Now for the really big one


While reviewing this post from 2002, foreshadowing a derivatives crisis like the current one, I found the following:

“At the end of 2002’s first quarter, the notional value of derivatives contracts involving U.S. commercial banks and trust companies was $45.9 trillion, according to the Office of the Comptroller of the Currency’s bank derivatives report. ”

The bulk of the exposure is in interest rate swaps, which are fairly well understood and seem to pose only modest risks in themselves. But there’s still around $1 trillion in more recent derivatives involving securitisation of various kinds of debts. This securitisation is sound only if the credit rating agencies have got their risk assessments right, which in turn requires that the accounts on which those assessments are based should be valid. A few years ago, when the market in debt derivatives was starting up, this assumption seemed safe enough, but now it looks a lot more dubious. The big danger is that defaults in the debt derivatives market could spread to the much larger interest rate derivatives markets.

As an update, the $1 trillion in credit derivatives has exploded to around $50 trillion. While less dramatic in proportional terms, the growth in interest rate swaps is actually more alarming, having reached around $300 trillion in notional values.[1]

It now seems pretty well certain that, as the quote above suggests, the chaos in debt derivatives will shortly spread to interest rate swaps.

Update Unless that is, all normal calculations are rendered irrelevant by a US government asset purchase on a scale that will make all past nationalizations look puny. How that will play out I have no idea. For example, will US-based ratings agencies take the step (automatic if it were anyone else) of downgrading US government debt? End Update

There are two reasons for this. First, swaps are essentially bets on interest rate spreads and these have gone wild in the last week, with interest rates on Treasury notes dropping to zero while commercial paper is just about unsaleable at any price. Imperfectly hedged players in the market must be sitting on losses of several percentage points. Depending on how much of this there is, the implied losses could be anywhere from tens of billions to trillions. Crowdsourcing plea: anyone who has a better estimate is welcome to offer it.

Second, hedging only works if you can collect from your counterparties. This Economist story indicates that Lehmans was a big player, but no-one really knows who is owed money by them. And it seems certain that there will be large-scale failures among hedge funds in coming months.

It’s hard to see this crisis being resolved by normal commercial or regulatory means. The hundreds of billions tipped into the market by central banks yesterday is just a drop in the bucket compared to the sums at risk here.

fn1. Under normal conditions, the exposure associated with a swap is of the order of 1 per cent of the notional value. But (a) 1 per cent of 300 trillion is 3 trillion (b) conditions are not exactly normal right now.

123 thoughts on “Now for the really big one

  1. It should be noted that the notional value of the swaps has no necessary connection to the size of the risk.

  2. i wonder if there is some level of collapse that would inspire the mandarins of capital and their servitors in academia to surmise: ‘perhaps we must look at socialism again’, or is this belief in personal freedom to burgle the national finances genuinely religious in nature?

    they say the weimar middle class came to national socialism when their money was wiped out, and there seems to be no shortage of ‘nazi’ personalities in the usa, and in oz. perhaps financial collapse will be even more exciting than the environmental one, and here sooner.

  3. PrQ,
    Surely you understand the risks inherent in an IRS better than that. The notional outstanding is just a parameter used in a calculation – the actual cash flows involved (the real exposure) are typically less than 1% of the notional value – and the value of the swap is likely to be even smaller. Lehman’s entry into Chapter 11 may mean that they are unable to meet their side of the deals under swap arrangements, but the actual cash flows involved will be miniscule compared to the notional you are bandying about there.

  4. Anybody who feels the need to engage in excited speculation about the future of financial industry should remember two things:

    1) Occasional turmoil is a normal and expected charachteristic of financial markets. The historical record has been equally unkind to people who predict the apocalypse during the bad times as those who predict eternal bliss during the good times.

    2) If you have confidence in your predictions you should take those views to market. It is very easy to trade a prediction that things will get worse, better, or stay the same. If you are not doing this then you must not be very certain.

  5. No use crying over past mistakes as the stakes are too high now as Thomas Palley points out-

    The United States financial system is caught in a destructive liquidation trap that has falling asset prices cause financial distress, in turn compelling further asset sales and price declines. If unaddressed, it risks sending the economy into deep recession – or even depression.

    Current conditions are the result of the bursting of the house price bubble and the end of two decades of financial exuberance. That exuberance was fostered by a cocktail of forces.

    First, economic policy replaced wages and productive investment as the engines of growth with debt and asset inflation. Second, greed and free-market ideology combined to promote excessive risk-taking and restrain regulators. This was encouraged by audacious claims that mathematical economic models mapped reality and priced uncertainty, making old-fashioned precautions redundant.

    Recognition of the scale of financial folly has created a rush for liquidity. This is causing huge losses, triggering margin calls and downgrades that cause more selling, damage confidence and further squeeze credit. That is the paradox of deleveraging. One firm can, but the system as a whole cannot.

    Having failed to prevent the bubble, regulatory policy is now amplifying its deflation. One reason is mark-to-market accounting rules that force companies to take losses as prices fall. A second reason is rigid capital standards.

    Application of mark-to-market rules in an environment of asset price volatility can create a vicious cycle of accounting losses that drive further price declines and losses. Meanwhile, capital standards require firms to raise more capital when they suffer losses. That compels them to raise money in the midst of a liquidity squeeze, resulting in fresh equity sales that cause further asset price declines.

    Bad debts will have to be written down, but it is better to write them down in an orderly fashion rather than through panicked deleveraging that pulls down good assets too.

    This suggests regulators should explore ways to relax capital standards and mark-to-market rules. One possibility is permitting temporary discretionary relaxations akin to stock market circuit breakers.

    Later, regulators must tackle the underlying problem of price bubbles. Currently, central banks are only able to control bubbles by torpedoing the economy with higher interest rates. New flexible measures of control are needed. One proposal is asset-based reserve requirements, which systematically applies adjustable margin requirements to the assets of financial firms.

    The Federal Reserve must also lower interest rates, and not just for standard reasons of stimulating spending. Lower short-term rates are needed to make longer-term assets (including houses) relatively more attractive, thereby shifting demand to them and putting a bottom to asset price destruction.

    Fears about a price-wage inflation spiral remain misplaced. Instead, the threat is deep recession triggered by the liquidation trap. If inflation is a wild card, now is the time to use the credibility the Fed has earned. Emergency rate reductions can be reversed when the situation stabilizes.

    The great irony is central banks can produce liquidity costlessly. Usually the problem is restraining over-production: today, it is overcoming political concerns about “bail-outs”. Those concerns are legitimate, but they also risk inappropriately restricting liquidity provision and unintentionally imposing huge costs of deep recession.

    At the moment the Fed is protecting banks and the treasury dealer network but leaving the rest of the system in the cold. That is perverse given how the Fed went along with expansion of the non-bank financial system. Instead, the Fed should consider an auction facility that makes longer-duration loans available to qualified insurance and finance companies too.

    The facility’s guiding principle should be an expanded version of the Bagehot rule. Accordingly, the Fed would auction funds at punitive rates, with loans being fully collateralized. The goal should be to facilitate repair of distressed financial companies with minimum market disruption and at no taxpayer expense. By creating an up-front facility, the Fed can get ahead of the curve and reduce need for crisis interventions that are always more costly and disruptive.

    Among financial conservatives there is a view that financial markets deserve punishment for their “sins” and only that will cleanse them. This view is often presented in terms of the need to restore market discipline and stay moral hazard.

    The view from the left is strangely similar, arguing Wall Street “fat cats” need to be punished. Asset prices should fall, banks must eat their losses, and all but the most essential financial firms should be allowed to fail.

    Both views have a moralistic dimension, and both risk unnecessary economic suffering. The mistakes of the past cannot be undone. All that can be done is to minimize their costs and then truly reform the system so that they are not repeated.

    Thomas I Palley is the founder of the Economics for Democratic and Open Societies Project.

    There is bipartisan support for that position now-,27753,24370562-31037,00.html

  6. AR, please reread the post. I agree that the typical exposure is of the order of 1 per cent of the notional or less, which is why I talked about losses in the range “tens of billions to trillions”.

    To give an idea of the arithmetic, 0.1 per cent of outstanding swaps is $300 billion, which sits neatly in the (log) middle of this range.

  7. 1. I’d agree that chaos is the right word. But what are the attractors in the system in question?

    2. The quote contains numbers with $ signs. You call them notional values. To illustrate how one can generate these notional numbers I am going to ‘financialise’ my household economy’ for illustrative purposes.

    My husband and I issue securities against all our real assets (from toothbrushes to …I won’t tell you), according to the ownership distribution between ‘him and her’ as determined at the time of acquisition. We are free to write any financial contract (with respect to time, borrowing and lending rates of real assets, conditions upon which a security is redeemed, etc) and we denominate the face value of the financial contract by putting an $ sign in front of the number and we agree that all trades have to be settled (redeemed) by means of issuing other securities or pay in ‘cash’ (ie government issued fiat money which also bears the $sign. All our activities in the household have to hence forth be consistent with the financial contracts. For example, the timing of usage of the bathroom has to be consistent with the financial contracts. Of course we are allowed to place bets on our respective financial commitments re usage of the bathroom by means of issuing put and call options, futures, as many as we like (including so many as to get back to where we started from). To be ‘objective’ and ‘transparent’ we agree to pay a fee (in ‘real’ $) on all financial securities issued to an ‘independent’ agent called a rating agency and we pay a fee for a financial accountant to ensure transparency. Suppose we started in or around 1982 and by 2002 we add up all the ‘values’ we have created by that time (of course net of all securities which have been redeemed during the process. Then we would arrive at a $ number which is ‘huge’.

    Please don’t tell me this is stupid – I know that. But why do people do something very much akin to what I have described only because there are more ‘players’ involved?

    The story isn’t finished. Suppose him and her get it so wrong that at least one has to borrow in ‘real’ dollars (fiat money), or, worse still, all energy has been spent on writing contracts, properly certified and risk assessed on the basis of reports provided by the accountant that all real assets have deteriorated including no more veggies in the garden. Then both have to borrow in ‘real dollars’ to buy consumables. And this is the stage we are at. (… I forgot the fees for the corporate lawyers).

    3. I agree one can’t solve the problem by the same methods by which they were created.

    4. Question: Would it be sensible to look for the critical numbers in this system to reduce spill over effects into the ‘real economy’ – a plan B, so to speak, just in case the mess is even bigger than imagined. By ‘critical numbers’ I mean financial contracts that are seen as useful for the real economy (housing loans, commercial loans to non-financial institutions, deposits, plans for business expansion, superannuation funds invested in equity valued in some to be determined sensible way) – the sort of stuff that can easily be related to the real economy, defined as {people, resources, technological know-how}. Sort all securities into ‘useful’ and ‘foam’. It seems to me this might reduce the complexity of the problem significantly.

    To illustrate, the critical numbers to get out of the mess of the hypothetically financialised household economy are: $ amount of net borrowings in real $ (as defined) and job opportunities to pay off the debt and live. (Burn the box labelled ‘foam’ – sorry, environmental concerns require recycling and the hope the next potential revisionist guru on a mission won’t discover the pieces and learn from it such that in another 70 years or so the next generation has to go through it again)

  8. “It is very easy to trade a prediction that things will get worse, better, or stay the same.”

    Umm, not really. I’m out of stocks and the US and UK authorities have banned shorting of financial stocks. There’s no point going in to the CDS market (assuming a retail investor could do so) when your counterparty might go broke and default.

    So, how should I trade a prediction that things will get worse for the US financial sector?

  9. Kenneth Rogoff, professor of economics at Harvard University and former chief economist of the International Monetary Fund, thinks the financial crisis will cost American taxpayers between one and two trillion dollars.

    He writes in the Financial Times:

    “Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.”

    That’s a massive increase, and it’s going to effect everyone somehow.

    “A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

    The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.”

  10. JQ,

    “So, how should I trade a prediction that things will get worse for the US financial sector?”

    It doesn’t need be shorts. You can still sell futures or buy puts very easily. If you think there will be a big move I suggest buying puts because you don’t have to worry about margins. You can trade on whole sector or individual stocks. If you’re serious get in touch and i’ll give more specifics. There are some very large potential returns if the state of the world you are forecasting eventuates.

  11. Re 11: JC, Why should “A” buy and pay for a put on a security at t which “A” expects to be delisted at time t+1?

  12. I have to agree with #11. It would be both easy and comparatively cheap, even for a retail investor, to get exposure to a trade that would most probably offer spectacular returns should the state of the world JQ is forecasting eventuate.

    Btw, John why is your website so slow?

  13. The other big risk for someone wanting to bet against financial corporations is that of a massive all-purpose government bailout, which now appears to be on the cards. I think I will stay on the sidelines.

  14. John could easily sell futures and then bleed to death on margin calls before his prediction comes to fruition, even if he is ultimately right.

  15. John,

    Don’t be discouraged! You can buy calls on the other side as well so you make money in the event of large bailout or a large crash.

    If you’re worried about that you buy options instead. Set and forget!

    I’m not sure what you mean. The option still pays if the company goes bankrupt.

  16. Joseph, a combined put and call is effectively a bet on volatility, and the market has already priced in an awful lot of that.

    And to both you and tintin, tu quoque (translating – if you’re so confident, why aren’t you going into debt to buy the stocks of the remaining Wall Street investment banks so you can profit when the market comes to its senses).

  17. JC. assuming the writer of the put is a financial institution that is still still liquid. So you have in mind a case where the put is on an operating company (non-financial). However, a major part of the current problem is with the financil institutions.

    Exactly, you can buy calls and puts to cover, assuming the writers remain liquid. For the rest see my hypothetical financialisation of a household economy.

  18. John, re your update on the bail-out. Rest assured Ben Bernanke (BB) will do absolutely everything he can to rescue the US economy and in doing so the US banking system – even if it comes at great expense to the US taxpayer. He is known in the markets as “Helicopter Ben” for a good reason.

  19. John,

    My portfolio reflects my views. I’m not requiring that other people do the same as me, I just think it’s strange that people with strong views are not prepared to trade on them.

  20. Quote: “I just think it’s strange that people with strong views are not prepared to trade on [their strong views]”

    I’m as subject as anyone else to a false consensus bias, but I’m still rashly tempted to think that (a) that most people around the world would find this an unintelligible sentiment, and (b) the fact that some people do feel this way could well have a great deal to do with some of the various messes we’re in.

  21. The greater risk to any remaining form of controlled crash, redemptions and panic, was brought home in one those quite moments as I was tugging the forelock to the customer service officer in my local bank yesterday afternoon. I could not help but overhear some of our more elderly and it would seem surprisingly wealthy octagenarians seeking advice and wanting to transfer very large sums out of Goldman Sachs into the their safe Aussie bank. Hmmmm!

  22. i think its strange in the reverse sense joseph,

    that somehow you are precluded from giving an opinion or that your opinion is somehow worth less if you dont gamble on the share market

    i think its the worse time in a hundred years to own shares, if i had any i’d sell them,

    somehow betting on this opinion seems to against the logic of the opinion

  23. Joseph, as Ernestine pointed out, you’re ignoring counterparty risk.

    You’ve also tried to introduce options as a way of avoiding the margin call risk that sdfc pointed out, but now you’re ignoring the theta (time decay) of the options, and still ignoring the counterparty risk.

    Good luck with your portfolio, dude.

  24. tin tin, thanks for the reference to the Canadian exchange. Interesting, my question was also in the ‘question of the month’.

  25. Off-topic but is Rudd setting himself up for ridicule? Next week he will address the UN General Assembly to announce Australia will lead research efforts into large scale clean coal, regarded as a technological fantasy by serious observers.

  26. Hermit, carbon dioxide sequestration is looking a lot more credible than it was a year or two back.

    There are several groups claiming to have significantly improved the efficiency of the carbon capture process and there’s also been progress on locking the stuff up chemically rather than simply pumping it underground.

  27. SJ,
    If you want to eliminate counterparty risk and still make a downwards bet you can short sell. Borrow the stock (there are many that do it) for a period of days or months, sell them up front and then make money when you buy them back later to repay the initial borrow. Same as buying a put, but the whole market then becomes your counterparty. If the stock is worthless then you do not even have to replace the borrow.

  28. The U.S. government is now getting paid to borrow money. And it should borrow lots of it, Treasury bills at 0% should fund the bailout of the computer modeling pseudo-capitalists

  29. If I might comment on Hermit’s off-topic #29. Yes, Rudd is illustrating his scientific and economic ignorance by pushing “clean coal” technology. Either that or he is pandering to the coal interests whilst knowing the path is wrong.

  30. JQ,

    I have trouble believing that there could be such a large amount ready to fall over. 300 trillion is the full value of 800 million 500 thousand dollar homes. So that would imply that there was a home and matching commercial property mortgaged to the hilt for every single american times 2. Have these people been trading in the finance of Europe as well?

  31. Pr Q perhaps Rudd’s clean coal initiative is a big topic for next week if it becomes an international embarrassment. The linked article is thorough so I doubt Rudd has anything new up his sleeve.

  32. “being engineered by Treasury Secretary Hank Paulson, Federal Reserve chairman Ben Bernanke and Congressional leaders “would represent perhaps the biggest intervention in financial markets since the 1930s.” The NYT, ahem, believes it could even “become the biggest bailout in United States history.” Period. The NYT writes, “while details remain to be worked out, the plan is.. ”

    while you guys argue about just how many financial angels can dance on a pinhead, the american ship of state is exhibiting stability failures that would preclude even liberian registration. i realize your focus is a mixture of academic preening and searching for the car keys under the street light, but don’t any of you mighty intellects think about the design and operation of financial systems that need not function as a mixture of ok corral, gang-rape, and lottery?

    why is there no public discussion of the merits of socialism? or democracy? not even from ‘democratic socialists’…

  33. “why is there no public discussion of the merits of socialism? or democracy?”

    Because its a theory that has been falsified.

    Democracy is the reason we will recover over time, what democracy does is enforce a contract and deliver property rights, this is what our free markets combined with capitalism needs.

    What has happened here is not capitalism, capitalism is about taking risks, these buffoons believed they were operating in a risk free/reduced environment, which they were not.

    That environment was created for them by very clever people who thought they could know the unknowns (as mr Rumsfeld said) ..and created computer models that pretended to support this stupid idea.

    All the experimental evidence says, when humans think they are in a safe environment they take more risks, and this is what happened on a gigantic scale.

    at the heart of all this, is not greed, but Pseudo-science.

  34. Falsified? Just like public beaches, libraries, roads, and parks?

    What is pseudo – science is capitalist based usury systems.

  35. Further to John’s update, the US government is effectively extending government deposit insurance to money market funds by pumping $230 billion into merchant banks to be used to buy illiquid assets from the funds so they can meet investor redemptions.

    Having set the precedent, like Fannie Mae, money market accounts now have an “implicit government guarantee”

  36. “Falsified? Just like public beaches, libraries, roads, and parks?”

    Actually, the theory that public beaches, libraries, roads and parks do in fact exist is supported by quite a bit of empirical evidence. It would be difficult to falsify the ‘beaches exist’ hypothesis. Sorry, what was your point? That socialism = public ownership of public goods?


  37. off-topic #29

    The coal industry is now in a bit of a bind, do they come out and say clean coal is nonsense and argue against carbon trading, or do they suck it up.

    I think it’s just like the GST, to get the thing up a few things that don’t made sense will be done to outflank the knockers. I think it’s called politics.

  38. Ian, a whole lot of words have become meaningless. But I think we should try to reclaim some of them from meaninglessness. Neoliberal is one that ought to be wrested from the control of Naomi Klein fan club. Fascist and socialist are probably too far gone to ever make them useful in intelligent conversation.


  39. The gold standard is long gone, now it’s only paper, as long as the fed (or whoever) can pull the money back when the private sector gets over itself they can add liquidity as desired. The way they get the stuff back is to lend not give it away. What they get as collateral really only effects pull back leakage.

  40. That seems to be the rub; all the chit chat in the world dont mean diddley squat unless you are prepared to back it up with cash.

  41. Andrew

    The short sale suffers from the same problem as the futures trade, i.e. you might eventually be right, but you can still get wiped out in the meantime. Like, you sell mac bank at $26 and the next day it’s at $36.

  42. I don’t think there’s a serious problem in understanding either “neoliberal” or “social democratic”, and since these terms span the effective spectrum of debate here, that’s all to the good.

    Not to say that each of these terms doesn’t cover a wide range of political positions, but I know what to expect when I see them. But “conservative”, “liberal” and “socialist” are not nearly so satisfactory.

  43. I must say it is bizarre to put up a post saying, in essence, that financial markets are irrational and corrupt, and then to be told that, if I really believed this, I should go long in financial market futures on irrationality and corruption (presumably, if I’m really serious, taking on debt to finance this).

    My financial policy, which I think is consistent with my position on likely outcomes is to get as far away from risky financial products as possible.

  44. What does GWB’s announcement on the news that the US Govt was taking over the bad debt mean? Everyone’s mortgage belongs to the US?

  45. re 50, I was interested in your comment, and it seems to me looking and Russia, China ect that the new cold war, or the new ideological debate is now between state capitalism and liberal capitalism.

    Mind you, words are one thing and deeds are another, if Soros believes his own views about open society and capitalist fundamentalism he would not decamp to Singapore would he?

    re, BBB what has public spaces and amenities got to do with Socialism?

    In the city I live in, Sheffield UK, my local park was built by the local gentry as too the library with in it, the school opposite was also financed by him.

    The reservoirs and water systems, city hall, and the first roads where all built by private money in the late Victorian period, and not to forget the local hospitals, and the railway, and most of the pubs I go into was built by private capital, as well as the first street lighting system, the first gas supply system, and the large national parks, in fact the UKs National Trust (which is not a state body) runs and opens to the public most of our heritage sites.

    In fact what did Private capital ever do for us hey :0)

  46. Some “socialists” will attack the religious fervor that people will defend free markets but will generally do so by invoking the “evilsâ€? of capitalism.

    Am I being too ridiculous suggesting that sometimes and in some areas it is better to leave economic agents to make their own choices at other times and in other areas it is better for government involvement/regulation.

  47. “Am I being too ridiculous suggesting that sometimes and in some areas it is better to leave economic agents to make their own choices at other times and in other areas it is better for government involvement/regulation.”

    No, you’re being a social democrat.

    Welcome to the club.

  48. @52

    It means the US is essentially acting as lender of last resort.

    It’s offering to buy something like $800 billion worse of mortgages (residential mortgages in the US are worth around $10 trillion but the Feds may also be buying some commercial mortgages.)

    The fundamental current problems is with house prices falling and banks going bust no-one is really certain what mortgages are worth – what percentage will go into default and what proportion of the loaned amount will be recovered.
    Consequently no-one wants to buy mortgages.

    Because banks, insurers and other financial companies bought hundreds of billions of dollars worth of mortgages (or loaned money against mortgages or insured mortgages against default), they have much of their total cpaital tied up in these assets of questionable value.

    That means they can’t lend, (many of them also can’t borrow because their own balance sheets look shaky). Seem of them, like the money market funds are having trouble coming up with cash as investors withdraw their money.

    The mortgages the US government is buying will most likely be held for a couple of years then progressively sold off.

    If past bail-outs are anything to go by, the government might even make a profit.

  49. All capitalism is state capitalism, at least since the 30s.

    Anglo-American “New Right” economic philosophy pretends otherwise. But this week is the climax of their grand experiment, when the mask falls off and we see it for the perverted mockery of ‘redistributive’ socialism that it is:

    Here are some excerpts from the bill.

    (a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

    (b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

    (1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

    (2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

    (3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

    (4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

    (5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    One last hurrah from the Republicans – a final orgy of looting on their way out.


    The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

  51. Ian (#56),
    Whether he is being a communist, socialist, social democrat, libertarian or something else cannot be determined by the statement he has made of his beliefs. The only thing that can be determined is that he is not being an absolute centralist or a complete anarchist.
    Any other political beliefs can be encompassed within that statement. The question is just down to degrees within the very wide spectrum given.

  52. I refer to Gerard’s post #58. If that bill is not unconstitutional and/or rejected by the representative house it simply demonstrates once again the seriously deficient nature of the US Constitution and system of government.

  53. Ikonoclast,
    While I do not disagree with you for the most part, the first and last paragraphs of #58 are simply wrong. The House and Senate are controlled not by republicans, but by Democrats. This bill, if presented, can only be passed on their say-so.

  54. if the senate can condone the war on iraq, the house must surely be capable of liquidating the fig-leaf of viable capitalism. a nation that has a dubya must be presumed capable of any irrational act you wish to nominate.

    just as they call america’s political system ‘democracy’, they will call state management ‘capitalism’, with rather more justification. the pirates will have to find new financial seas to plunder, but they came back from the s&l setback with the even more creative sub-prime gambit, so there’s no reason to imagine that they will suddenly change their spots.

    incidentally, socialism is not quite dead, the swedes enjoy a very high standard of living, and democracy still exists in switzerland, and they live even better.

  55. Fiat currency is a social construction, its is based on a system of trust, The government under this system is really acting as the underwriter of that trust, thus we have choose one option, print lots of cash to restore trust (in the short term and hope to deal with the problem in the long term) or let lack of trust destroy the system.

    Conservative ideology (if there is one) is alive and well (here defending the customs of the financial industry) And make no mistake this is no socialism in this intervention.

  56. it’s not socialism if it redistributes upward.


    trust that government bonds are backed by the government is one thing. trust that monster speculative bubbles will be backed by the government is quite different.

    congress had better reject that ‘blank check’ bill but they probably won’t – short of a massive public outcry. reports are that congressional leaders were suitably ‘shocked’ following a presentation by Bush’s economic team claiming that the world was coming to an end. taking advantage when everybody is in a shocked daze is the modus operandi of the looting class.

    I can see them guffawing to themselves, as they make their getaway in a car stuffed full of dollar-sign sacks. “let the black boy clean up the mess!”

  57. “Fiat currency is a social construction,”

    So is gold-backed currency based as it is on the socially-determined value of gold and trust in the capacity and willingness of the issuer(s) to redeem their specie.

  58. “So sean, nationalising businesses is not “socialismâ€?? What, pray tell, is it then?”

    Sean ios GOOD. Socialism is BAD.

    Sean approves of the bail-out, therefore it must be GOOD.

    GOOD and BAD are opposites, therefore logically the bail-out can’t be socialism.

    Next, why Achilles can never catch the turtle.

  59. gerard,
    In that case full socialism itself has never existed on the planet and, to paraphrase PrQ on libertarianism – “socialism is unsullied by any real experience”. What everyone calls socialism has, whereever tried, resulted in the enrichment of a ruling class and the beggarment (or death) of everyone else.
    Social democracy has, on occasions, managed to do better.

  60. AR are you going to become a social democrat now that your philosophy has been consigned to the dustbin of history?

    Ian, what’s my preferred alternative? Surely you’re not saying that there is no alternative to this bill. What could be worse, seriously, than giving the B*sh Administration, in its final months, a blank cheque to throw as much as they want at the financial industry? After the last 8 years of the worst government imaginable!!! Could there be a more terrible idea than that??

    My preferred alternative isn’t the point. But for what it’s worth I say destroy the whole thing and start from scratch.

  61. It’s going to be a wash, gerard. The massive government interventions, many championed by the left, that helped cause this crisis (massive monetary expansions, the CRA, the GSEs, the U.S. Department of Housing and Urban Development’s forcing of the GSEs to take on subprime home loans, the way that Basel II treats home loans generally, etc.) will be done away with, and the risk-management practices of key financial intermediaries will change, both voluntarily and through a new round of fairly light-touch regulation. The upshot: neoliberalism unscathed, both in theory, reality and within the minds of the reality-based community of liberals. Socialists and social democrats will, once again, be sorely disappointed. I can’t wait!

    As for starting from scratch, can I assume that you’ve got in mind a fantastic government body that will determine who gets what? LOL.


  62. Yep, a fantastic government body could, I’m sure, do better than the cocaine snorting psychopaths who created this monster.

    First priority of this fantastic government body will be the world food crisis – remember that one? I didn’t hear much talk of a trillion dollar bailout from mass starvation, so let’s get our priorities right here!

    As for neoliberalism emerging unscathed – we’ve already established that you don’t even know what that word means, you think it is the same thing as ‘capitalism’. This is the full stop – a TRILLION DOLLAR GOVERNMENT BAILOUT. The grand finale of the New Right, in the decade when it has taken Corpo-Right policy to the utter extremes, and you’re prepostrously trying to blame this on the left! What bloody left???

  63. “As for neoliberalism emerging unscathed – we’ve already established that you don’t even know what that word means…”

    Ha ha. Sigh, no. Only in your deranged mind. Do I need to go get you the Washington Consensus paper (again) (the left has got it right that the set of tenets now called the Washington Consensus is useful shorthand for neoliberalism in a global context, but it remains unsatisfactory in relation to domestic policies that have economic liberalism at their heart). Aren’t you the one who thought neoliberalism and libertarianism were the same thing, and then after I set you straight said that libertarians ought to find neoliberals abhorrent? And I haven’t forgotten your absurd charge that I believed China to be a neoliberal place (!) just because I pointed out that economically liberal ideas had reduced poverty on a massive scale there (this might be a useful point at which to tell you, again, that ‘neo’ means ‘new’, ‘liberalism’ means ‘liberalism’).

    “…and you’re prepostrously trying to blame this on the left! What bloody left???”

    Not all the blame. Just a decent chunk. We can’t deny that poor risk management and greed on the part of Wall Street-types was a very significant contributing factor. As for who ‘the left’ are, how about the left that created and maintained the GSEs, the left that championed the CRA, the left that forced the GSEs to take on subprime debt, thereby expanding the market for such lending… and on it goes. Just to give you a flavour for the negligence of the American left on this:

    “Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

    The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.�

    Proposed by the Bush administration in 2003, opposed by Congressional Democrats: “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,â€? said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.â€?

    But we can’t be biased about this. Check out the Bush administration’s incompetence:

    “In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

    Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more “affordableâ€? loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.”

    Final question: why does the left never take responsibility for its actions?



    I believe I answered everything you have to say about neoliberalism in relation to ‘libertarianism’, the ‘Washington Consensus’ and China on the other thread. Anyone who wants to can read it and decide for themselves who is deranged.

    So now you are calling the Wall-Street owned Congressional Democrats ‘the left’? If that’s ‘the left’ then God help us all. They’d be laughed out of any other developed country. America doesn’t have a left, its political spectrum has been shifted so far right it’s fallen off the edge – that’s why its government is trillions in debt, pouring money into foreign wars while millions of Americans are one illness away from penury (thanks to the Bankruptcy Bill that the ‘left’ democrats helped pass). Remember it was Clinton to was praised to the neoliberal heavens for his ‘Welfare Reform’ by the same people who are now praising the biggest act of Corporate Welfare in world history.

    At any rate, the Democrats were totally out of power in every branch between 2002 and 2006, which makes trying to blame them for this mess pretty lame even by your standards.

  65. “Ian, what’s my preferred alternative? Surely you’re not saying that there is no alternative to this bill. What could be worse, seriously, than giving the B*sh Administration, in its final months, a blank cheque to throw as much as they want at the financial industry?”

    Gerard, I’m not defending he status quo – as anyone who reads this blog should know I’ve been a bitter critic of Bush’s economic policies pretty much from Day One.

    Where we differ is that you apparently think the alternative is “socialism” – a term you won;t (or can’t) define in this context.

  66. I don’t want to define “socialism” because I agree with you that the term has largely become devoid of meaning over the last hundred years. I mean, if we mean that socialism means trillion-dollar government interventions in the economy, then socialism is what we have already – socialism for the rich. I would just like to see some of the same generosity directed at those truly in need – even a tiny fraction of this type of money could make an enormous difference to millions of people’s lives. Yet nobody would even consider it, even as they chuck hundreds of billions at planet Earth’s least deserving inhabitants. What type of upside-down world is this?

  67. gerard

    “At any rate, the Democrats were totally out of power in every branch between 2002 and 2006, which makes trying to blame them for this mess pretty lame even by your standards.”

    I thought as much. 80 solid years of government intervention since FDR’s state monopolisation of the secondary mortgage market (hey, do you think it’s OK to call FDR ‘left’?), but because the Republican’s didn’t unwind it all in four short years between 2002 and 2006, they are at fault. This is precisely what I mean about not taking responsibility. You need to understand that the industry structures that contributed to this mess were proposed, implemented and maintained by the American left, both in Congress and in executive administrations, mainly in the name of affordable housing for disadvantaged minority groups / low income earners. Yet another set of misguided and counterproductive social policy from the left… Actually I think you do understand this, but are pretending not to.

    And you’re not fooling anyone with this ‘the left doesn’t exist in the US’ stuff. It’s amusing: you rail against others for resisting your definitions of certain political philosophies, and then simply (and bizarrely) define the left out of existence in America. It’s heroic stuff, even for you.


  68. And Christ, how hard is it to define socialism? It is state ownership (in substantial majority or in full), and state control of, the means of production and distribution. Simple.

    In this context the term has limited application because of course under socialism there is no need to borrow money to buy a house – one would be assigned to you – and therefore no need for anyone to buy the mortgage, package it into a guaranteed security and onsell it. There would be little to no ‘finance industry’.

    I think your problem, gerard, is that you think socialism is about redistribution to the poor. To some extent it is: usually there is an initial notional re-distribution (because of course the poor go from owning very little to owning absolutely nothing as private property is outlawed) but in the long run it is just equality in poverty. However the main game is a different kind of redistribution: straight up to the Party leadership and its mates. The kicker is that any real-world implementation of socialism necessarily involves totalitarianism.

    The term ‘socialism’ has become devoid of meaning only for those who want to pretend it hasn’t been a monumental failure, which has brought misery and death to millions.


  69. To repeat a very recent comment, the reason I use “social democratic” to describe my position is because it covers a reasonably well-defined range of policies actually adopted in developed democracies, as does “neoliberalism”. On any reasonable interpretation of the terms, the US follows neoliberal policies while most EU countries are predominantly social democratic. In this sense, recent events represent a failure of neoliberalism.

    If you want to use terms in such a way that no developed country satisfies them, feel free, but be aware that your discussion is irrelevant to reality.

  70. jquggin, in what sense does the maintenance of the GSEs and their forced absorption of higher-risk mortgages represent neoliberalism?

    Your comment seems the one not quite in touch with reality: any country will have a mix of policies, some corresponding to economically liberal thinking, some corresponding to social democratic thinking. The ‘predominance’ of one or the other in an economy is neither here nor there if the problems at hand arise in a particular industry or sector. I mean, in Australia we have an economically liberal food market, but largely socialised health care. I presume that you wouldn’t blame liberalism for a systemic breakdown in our hospital system. Similarly, the problems confronting the American finance industry are in part a product of a highly regulated housing market, with substantial levels of government interference that encouraged risky behaviour. These effects are a direct result of social democratic thinking: using the state to shape the market so that disadvantaged is ameliorated.


  71. “I thought as much. 80 solid years of government intervention since FDR’s state monopolisation of the secondary mortgage market (hey, do you think it’s OK to call FDR ‘left’?), but because the Republican’s didn’t unwind it all in four short years between 2002 and 2006, they are at fault.”

    yes, I could call FDR ‘left’. So that’s how you’re managing to blame the left now – 2008 Wall Street Crash, and it’s FDR’s fault!!!

    Look at yourself.

  72. Anyway, if chucking a trillion dollars of government money at the financial industry isn’t socialism what is it? just plain old theft? I guess it’s not socialism if the government doesn’t take over all the companies that it’s bailing out. Maybe it should, then taxpayers would have something to show for all this money. As it is, it’s just plain income redistribution from the many to the big-time g*mbling few.

  73. BBB, if you want to keep “neoliberalism” pure and unsullied by actual experience, let’s just call it “the US model, early C21”. Whatever name you call it, it’s failed badly here, and those who made triumphalist claims about its capacity for financial innovation have been proved wrong.

  74. gerard, you are now making a terrible fool of yourself.

    I said 80 years of government intervention since FDR, not by FDR (although he did create Fannie Mae, so I suppose at least some blame must rest with him). Did you know that FDR died in 1945? No, it is the long-term championing (i.e. maintenance, as I said) of these structures by the left (in the name of re-distribution) that is the problem, coupled with a non-liberal political structure in which the government reserves the right to meddle in everything, creating an environment in which particular corporate interests (e.g. the management and shareholders of the GSEs) unduly influence the regulatory framework.

    Once again you have been caught out trying on a desperate debating trick… puff puff.


  75. jquiggin, we already know what a social democratic financial crisis looks like: Sweden in the early 1990s. By the logic of your ‘predominance’ theory, you ought to concede that those events represented a massive failure of social democracy. Do you?


  76. PrQ,
    I would agree that the model used in the US is causing real problems. I would just not agree that, particularly in the financial markets area, that it is in any material way, “neo-liberal”. For example, which neo-liberal do you know that has argued that the largest buyers and sellers of mortgages should be Government Sponsored Enterprises? That there should be multiple regulators with often conflicting priorities? That those regulators should be actively fighting amongst themselves as to what the framework of regulation should be? That all commercial banks must purchase deposit insurance from a single, government supplier? That the government should have a strong role in directing credit?
    In short, can you name a single “neo-liberal” that has ever argued that the US banking system is a paragon of regulatory virtue? Ever? Anywhere?

  77. I know FDR died in ’45 which makes blaming him for this crisis so ludicrous. Yes, he created Fannie Mae and presided over the greatest improvement in American’s standards of housing every. there were never any problems with financial speculation while Fannie Mae was a government agency (before ’68). this sort of thing never happened between 1929 (the last time Republicans were in charge of everything) and NOW (although there were hints of it under Reagan and S&L, another grand act of theft, but nothing on this scale).

    Since the 1980s, unless you’ve been living on the moon, the “New Right” has been stripping away at the regulations that were brought in during the New Deal, precisely to avert this type of thing from happening. Now we’re back at square one, with the same type of financial crisis that made the New Deal necessary in the first place. You want to blame everybody except the people who were in charge. It’s a textbook example of cognitive dissonance.

    I noticed you mentioned ‘redistribution’. Wouldn’t you agree that this bail-out is an act of ‘redistribution’? But upwards redistribution is the type that you guys can’t get enough of! Veto healthcare for poor kids – but bring on the Welfare Flood for Investment Banks. It’s sick!

  78. BBB, I take it you’re support the Plane Crash/Trailer Trash ticket this year (apologies to residents of trailers). God forbid those radical democrats take control – if the last 8 years has taught us anything, it’s that only Republicans can clean up this mess that FDR made 80 years ago.

  79. gerard, wrong again (you’re making a habit of this)!

    I don’t like the Republicans anymore than you do. They are: pro-life, pro-religion, prone to accepting corporate welfare, incompetent in the extreme when it comes to foreign policy, etc. So I am opposed to their programme on a number of fronts. And your intellectual deficiencies are shining through again: “liberalism = conservatism = Republicans!” Wait, don’t tell me: “There’s no difference between modern liberalism and modern conservatism, BBB!” LOL. I blame Naomi Klein for this shallowness.

    Listen to Andrew R, gerard. You might learn a thing or two beyond your sad grand narratives which are bereft of nuance, and therefore accuracy.


  80. Interesting to point out that B*sh came to power with a program to dismantle what was left of the New Deal by privatising Social Security. He has always claimed it to be long-term unaffordable, and the only way to guarentee retirement funds was to have them casinoed on the stock market. The same stock market that has just wiped itself out. All part of the plan? Taking on another trillion in debt to bail these folk out will have serious consequences. They can’t destroy Social Security by openly, they’re just going to engineer as big a fiscal crisis as they can, just so that they can argue that it’s unaffordable, while “making permanent” a huge swathe of tax cuts to the very same gamblers. Who knows what will happen next, I don’t understand what’s going on but I know it could get much worse. People who were talking about this sort of financial crisis were being mocked quite recently. It’s gotten this bad, but how much worse can it get? You thought the stock market was a house of cards but when you look at it, does a dollar crisis sound that far-fetched?

  81. gerard,
    How about trying to restrict your tendencies to grandstand and actually trying to answer a few points? Who knows, you may actually come to understand a few of the points you are making. OTOH, you may be able to convince us you have a clue. It’s possible, but with comments like the above, I doubt it.

  82. gerard,
    Your comment did not answer any of the points the BBB or I had made – so there seemed little point in making any more points. Rather than grandstanding (yet) again, please try to actually read any of the comments, think about what we are saying and either expressing agreement or bringing up points that actually address any of the points we have made. You know, make an argument.

  83. “At the time that Fannie Mae and Freddie Mac recruited Mr. Davis to run the Homeownership Alliance in 2000, they were under new pressure from private industry rivals and deregulation-minded Republicans who argued that the two companies’ federal sponsorship gave them an unfair advantage and put taxpayers at risk.”

    Yeah, idiots! Oh, wait…

    Amusingly, your link demonstrates a few things that are opposed to your thesis, for example:

    (1) Republicans were opposed to the GSEs abusing their position to crowd out private interests;

    (2) Republicans correctly identified that the GSEs’ size and funding arrangements (proposed and championed by Democracts (also known as the American left in the reality-based community)), coupled with the implicit government guarantee that attended such size, endangered taxpayers;

    (3) Republicans correctly identified that the GSE’s government-mandated expansion into higher-risk mortgages would expand the market for such lending downstream, threatening the broader financial system; and

    (4) in a system in which particular corporate interests within the financial industry (like the massive left-created GSEs) are able to lobby for regulations that benefit them, rather than one which allows the market to freely operate (in short, a system in which government control is routine), will inevitably damage the the system and the interests of the community as a whole.

    The upshot for geard (quite strangely, yet predictably): a free market has caused this.

    Sadly, Republicans’ efforts here respect were unsuccessful and the GSEs did in fact take on literally hundreds of billions of dollars of loans in these riskier lending classes, encouraging (as the left wanted) lending to relatively disadvantaged home buyers downstream. The results are there for all to see…

    Do you even think about these pieces before you link to them?


  84. the latest Rightwing internet meme is that this crisis was “not because of deregulation, but because brokers were pressured into making loans to “minorities and risky folks”,”. Pressured by who? By ‘the Left’ – exhibit A: The Homeownership Alliance, headed by Mr Davis.

    Ok, so what? It’s not like this guy can represent the values of “the Right” can he now? He’s just a bad apple. Republicans and Democrats are both in the pay of mortgage companies. some Republicans, were in the pay of Fannie and Freddie’s competitors and some in the pay of Fannie and Freddie, like McCain’s campaign manager.

    that’s not surprising, the surprising thing is that you’re saying it’s “the Left” that has to “take responsibility” – so is McCain’s campaign advisor part of the Left now? Does he need to take responsibility? Does the wonderful Alan Greenspan have to take responsibility? Does the Chicago School need to take responsibility? Do the people who turned billions of mortgages into trillions of derivatives take responsibility?

  85. Jeez, gerard. I make it easy for you by deliberately conflating McCain’s advisor with ‘Republicans’ and you blow it. You can lead a horse to water…

    Anyway, you’ve managed to get something right: no one forced these investments banks to take on the risk. They can’t blame anyone, certainly not Teh Left, for their own predicament. But that’s the thing: it’s their predicament. Take a step back and ask: why would such risky behaviour occur in the United States, and not in places like Australia, whose mortgage lending controls (I understand – AR?) are more or less the same. One answer: massive US government intervention encouraged it by creating a conduit through which the risk could be passed (ie. the GSE and their recent role in absorbing hundreds of billions of dollars in subprime debt). Indeed, the state (not the market) required, by way of executive policy, the conduit to be used in this way. Not to mention the CRA, which seems to have played a genuine (but minor) role. These government interventions were, always, a creature of leftist politics. Just look at the quote above from the Democrat championing the damaging government intervention in the form of the GSEs. Wait, no, the Democrats aren’t the left anymore. War is peace, Ignorance is strength, etc.

    “that’s not surprising, the surprising thing is that you’re saying it’s “the Leftâ€? that has to “take responsibilityâ€? – so is McCain’s campaign advisor part of the Left now?”

    Hmmm… this is shockingly obtuse, even for you. No, he is a hired gun. He was able to operate as a hired gun because there was no free market. In a free market, in which government intervention isn’t taken for granted, such lobbying is ineffective. It won’t surprise you to know that liberalism (and, wait for it, neoliberalism) is opposed to such chicanery. Actually it probably would surprise you. But you still haven’t caught on, have you? The measures advocated by McCain’s apparently right-wing advisor would have (inadvertently) helped! The GSEs wouldn’t have absorbed so much high-risk lending, and the market for such lending wouldn’t have been artificially expanded by government decree. And taxpayers wouldn’t be on the hook for nearly as much. Oh, the irony…

    “Does the Chicago School need to take responsibility?”

    Not sure about this one, but I am sure there’s a Naomi Klein book somewhere blaming them. Perhaps you could quote the relevant paragraphs?

    “Does the wonderful Alan Greenspan have to take responsibility”

    What, for the biggest monetary expansion in history and the resulting asset price bubble? Hell yes! The head of an effective government agency he was, wasn’t he? Yes, I think he was. Yet another state failure. And you want the state to run everything? Jiminy.


  86. “The latest right-wing internet meme is that this crisis was “not because of deregulation, but because brokers were pressured into making loans to “minorities and risky folksâ€?”

    It’s wrong, but it’s also a little more credible that the latest leftwing meme that “this crisis represents the end of capitalism”, don’t you think? Wait, don’t answer that.


  87. “1) Republicans were opposed to the GSEs abusing their position to crowd out private interests;”

    Yet mystifyingly they never got around to do anything about it even when they controlled the Presidency and both houses of Congress.

    I guess it’s like their opposition to excessive government spending, George Bush’s promise of an end to “nation-building” and Larry Craig’s opposition to homosexuality.

  88. Ian

    Bush tried to rein in the GSEs in 2003 or thereabouts, but was rolled by Congressional Democrats. Later, Bush’s HUD forced the GSEs to take on hundreds of billions of dollars of subprime debt but not account for it properly. So the administration is clearly at sea.

    The other examples you’ve mentioned merely demonstrate what everyone already knows: the Republicans are not the least bit principled. They are for themselves, their mates, whatever is politically expedient and whatever will mobilise the conservative base every four years.

    And gerard, I do apologise for any confusion I have caused. But really, if a person is hired as a lobbyist to effectively oppose “de-regulation minded Republican” wishes, but then goes on to become a Republican advisor, it hardly makes sense to conceptualise his/her actions as right or left, does it? Much better to think of it as: paid work for Mr X or paid work for Mrs Y.


  89. BBB,
    Australia’s mortgage market is in some ways less regulated than the US and in some ways more. The US has much more directed credit regulations then we do (for example, US banks are prohibited from taking the area the borrower lives in into account) but they are also (slightly) freer to lend on higher gearing. The combination of these two is (IMHO) part of the problem.

  90. Thanks for that AR. Wow, so in the US the state removes their ability of lenders to properly manage risk by prohibiting them from making a full assessment of the borrower? How absurd.

    Anyway, am I right in assuming that a major reason why we in Australia have far less subprime lending is that there is no government-mandated GSE-like conduit through which to pass the risk? Or is it really a function of consumer credit legislation, etc.?


  91. The latest right-wing internet meme is that this crisis was “not because of deregulation, but because brokers were pressured into making loans to “minorities and risky folks��

    No negatively amortised, no-doc, liar loans and no problem. The wonders of “market innovations”.

    Pressured my a$$.

    But of course it was all part of a grand scheme to give poor people a chance to live in a McMansion for a couple of years. Just such a shame they’ll be living in tents for the next ten years.

  92. “Wow, so in the US the state removes their ability of lenders to properly manage risk by prohibiting them from making a full assessment of the borrower? How absurd.”

    No, the state told them that if they wanted to operate (federally-insured) branches in poor black communities and make money from doing so they couldn’t then turn around and automatically reject all loan applications from those same communities without an assessment of the individual borrower’s creditworthiness.

  93. Bush tried to rein in the GSEs in 2003 or thereabouts, but was rolled by Congressional Democrats.

    Bush only wanted to ‘rein in’ the GSE to the extent that the non-GSE mortgage companies (who owned Bush and the anti-regulation Republicans) expand their market share in the then-booming mortgage securities game.

    and how did the democrats manage to ‘roll’ Bush in 2003, when they held no power in Congress?

  94. I’m glad you are willing to assign to Greenspan his share of the blame. But although you may try to disown him, his widely hailed ‘genuius’ represents the best of Chicago School orthodoxy – that the governments should avoid recessions using monetary stimulus and upper-class tax cuts and by fiscal stimulus. the result is that you end up with bigger deficits than anything you’d get under Keynesianism but nothing to show for all the money except speculative stock and real-estate bubbles – precious little investment in infrastructure or productive physical capital. It works out very well for the mega-rich who own most of the price-inflated assets, especially once the bubble pops and the government comes along to rescue them while letting all the millions at the bottom of the heap go homeless and without health insurance.

  95. that should be:

    – the governments should avoid recessions using monetary stimulus and upper-class tax cuts and NOT by fiscal stimulus.

  96. Congressional Democrats rolled him alright. Along with a few Republicans (the former and latter no doubt all recipients of some completely kosher campaign contributions)…

    Again with the lack of responsibility: “We didn’t control Congress, therefore we are not at all responsible for voting against reform. We are not responsible for blocking this in Committee. We are not responsible for our public comments that reform is unnecessary. We don’t control Congress!” It’s absurd, and demonstrates a complete misunderstanding of US Congressional party politics.


  97. A compelling piece, gerard. Thanks. It seems to implicity back the gerard ‘start from scratch’ proposal (although to be fair it’s not clear), so you may have some company on that. Luckily for, well basically everyone, it’s probably only going to be you two.


  98. And gerard, your attitude that if someone disagrees with you, they ‘own’ all opinions and philosophies (and even people) that you disagree with, is revealing. It’s a tell-tale sign of immaturity of argument. While you have shown that you are capable of cutting and pasting arguments from Naomi Klein books (it’s a fair cop – I am obsessed with her) and left-wing blogs, you haven’t quite demonstrated that you are capable of independent thought and the inescapable nuance that attends such thought. Try it. Seriously. I, for one, have faith in you.


  99. why do you have to be so insulting? do you really think that I’m cutting and pasting here, incapable of independent thought? or have you just run out of things to say?

    yes I must admit I am tying you to some well known New Right figures because by that’s the well-understood meaning of the term ‘Neoliberalism’ which you are defending.

    but you don’t want to defend it in practice so you defend it in theory, saying it’s not “real” Neoliberalism, sounding just like an old Trot.

    Of course it’s not real Neoliberalism – nothing is. but maybe if we cough up a trillion to fix up this little hiccup we might be lucky enough to have Neoliberalism live to fight another day, and then maybe one day if the left doesn’t get in the way all the distortions with wither away and we’ll see the real thing.

    go on complaining about people associating you to the New Right while you associate the opponents of the New Right with North Korea, the eastern bloc, and the abolition of private property. and of course the dreaded Naomi Klein, who you mention every second post.

  100. Hey, I’m happy to defend it in practice. 90% of the broader neoliberal programme is encapsulated by the historical economic development of the West over two centuries. This is why I had to point out to you that neoliberalism and social democracy are only marginally different in modern implementation. As we know from the other thread, broadly speaking, neoliberalism seeks the following in a modern context:

    (1) fiscal policy discipline – this is important to ensure that wasteful public spending does not . Disciplined fiscal policy does not preclude borrowing for productive investment. In fact, there is a strong argument that failing to borrow for things like physical infrastructure and structures that improve the stock of human capital. In the long term fiscal policy discipline is highly correlated with economic growth, and therefore less poverty;

    (2) redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment – this ought to be self-explanatory: any moral state must invest for the future and must assist its most vulnerable. However, this assistance should be general and must resist the temptation to protect particular producers or sub-groups of consumers (ie. it must resist the corruption of special interests). Assistance by way of well-designed markets is usually better, since it discourages waste and encourages innovation (see, for example, state-funded but market-based health systems such as Singapore’s). Fully government-controlled assistance is very often effective, but also far from optimal.;

    (3) tax reform, broadening the tax base and adopting moderate marginal tax rates – the elimination of loopholes, special exemptions, etc. means lower business costs (which actually matter), easier-to-understand regimes, and generally higher rates of compliance. Note that business itself is usually for exemptions, since they are in a position to exploit them. This must be resisted. As for moderate marginal tax rates, the science shows clearly that very high tax rates discourage productive activity, and therefore impoverish society.

    (4) interest rates that are market determined and positive (but moderate) in real terms – simple macroeconomic orthodoxy which not even social democrats (I think) worry about these days.

    (5) Competitive exchange rates – see above.

    (6) Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs – trade is one of the greatest forces for good in this world. it unambiguously helps the general citizenry, although of course some capital is opposed to it because it usually threatens some domestic industry. capital has managed to enlist the unions to oppose free trade on the basis of labour protection, when in fact protectionism is really protection of capital. the theory of comparative advantage remains essentially unchallenged, and has been proven correct in practice over centuries;

    (7) Liberalization of inward foreign direct investment – should be self-explanatory. The importation of capital for productive investment always benefits the host country. China is a good example here.

    (8) privatization of state enterprises: in the long-term private enterprises are usually run better than state enterprises. see, for example, the massive improvement in telecommunications where state monopolies were privatised following the introduction of genuinely competitive firms. of course, privatisation is defensible only if there is a true and uncorrupted market for the assets. In Victoria, for example, electricity assets were auctioned at genuine market prices and the people benefited enormously (they are still benefitting from efficient private investment). there may be scope for continuing price monitoring if the commodity is an essential service (although direct assistance to households may be better if competition is fierce enough). natural monopolies are a different matter. there may be good reason to keep these in public hands.

    (9) deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions – if citizens are to get the best out the free market, the state must not impede entry on behalf of well-heeled incumbent firms. This is no small matter. Even generally free societies like Australia and the US are riddled with unnecessary regulations that protect corporate producer interests rather than consumer interests. Note also the last part!;

    (10)Legal security for property rights – no explanation necessary, except to note that this wasn’t a feature in “North Korea, [or] the eastern bloc”

    So there you have it, neoliberalism in a nutshell. Now don’t pretend that this isn’t neoliberalism. Teh Left has been going on and on about the Washington Consensus and the World Bank and the IMF for years, and I’ve just cut and paste the precise policy prescriptions of the Washington Consensus and added some of my own commentary, so there’s no denying it!

    Finally, your comment does raise an interesting question (for me, right now, not for anyone else I’m sure): would you like to be associated with socialism or social democracy (or something else)?


  101. Well (1) is poorly written and incomplete, but you get the gist. Governments should not spend money they don’t have on consumption, but they ought to be free to borrow to invest. That is fiscal policy discipline.


  102. You know, the more I think about it, the more South Korea is a pin-up for (anticipated) neoliberal thinking, despite it’s serious level of government intervention throughout the 1960s and 70s.

    In the 60s the South Koreans:

    (*) accepted that globalised trade was the answer – they adopted export-oriented programmes in line with classic conceptions of comparative advantage, and did away with import restrictions on critical intermediate and capital goods, both of which were almost all imported up until the late 70s (!) (this is a big one – this was probably enough to overcome the damage caused by import tariffs in respect of consumer goods, some of which were produced by the favoured industrial concerns) – see (6) above;

    (*) encouraged private enterprise by providing low-interest loans;

    (*) got rid of foreign capital restrictions, which precipitated a massive and prolonged influx of FDI from Japan, etc., (easily the most important factor in South Korea’s development, something which simply blew away any negative effects of inefficient state direction – easy from the low base) – see (7) above;

    (*) implemented higher positive interest rates to encourage savings (domestic capital);

    (*) significantly reduced both direct and indirect tax rates.

    Of course, they had a massive head start with all the capital that the US pumped in after the war, but still. These factors produced the South Korean economic miracle, but because the government still had its hands all over the shop, the leftists think it’s all an advertisement for protectionism (or even socialism). Many places had the same kind of protectionist attitude (for example, India), but they went nowhere (comparatively) because they did adopt prescriptions (3), (4), (6) and (7) of the neoliberal programme I have set out above. More’s the pity.


  103. Make that “they did NOT adopt prescriptions (3), (4), (6) and (7) of the neoliberal programme…”


  104. would you categorize what J. Quiggin terms ‘the US model, early C21’ as more or less ‘Neoliberal’? If different, would you say that the problematic differences involves an excess of ‘social democratic’ policies?

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