economic growth above that is inherently unsustainable. I'm not sure why we can't have a system that has the strengths of the current one but operates in a low credit growth regime.

[Bruce Baugh]

LeftTurn: Right on. And exactly that criticism of fiscal policy has been made by various observers all along, particularly the part about it denying means of recourse when crises inevitably arise. The party line in response has always been that there wouldn't be crises as long as folks kept doing what the Republican machine's pet theorists wanted. They were wrong.

[Slartibartfast]

"Someone born in the year Ronald Reagan took office and first unleashed this crew of violence-loving wastrels on the federal government could be retiring from the military this year as a 20-year veteran."

There's some questionable math, there, but maybe you didn't mean what this appears to say. Someone born when Reagan took office might manage to have put in nine years of service by now.

[now_what]

The FT is one of the few decent newspapers left in the world:

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

...

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

It gets even better after that.

[ThatLeftTurnInABQ]

I don't think it's too much to ask to have a strong regulatory system and a central bank that doesn't try to actively squash every recession and lets excess bleed out of the system.

That is my position as well - we need both, but if a failure occurs in one area the consequences are much less severe than a simultaneous failure in both, which is what we have on our hands right now - the Fed failed us from the standpoint of maintaining monetary policy discipline at the precise time that our regulatory system was being dismantled.

That was a really bad idea, and now we are going to find out just how large the consequences are. Personally I think a failure of the FDIC due to multiple IndyMac sized bank runs cascading one after the other, with the Treasury unable to rescue them as rates soar and we are unable to float the new debt needed to apply a large scale fiscal rescue, is a distinct possibility. We haven't gotten to the "cash in the mattress" stage, but I'm no longer regarding a repeat of 1932-3 as being out of the question.

The next few months will be telling, as I think Paulson, et. al. are desperate to kick that can down the road as far as possible, but I'm not sure if they can pull it off anymore. As a back of the envelope calculation, I'd say the probability of a widespread bank failure (i.e. the ATM's stop working and anybody without cash is unable to purchase gas or groceries) sometime between August 2008 and February 2009 is now non-trivial.

[Bruce Baugh]

You're right, Slarti, I slipped on my math, and have no idea how.

[rdldot]

Ok - now I'm concerned. Am I getting this right? Is it really possible I wouldn't be able to get my money out of my bank? I thought my deposit were insured and safe. This is what we've been told for decades. If that's actually a possibility I'm going to go Monday and pull my money and put it under the mattress, for real...

[Brick Oven Bill]

Re: ThatLeftTurninginABQ’s thoughtful remarks;

If you look at the Fed’s tracking of non-borrowed banking reserves, it sure looks to me like there has already been a $170 billion withdrawal from the banking system. This is unprecedented in modern history.

Excuse the math error in the link.

[russell]

Mortgages were sold to people who had no hope in hell of repaying them.

He said with perfect hindsight.

Person A sits across the table from person B and sells them a mortgage.

It's not hard to find out a reasonable market value for a house. It's even less hard to take a social security number and get a very clear picture of person B's financial standing.

From there on, it's a math problem. The property does, or does not, support the value of the mortgage. The person does, or does not, have the income to pay the mortgage. No hindsight needed.

Anyone buying property on the assumption of double-digit increases in value indefinitely into the future is a fool. Anyone selling a mortgage on that basis is a crook.

There's always someone who'll take free money. IMO the guy who hands it out owns equal responsibility when the sh*t hits the fan.

Down in my basement, I've concocted a secret elixir that will take inches off your waistline, put a youthful spring in your step, and add five years to your life. Want some? Five bucks a bottle.

If you buy it you're a dope. You'll pay when you don't get thin, young, or spunky. Or when it makes you sick.

If I sell it, I should go to jail. If that's too punitive, I should pay in some coin that will make it not worth my while to try that, or any other, scam, again.

What's not clear?

Whoa, Whoa, wait a minute. So investors are the victims here?

My understanding is that the investors are unable to get an accurate understanding of the risk represented by the security. Hence, the problem. Nobody wants to buy the sausage with the turd inside, but nobody knows which sausage the turd is in.

Could be I misunderstand the nature of the problem. If so, I stand corrected.

Thanks -

[russell]

P.S. -- what the Financial Times said.

now_what, thanks for the link.

Thanks -

[Phil]

surely there's some way of more tersely distinguishing between the collection of assholes in office, and individual people of the Republican persuasion that just may be honest enough that they haven't earned the blanket contempt that's just been heaped on "Republicans".

Surely there is, but that terse distinguishing should be mitigated by the fact that somebody is voting for the Republicans that we are talking about, and I'm just about 99% certain, +/- 1%, that it isn't the Democrats.

Thus the people doing said voting either a) want exactly the results they're getting, b) want something else and are willing to take this stuff as a reasonable side effect, c) are woefully uninformed as to the candidates' governing philosophies, or d) perhaps should not be legally permitted to exercise the franchise, are they are comatose. If there is an e) through z), I'm willing to hear them.

[ThatLeftTurnInABQ]

rdldot,

IMHO (remember, free advice is worth what you pay for it) there is no need to panic and start stuffing your mattress with cash at this point in time (I'm assuming your comment was in response to my previous one). This is an area where in normal times you would have nothing to worry about, and the approach of abnormal times should be slow enough that you will have a chance to act to protect yourself if you are paying attention to the news on a weekly basis.

The issue is that the FDIC insurance fund only carries a small percent (between 1 and 2%) of the funds necessary to make good all of the deposits which it insures in the event of a total loss. See for example the site that Adam linked to above for some recent historical data.

That may sound alarming, but most bank failures require the FDIC to supply only a small fraction of the total funds on deposit to make whole the depositors, and obviously not all the banks are at risk of failure at the same time - some are weaker and some are stronger, and they won't all go down at once. Like any other form of insurance, the FDIC is predicated upon the assumption that the risk of them needing to pay out on all of their liabilities simultaneously is so small as to be neglible.

What worries me is that the stories re: IndyMac suggest that the FDIC may have to consume an estimated 4-8 billion dollars (out of 53 billion or so currently in the insurance fund) liquidating IndyMac because of their difficulty in finding a buyer, thus drawing down what they have left to cover any additional bank failures before they can recapitalize.

That is a large chunk (between 7 and 15% of the total), and IndyMac isn't the only large bank with toxic CDO paper lurking in the background. I can think off the top of my head of several other similar institutions, and I'm not an expert (i.e. there may be others I haven't heard of yet). Which means that we could get into a sticky situation if several more such failures occur in quick sucession (which is why you should pay attention to the news and start worrying if more IndyMacs occur) and it turns into a race between how fast the FDIC can recapitalize and how quickly failing banks draw down the insurance fund. It is theoretically possible that the FDIC insurance fund could be run down to zero by a cascading series of large bank failures, if they take place rapidly enough.

In which case the Treasury would have to step in to rescue the FDIC directly, which takes us into a whole 'nother realm of speculation re: possible limits on our ability to raise additional funds for fiscal stimulus/rescue purposes under unusual circumstances. I think it is very unlikely that the FDIC would be left to fail outright, but I can forsee a situation where a bank run too large for the FDIC to cover out of the money remaining in a depleted insurance fund necessitates a temporary across the board bank closure/freeze of deposits (i.e. ATM's stop working for several days or more) and I suspect that the measures required to recover from such a black swan event would be so inflationary that while you should get back the money in your account, the purchasing power of that money would be noticeably less than what it was when you put it in (and note that it would be no safer from inflation in your mattress than it would be in the bank).

Net-net is that IMHO keeping enough cash on hand to cover several weeks or as much as a month of normal expenses is probably a good idea, but there is no need to go stuffing the mattress just yet, and even if it comes to that, the mattress may not save you much anyway.

HTH, YMMV, IMHO, caveat emptor, past performance is no guide, free advice is worthless, etc., etc.

[mikkel]

LeftTurn that's my analysis as well except for one point that I am interested in your opinion on. (As an aside, WaMu and Wachovia are both neck deep in Alt-A stuff as well....and well, uh JP Morgan and Citi have trillions of swaps that are mostly likely related to all this stuff. So if you want to talk about who is messed up, nearly all of them.)

Anyway, it is my understanding that purchasing power is a function of the real monetary supply, i.e. cash and credit. Obviously if there is massive bank failure all the credit goes away and that is highly deflationary. Same thing for if deposits are frozen. Am I wrong in my assumption that the treasury could just "make whole" the FDIC for this reason? I mean if you have tens of trillions of debt going down then outright printing (to just replace what was supposed to be there) would still have a net effect of deflation, right?

In any case, the most logical thing to do if FDIC does fail is to freeze assets and go to the treasury directly...but that is literally from my own thinking and I haven't read from anyone that actually knows anything about if there is a plan or not.

I have to admit that it is a relief to read someone that has the exact same take on the situation. I was very troubled last night because it seems like almost no one understands what we are facing and the few people that do are apocalyptic. It is hard to find much calm analysis that looks at the facts yet is optimistic that we'll persevere (except for like Nouriel Roubini who is now proposing ideas). I am aghast at the fact that naked capitalism, calculated risk, etc. have been talking about this so clearly (yet skeptically) for so long and yet almost no mainstream economists appreciate the issues.

[mikkel]

One last note about the long term consequences. They are now projecting $1.6-$2 trillion in losses. This is what I consider an optimistically realistic scenario (i.e. what LeftTurn talks about is realistic as well but hopefully it won't happen). So let's say that we avoid major systemic collapse and only lose that much. That will impair future lending by somewhere between $10-$20 trillion.

Even if we avoid a major collapse, we are looking at an extreme reduction in credit and therefore a major change in lifestyle and "quality of life" for years if not decades. This is not necessarily a bad thing. For one it will constrain price increases for medicine, education, food, etc. It will also force people to live within their means. We aren't going to be able to have as much "stuff" as we do now, but that "stuff" was also leading to the enormous increases in the cost of things we need. Over the long term, it may go a long way towards helping balance the projected shortfalls in government programs and decrease the crushing burden for basics that the poor (and increasingly middle class) are feeling...unfortunately it will also mean that people that are projecting to make 8%-10% a year in investments are deluding themselves. At least until we get a large supply of cheap and renewable energy, then anything is possible. To me that is the biggest wild card and most important task that our society has.

[hilzoy]

Luckily, I just bought my iPhone...

[ThatLeftTurnInABQ]

Anyway, it is my understanding that purchasing power is a function of the real monetary supply, i.e. cash and credit. Obviously if there is massive bank failure all the credit goes away and that is highly deflationary. Same thing for if deposits are frozen. Am I wrong in my assumption that the treasury could just "make whole" the FDIC for this reason? I mean if you have tens of trillions of debt going down then outright printing (to just replace what was supposed to be there) would still have a net effect of deflation, right?

mikkel,

That's a very good question, which you should get somebody else to answer since I'm not an expert in macro-econ. I'll try to answer it as best I can and hopefully somebody more knowledgable will correct me.

My take from the econ reading I've been doing is that while a large scale bank failure would be in the short run be highly deflationary, a successful response to such a crisis sufficient to reopen the banks and get things back to normal would involve the Treasury effectively printing new money rather than just using the sort of liquidity tools (the TAF for example) which the Fed has been using to deal with the credit crisis up to this point.

The problem with this is that it would require an extremely cool set of heads and a lot of luck not to overshoot the target and inject into the economy too large of a pulse of cash which would have inflationary effects once the initial crisis was over. And once the toothpaste is out of the tube you can't put it back in.

Or to use another analogy - the very high levels of liquidity which we've enjoyed during the Greenspan era should have been highly inflationary in their effects, but haven't been for two reasons: (1) we've been exporting our inflation to China, and (2) our inflation was captured into assets (e.g. rising housing prices captured as CDOs and then stored in our banks and other investment houses) rather than expressed as a classic wage/price spiral.

If the Treasury Dept. has to step in to recapitalize our banks directly to compensate for a CDO-driven meltdown and does so too succesfully, the net effect will be to monetize the inflation that was being stored as inflated asset values, allowing it to escape from the banks and be converted into commodity goods price inflation (and then we get to find out whether labor has any bargaining power left or not, when wages either respond or fail to do so), because a large amount of this stored value has to be destroyed in order to allow it to act as an inflation sink, and Treasury intervention will prevent that from happening. Instead we would experience some of the missing inflation which should have occurred during the last decade and change, but which went missing because it was stored up as asset value. Chickens, roost, etc.

In other words, an inflationary rebound triggered by a ham-handed over-reaction to an initially deflationary crisis - that is what I'm expecting to see if it gets that bad.

[mikkel]

"which went missing because it was stored up as asset value."

But there wasn't "money" stored up, just debt. If there is massive default on debt then the value goes down but money stays relatively the same. As some people say, "credit is money...until it isn't." There is no functional difference between the two in normal times but in a deflationary environment there is a huge difference.

I agree that ending a deflationary spiral requires a large amount of inflation by definition but inflation isn't bad per se. For example during the Great Depression they didn't just print money and hand it out, they did it through massive deficit spending and all the massive infrastructure improvements paved the way for the biggest economic boom in history. I.e. there was a lot of (monetary) inflation, but there was a huge increase in productivity that prevented prices from spiraling out of control and enabled a massive expansion of the real economy. A similar thing could be undertaken for energy and urban development this time around.

This is what I alluded to a bit...the choices that are made when reacting if things get bad will determine whether we become prosperous or not. If they attempt to hold up asset prices by inflationary measures then our money loses a ton. If they misuse stimulus during deflation then it could lead ot massive price increases while also not resulting in much credit. It's tricky.

[Bruce Baugh]

I just wanted to say "thank you!" to everyone working on explaining the issues and possibilities here. What I know abut banking doesn't go a whole lot further than what I find when I log in to check my account balance, so I appreciate it very much. It seems like the disagreements are illuminating this time, too, because I can see how the interpretations fit together.

[Gary Farber]

"But that raises the question...if the people are running the Republican party are so objectionable in the financial responsibility...why are the rank and file Republicans so complacent in allowing that to happen?"

Excellent and highly important question. I'd suggest that a) there is very little grass-roots power in the Republican Party, and if you've never looked into the highly top-down control structure of the Republican Party, you might want to, as I think that would answer a great deal of your question, and b) that most Republicans are ignorant of a.

I'm perfectly open to other explanations, to be sure, but Ockham seems to suggest to me that a and b are sufficient.

But what do you think, Slartibartfast?

BoB: "The model appears to be Central America."

Which you happen to have some small familiarity with. It's just coincidence that your hammer sees nails wherever it looks.

Sebastian: "That is why I think it is perfectly ok to start from a position of fairly extreme skepticism when new spending is proposed."

I have no disagreement with that. Save that we might differ on where to draw the line of our "fairly extreme skepticism," but I certainly agree that publically spending shouldn't be proposed lightly, or without good reason to think that it is, at the least, a pretty good risk, and a responsible decision. I don't think this is a terribly controversial position.

"But you have to show that there is A) a serious problem, B) that government can in practice usefully address the problem, C) that there aren't better practical ways to address the problem, and D) that you acting to strongly control the personal/public stewardship problems."

I agree with all that, too.

"P.S. -- what the Financial Times said."

Small point, and I don't direct this to you, Russell, but to everyone as a general point, but it wasn't the Financial Times editorial board, or any other entity of the FT that wrote that, and it wasn't published in the Financial Times newspaper at all; it was solely the work of Willem Buiter, the individual ("Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions"), writing a solo blog post on his blog, which is hosted on the FT.com website.

People keep making this error in attribution all over the place; one particularly sees it when blogs on washingtonpost.com, an entirely separate company with no editorial direction from the Washington Post newspaper, are attributed to the newspaper. It's a fairly serious error in attributing responsibility, and it would likely save a lot of confusion if most folks who don't pay attention to whom they are quoting, and to who has the responsibility for publishing those words, paid a tad more attention to their sources, and attributed them accurately, rather than leading people astray with clear misattributions.

In this case, for instance, it says in clear English at the top of the linked page:

MAVERCOM BLOG
FT Home > Comment > Blogs > Willem Buiter’s Maverecon > Individual posts

Similarly, I'm just a guy commenting on the blog Obsididan Wings, and my words couldn't fairly be described as the responsibility of "Obsidian Wings." Etc.

[Bernard Yomtov]

It's a fairly serious error in attributing responsibility, and it would likely save a lot of confusion if most folks who don't pay attention to whom they are quoting, and to who has the responsibility for publishing those words, paid a tad more attention to their sources, and attributed them accurately, rather than leading people astray with clear misattributions.

You're being way too harsh here, Gary. When the FT puts its logo on Buiter's blog, and uses whatever that color is as background, it's not a major error to cite the FT as the source. Also, I didn't know that washingtonpost.com is completely separate from the newspaper. Why would I? How many people do? They certainly don't make much effort to tell us.