Deregulation

A lot of people, including pretty much everyone in academia, including supposed libertarians in academia, agree that deregulation has been happening.

Everyone agrees that the US banks were “deregulated” – in that a seventeen page law governing their permitted activities was replaced by three thousand pages of laws governing their activities, which three thousand pages were not so much laws, as headings for regulators to title their decisions. It is impossible to say how many pages of regulations were created, since the extraordinary flood of regulations bypassed the normal mechanisms such as the federal register, and consist of all manner of document categories – not only does no one know how much regulation there is, no one even knows how to find all the regulations that there are.

This was indeed “deregulation” in that activities that banks were previously forbidden to do, were now permitted under the supervision of regulators.

And most of these new activities turned out to be staggeringly costly for taxpayers, and continue to be so.

What happened was not that the government got out of the banking business, but that the government got further into the banking business, making case by case banking decisions on the basis of political considerations, and predictably losing money hand over fist. One such set of decisions, one of many, was case by case approving anything that led to more lending to non Asian minorities – which is how most of the money in the US was lost, though by no means all the money. Most of it was lost in the crisis on loans to non asian minorities, and such little of it as was lost on whites, was lost to whites largely as a result of across the board reductions in credit standards partly motivated by desire to benefit the poor in general, but largely motivated by desire to benefit non Asian minorities in particular.

Government decisions are usually incompetent, and on the rare occasions that they are competent, are competently motivated by short term politics rather than long term profit and loss, so if government increases its decision making burdens, it will reliably lose more money and create more havoc. Deregulation is beneficial if it gets the government out of business activities. It is harmful if it gets the government into business activities, if it substantially increases government decision making and government employment, which banking “deregulation” clearly did. If you wind up with more regulators exercising more power, it is not deregulation, or if, in some sense it is deregulation, in that the banks were doing lots of stuff that was previously forbidden, it is nonetheless apt to be massively damaging, for the new stuff the banks were doing was largely motivated by politics, not profits, as was obvious in the activities of those that lost most of the money: Fannie, Freddy, the FHA, Countrywide, and Washington Mutual.

These highly political banks would make politically motivated decisions that were obviously going to lose a bundle and rationalize them on the basis of incoherent politically correct nonsense and magical thinking. When these decisions started to predictably lose gigantic amounts of money, accounting rules were hastily altered to delay reporting these losses, altered for everyone, not just badly run banks – and remain altered for everyone to this day, even though the losses have become obvious.

That the government agencies, Fannie, Freddy, and the FHA would be badly behaved and politically motivated was inevitable and predictable. If you have government agencies playing with large amounts of money, that the money will disappear is inevitable and predictable. Bernanke, however, was piously puzzled that privately run banks, in particular Countrywide and Washington Mutual, would make decisions that were going to lose colossal amounts of money.

One might suppose that Countrywide and Washington Mutual made million dollar loans to people with no income, no job, no assets, and no credit rating because the government had changed the rules to allow the banks to unload these loans onto some other sucker, that other sucker usually being Fannie or Freddy, but the worst behaved banks, Countrywide and Washington mutual were not able to unload all their dud loans onto some other sucker. When the state of the loans could no longer be denied, Countrywide and Washington Mutual, and a great many other banks, went down with their loans.

Rather, it was in large part the other way around. Banks made politically motivated dud loans, then begged the government for ways to unload those loans on some other sucker.

And why did they make politically motivated loans? Partly it was that the CRA mandated politically motivated loans. Partly it was political correctness. The regulators demanded not merely politically correct behavior, but also politically correct belief, demanded holy zeal for the true faith, and got it. Partly it was that the leadership of Countrywide and Washington Mutual did not rise to the top by pleasing shareholders, but by pleasing regulators, and in large part, by pleasing regulators with the purity of their political faith. Not only were banks rewarded and punished according to the holiness of their faith, but bankers rose and fell more according to the holiness of their faith, than their ability to make money. Bankers sincerely believed, or sincerely believed that they sincerely believed, that Mexicans and blacks were under served, and therefore that anything that got in the way of serving blacks and Mexicans, such as requiring jobs, income, and a credit rating, was irrational and racist.

23 Responses to “Deregulation”

  1. asdf says:

    “One such set of decisions, one of many, was case by case approving anything that led to more lending to non Asian minorities – which is how most of the money in the US was lost, though by no means all the money. Most of it was lost in the crisis on loans to non asian minorities, and such little of it as was lost on whites, was lost to whites largely as a result of across the board reductions in credit standards partly motivated by desire to benefit the poor in general, but largely motivated by desire to benefit non Asian minorities in particular.”

    I think this is a narrow way to look at things. There were a lot of ways money was lost in the crisis. For instance a great deal of money was lost on derivatives based on mortgages that didn’t even exist. In general I think NAM lending was not remotely the reason for the crisis, rather it was just one of many floated as political cover. I never met a guy trading the third derivative on some MBS that was doing so because he wanted NAMs to won houses. And the people making these decisions weren’t doing it to help NAMs, but to juice their own bonuses and stick shareholders with the bill.

    “If you wind up with more regulators exercising more power, it is not deregulation, or if, in some sense it is deregulation, in that the banks were doing lots of stuff that was previously forbidden, it is nonetheless apt to be massively damaging”

    Bingo. Large sectors of banking should simply be illegal. There should be no judgement call needed because they are flat out off limits. Excuses and exceptions should not be tolerated. Whatever dead weight loss that represents ain’t so bad.

    • jim says:

      Derivatives are nothing to do with the losses. That is just PC displacement, they say derivatives because they cannot say “wetbacks”.

      A derivative is a bet. Some entity, usually a quasi government actor, such as AIG, bets the mortgage will succeed. Another guy, usually but not always a mortgage holder, bets the mortgage will fail, thereby offsetting the risk of failure – usually from a private actor to a too-big-to fail actor

      The big problem was that the mortgages failed, not that people had derivatives on them. If a mortgage succeeds, no big losses, derivatives or no derivatives. If a mortgage fails, there will be big big losses, derivatives or no derivatives. Derivatives just shift the losses around. All the money that was lost, was lost on dud mortgages, the vast majority of them made to mestizos. The fact that some of these dud mortgages were covered by derivatives is just a detail.

      • asdf says:

        Dude, you got no clue. Some of these mortgages were leveraged 20:1 or more in the derivatives market. They were big losses because every one failed mortgage was multiplied 20 times. If they simply failed without the leverage there wouldn’t have been a huge banking crisis.

    • jim says:

      Bingo. Large sectors of banking should simply be illegal. There should be no judgement call needed because they are flat out off limits. Excuses and exceptions should not be tolerated. Whatever dead weight loss that represents ain’t so bad.

      But they did not lose money on that stuff. They lost money on housing mortgages. The only big losses on “derivatives” were AIG’s losses – which lost money by issuing by issuing guarantees on mortgages issued to no-hablo-English hispanics with no job, no income, and no credit rating, which guarantees were issued out of political correctness.

      • asdf says:

        Have you ever worked on a derivatives desk? Your making statements without anything to back them up. Do you really think AIG is the only one to lose on MBS and its associated derivatives? Are you that dense?

        If your going to make a claim like this you’ve got to back it up. There are a lot of sources out there backing up my claims. And I know from personal experience that nobody was buying up MBS because of some PC desire that wetbacks get mortgages. Most of them had absolutely no clue what the underlying was. They didn’t care. The underlying could be totally made up for all they gave a damn. Sometimes it was.

        • jim says:

          There are a lot of sources out there backing up my claims.

          There are a lot of sources piously making equally vague politically correct claims, but can you name someone who the taxpayers covered for gambling in derivatives.

          AIG got covered, arguably to bail out Goldman and Sach, but what was covered was AIG’s guarantees for mortgages, and what made those mortgages go bad was that they were in large part made to Hispanics

        • jim says:

          If your going to make a claim like this you’ve got to back it up

          I claim that the only derivatives that cost the taxpayer were mortgage insurance, which were part of the government program of easy money, especially easy money for Non Asian Minorities, and the political correctness program of shovelling hispanics into leafy green suburbs.

          You claim that the taxpayer lost money on other derivatives. Name those derivatives. Who issued them, and who got bailed out by the taxpayer?

          You claim that something exists. I claim that it does not exist. It is the job of the person claiming existence, to produce an example of it existing, not my job to produce an example of it not existing.

          Those derivatives, the ones that the taxpayer bailed out, went bad because the underlying mortgages went bad. AIG should not have issued insurance on mortgages issued to unknown borrowers. They should have checked out a sample of the borrowers. That they failed to do so suggests that the insurance was political. Political or not, the insurance went bad because issued on bad mortgages, and we know that the reason the mortgages were bad is that they were issued for political reasons, for the biggest private issuers were Countrywide Bank and Washington Mutual, whose loans were explicitly and openly motivated by both politics, and the equally political CRA.

          • asdf says:

            Government backstops went far beyond AIG. And losses extended far beyond AIG.

            Here’s a started source:
            http://www.interfluidity.com/v2/2587.html

            I recommend every post at that blog BTW. “Earning” the money to “pay back” because the fed has orchestrated a steep yield curve so banks will earn profits on maturity transformation and spreads (due to backstop) is a form of bailout.

            In addition one must consider losses by other governments (a firm I worked for at the time got bailed out by a European bank). In addition there are losses that while not backed up by the government certainly caused economic damage.

            “That they failed to do so suggests that the insurance was political. ”

            No. It doesn’t.

            “whose loans were explicitly and openly motivated by both politics”

            No, they were motivated by the fact that the people issuing them got paid bonuses up front based on volume. The underlying doesn’t matter. Are you dense?

          • jim says:

            Government backstops went far beyond AIG. And losses extended far beyond AIG.

            Here’s a started source:
            http://www.interfluidity.com/v2/2587.html

            Which fails to identify a single specific identifiable derivative causing the taxpayer bailed out banks any losses.

            Your source refers to the losses made by banks. For the banks, derivatives were not the problem. Bad loans were the problem, and derivatives were the solution, in that through derivatives, they managed to unload some, but far from all, of their bad loans onto other people.

            For your source to be a source, has to say “Here is how bank A lost money on derivative B. Obviously they should not have been allowed to risk depositors money on derivative B, since derivative B was a high risk investment”

            It has to give a specific particular concrete example of an actual identifiable bank doing this with an actual specific identifiable derivative.

            But the banks were not making risky investments in derivatives. They were making risky “investments” in “loans” (effectively welfare for hispanics), and then using derivatives to unload these bad loans. They lost money on the loans, not the derivatives. The derivatives protected the banks from losses (largely at the expense of AIG, Fannie, and Freddy)

            The banks it refers to were being bailed out for bad mortgages that they themselves owned and they themselves had made, not for losses on derivatives. They used derivatives to unload bad loans on other people, such as AIG, but got hammered for the mortgages that they failed to unload on to other people.

            I repeat: they got hammered for mortgages they failed to unload, not derivatives. To the extent that they created derivatives of their dud mortgages, it protected them from losses by unloading their dud mortgages onto other people, in large part onto Fannie, Freddy and AIG.

            That is not a source, that is the politically correct at prayer. A source would name a derivative, and tell me who issued it, what it was a derivative off, and how it went bad, and explain why its failure was a result of financial wizardry, rather than politically motivated loans made to poor people with the intent of benefiting those poor people rather than the intent of being repaid with interest.

            To blame derivatives, you need to identify some derivatives being made good by the taxpayer, and explain what these derivatives were. Those derivatives that went bad and got bailed out, the AIG mortgage guarantees, went bad not because of some elaborate ingenious financial wizardry, but because they were guarantees of bad mortgages – typically million dollar mortgages made to no hablo-english wetbacks with no regular job and no credit rating, made for political reasons by politically motivated banks, in particular made by the highly politicized Washington Mutual and Countrywide.

            When you look at the biggest bank losers, when you identify specific cases, the biggest losers were Washington Mutual and Countrywide, and they lost the money because they made politically motivated loans. And when people lost money on derivatives, it is because they purchased derivatives based on politically motivated loans – their derivative was payment for the promise of an income stream for from dud loans, or a mortgage guarantee guaranteeing dud mortgages. The problem was not that banks were unloading dud loans using derivatives, but that they had dud loans, not all of which they were able to unload.

          • jim says:
            “whose loans were explicitly and openly motivated by both politics”

            asdf

            No, they were motivated by the fact that the people issuing them got paid bonuses up front based on volume.

            Based on race of recipient and volume.

            Why did the management of Washington Mutual and Countrywide abandon the requirement that loans had to be made to people capable of paying them back, and reward salesmen based on volume, without regard to quality of loan?

            Because requiring that the recipient have the ability and intention to pay the loan back had disparate impact.

            Washington Mutual and Countrywide lost money on these loans, lost gigantic amounts of money. Why did they make them?

            When they were in business they told us, loudly, repeatedly, proudly, and frequently why they were making them: To remedy the silly racism that old fashioned bankers had inflicted on poor long suffering minorities. They told us this not only in filings with the government, but in television advertisements directed at the general public. Back when the losses were still deniable, they told us it was all about race.

            We know that US banking losses were primarily race based, because the specific banks that issued the most dud loans, Washington Mutual and Countrywide, were intently focused on race, and because the suburbs and exurbs where the defaults are, are the suburbs and exurbs where the non Asian minorities are, or have recently arrived.

          • asdf says:

            If you want specific reference to deriviative misdealings you can find it on that website in other essays.

            The link addresses how government bailouts went far beyond the losses at AIG. You clearly don’t understand this concept.

            “Why did the management of Washington Mutual and Countrywide abandon the requirement that loans had to be made to people capable of paying them back, and reward salesmen based on volume, without regard to quality of loan?”

            Because it increased booked profits, and they got bonused on booked profits, and shareholders (i.e. not them) had to deal with the problem of loans not being paid back long after their golden parachute.

            “they told us it was all about race.”

            That’s like a woman telling you what she’s attracted too. Who cares what she says. What does she do? I knew these people. They did not care about wetbacks getting loans. That’s a throw away PC line. It is NOT the reason they did anything.

          • jim says:

            The link addresses how government bailouts went far beyond the losses at AIG.

            Indeed they did, but the question at issue is the cause of the losses, not which institutions were bailed out.

            The banks were in trouble because their mortgages were no good, not derivatives of mortgages, and buyers of derivatives of mortgages were in trouble because the mortgages underlying the derivatives were no good.\

            You have failed to explain how derivatives did it, or could have done it, or give any concrete examples of derivatives doing it.

            Huge loans to people who had no regular job, no assets, frequently could not read or write, and seldom spoke English did it.

          • jim says:

            Because it increased booked profits, and they got bonused on booked profits

            Yes, but management’s survival ultimately depends on actual profits, not booked profits. Books deviated from reality, because reality was horribly politically incorrect.

            Their ever greater efforts to unload these loans on someone else, anyone else, efforts that never entirely succeeded, shows that in their hearts they knew what these loans were really worth.

          • jim says:

            shareholders (i.e. not them) had to deal with the problem of loans not being paid back long after their golden parachute.

            That might explain dud loans made in 1990, but by 2005, it was evident that the music was going to stop pretty soon.

            It also fails to explain why banks that refused to issue dud loans, for example Beverly Hills Bank were censured as “substantially non compliant with the community relations act”. It is not just that the government closed its eyes to bad lending practices, but that the government actively punished banks that failed to engage in bad lending practices.

            The government told banks that demanding evidence of income, credit worthiness, or indeed ability to read and write, had “disparate impact”.

    • jim says:

      I never met a guy trading the third derivative on some MBS that was doing so because he wanted NAMs to won houses

      That guy did not lose big money, or if he did it was his own. The entity that lost big money on derivatives and was bailed out by the taxpayer was AIG, whose derivatives were mortgage guarantees – and they were indeed issuing guarantees on mortgages so that NAMs could have houses.

      • asdf says:

        Dude I was working for an entity that lost big money on MBS and a variety of derivatives claims and it was not AIG. You are being silly.

  2. Bruce Charlton says:

    OK. But if this is explained to most people (and I mean almost everybody in the world who ever existed except a tiny minority of intellectuals with libertarian tendencies) I think it will emerge that they *want* decisions to be ”politically motivated’ – or rather religiously motivated. This seems to be the way that humans are constructed.

    • jim says:

      Yes indeed.

      One of the big benefits of Christianity is that being other worldly, less apt to mess things up in this world.

      With extensive regulation of the finance industry, the big problem was that credit was apt to allocated to the supposedly deserving, rather than those likely to pay it back with interest.

      Obviously if someone needs credit, he should not get it. A banker should only give credit to those who don’t need it, which procedure makes Christians uneasy. Christians are therefore apt to ban interest, which bans most credit, but a progressive is apt to direct credit to be given to those that do need it, which leads to disaster.

      That tiny handful of libertarian intellectuals could explain why banning usury is harmful, but mandating usury turned out to be a great deal more harmful.

      People need faith, and theocracy is natural for humans. But Christianity is dead, except for a tiny remnant. The mainstream churches have made their peace with progressivism.

      • guest says:

        Credit isn’t for aid, but for specific opportunities to profit (or, rather, perceived opportunities).

        The market for credit is based on people’s different time preferences; Someone is willing to borrow money today to seize an opportunity to make what he anticipates will be more money than he will have to pay back later:

        Basic Economics Lesson 4 – Time Preference, Interest Rates, and Production
        http://www.youtube.com/watch?v=g2OK5D_3TzM

      • Bruce Charlton says:

        Perhaps it could be said that what we have at present is not even usury but a kind of theft – or reckless borrowing without permission. I mean it is one thing to lend-out, and maybe lose, your own money; but quite another to loan-out and lose, without specific permission, money you are supposed to be merely looking after.

        But when it is about money, then it is already too abstract to keep hold of – I find I need to think about ‘real’ money (linked to resources) as something like stored corn.

        For example, my savings are the (long lasting!) store corn I have saved to live on when I am old and frail.

        Unfortunately, in the past four years, the government has secretly raided this corn store to stop other people’s standard of living declining, and to help feed 250-500,000 extra non-productive people per year.

        Some of the corn has been used to pay builders to make shelter and facilities for the new arrivals and the bureaucracies (I can see that there is a heck of a lot of building going on!).

        The actually standard of living in terms of consumption of the mass of people in England has not visibly declined in the past four year – after a few months in late 2008 when car usage clearly went down and there was less traffic. Indeed it is probably rising. A recent obvious trend is that young working class people (women and men) now engage in mass ‘costumed’ drinking parties over several days staying in hotels and going abroad (on the excuse that one of the party is getting ‘married’ for a year or two) – which behavior doesn’t look like hardship.

        My own standard of living – in terms of savings and ability to save – has however gone down a lot. My inference is that this is explained by something like the above – my store corn was confiscated and payed for it and is now dissipated.

        However, I see in the media that the government says that upper-middling people such as myself will be required to pay with a larger share of corn in in these difficult times – like this was some novel idea which might theoretically be tried out soon, rather than being the system upon which modern society is built…

        • jim says:

          Money is an abstraction, which when it links production and consumption taking place at different times, becomes hard to think about.

          In order for one person to save money, another person must borrow, or the same person must invest. And if lots of people save lots of money, then for them to have any prospects of being repaid, the borrowers, or most of them, must borrow to invest.

          If you are saving corn in a pile in your basement, then you are saving, and, simultaneously investing, hence no problems.

          If you are saving, and the government is borrowing to spend on consumption, a problem is going to bite eventually.

          A large part of the crisis is that people have stopped investing, thus savings are no longer balanced by investments. The official explanation of this is lack of demand, but continuing inflation and nominal GDP growth indicates that there is demand. A more plausible explanation is fear of taxation, regulation, and regulatory confiscation. For example a lot of people had their General Motors related investments confiscated in the uncompensated, illegal, and unconstitutional nationalization of General Motors – which was nationalized through fiat, not through normal channels. Nationalize a company illegally, investment drops like a stone. Nationalize a company without compensation, investment drops like a stone.

          Because General Motors was broke, existing shareholders should have lost all their shares, and creditors, people that General Motors owed money to, should have become shareholders, receiving newly issued shares in proportion to the amount of money General Motors owed them, in place of the money that General Motors owed them. The new shareholders should then have appointed a new board that represented their interests, and fired the old board, for running General Motors into bankruptcy, and the new board should then have appointed a new CEO to serve the interests of creditors reluctantly turned into shareholders. This did not happen. What happened instead was that not only shareholders were wiped out, but also some creditors also were wiped out to benefit Obama’s cronies.

          Because people are afraid to invest through normal channels, the market forces that normally balance saving and investing have frozen up. So government comes to the rescue by spending on welfare bums and crony capitalists, to balance your savings.

          The rescue is itself part of the problem, for it causes people to be even more frightened to invest.

          I will probably lift this reply from the comments into a post.

          • guest says:

            The Austrian Economists consider real money to be something that emerges out of a barter economy as the most traded commodity (having other properties, too, of course).

            This is how indirect exchange can happen with a money that is not an abstraction. Historically, the market has chosen gold and silver.

            This is why the Austrians say that paper can’t be money (or at least makes a very poor currency); It doesn’t have a value as a commodity, and the supply of a paper currency can be inflated at little cost.

            Please consider watching this explanation of the Austrian view of money; including something called the Austrian Business Cycle Theory (ABCT); It will explain how Ron Paul was able to see the Housing Crash coming back in 2001:

            Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
            http://www.youtube.com/watch?v=HAzExlEsIKk

            On the issue of hoarding, please consider this video; When people hoard, the value of circulating money goes up, so there’s no problem:

            Defending the Undefendable (Chapter 15: The Miser) by Walter Block
            http://www.youtube.com/watch?v=x4XSEVJLrdY

          • jim says:

            No one here disagrees. Preaching to the choir.

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