Reply to: Bankers in sack-cloth & ashes!

[doodab]

It just amazes me how many people seem to think Gordon Brown was some sort of evil genius who intentionally manipulated the global financial system to make himself look good for 10 years before getting caught out.

I'm not defending the guy, I'm saying that view gives him far too much credit. He was just a politician who rode a wave over which he had no control whatsoever, like a shaman taking credit for rain. Ergo, he couldn't have stopped it even if he wanted to.

I think you could say the same about any individual bank or regulator. The only thing that could have stopped it was a collective decision not to try to make money where there was none to be made.

[OwlHoot]

I've no doubt those polices added fuel to the fire, but to blame Gordon Brown for early 90s US policy really is far fetched .

Oh, I missed the bit where he blamed Gordon Brown for everything (if that's what you say he did).

I was referring to the part of his post which you quoted:

Yes, they did - but governments were practically begging them to do it, and in the US, banks were virtually ordered by law to dish out cheap credit to people that couldn't afford it.

OH in "still waiting for the gas guys to turn up" mode

[doodab]

centurian is right, or morally right at least. As I've often argued here in the past, the whole mess started when the Clinton administration pressured reluctant lenders, and threatened legislation to compel them, to increase sub-prime lending.

It's understandable they wanted to improve the lives of millions of poor, including at least 10 million immigrants who had appeared in a mere few years (and are still pouring into the US today). But you can only do that so fast.

I've no doubt those polices added fuel to the fire, but to blame Gordon Brown for early 90s US policy really is far fetched .

The original mandate to have goals for low income housing was actually enacted by the first Bush administration in 1992. It certainly inflated the bubble and caused trouble for Freddie and Fannie but it wasn't intended to encourage either fraud or misselling and it didn't require investment banks all over the world to hide subprime backed securities in off balance sheet vehicles to circumvent capital adequacy requirements either.

[OwlHoot]

...

I think you might mean la la land? In the US there was widespread fraudulent selling of sub prime mortgages and certainly no law ordering it to happen. In fact there were laws against it, which resulted in prosecutions, including countrywide who were I think the biggest.

What drove it was investor appetite for high yield "safe" debt and too much capital sloshing around. I agree that governments failed to spot the problem or deal with it effectively but to suggest it was all done at their behest is bobbins.

centurian is right, or morally right at least. As I've often argued here in the past, the whole mess started when the Clinton administration pressured reluctant lenders, and threatened legislation to compel them, to increase sub-prime lending.

It's understandable they wanted to improve the lives of millions of poor, including at least 10 million immigrants who had appeared in a mere few years (and are still pouring into the US today). But you can only do that so fast.

An article here relates how the situation stemming from this developed, and went from bad to worse.

...

In the Clinton administration, a primary mission of HUD (Housing and Urban Development) was to increase home ownership rates, especially among minorities and low-income families. That mission was carried out through HUD subsidy programs and through the two government-connected mortgage finance giants, Fannie Mae and Freddie Mac. In 1992, HUD was given regulatory authority over these government-sponsored enterprises, and it began pushing the two firms into the subprime lending business. We now know that these political decisions on housing that were made in the 1990s helped fuel the housing bubble and subsequent crash in the early 21st century, so it is worth looking into the leadership of HUD during those years.

Henry Cisneros served as President Bill Clinton's HUD secretary from 1993 to 1997, when he resigned to deal with allegations that he lied to the FBI about payments he made to a former mistress. Cisneros plead guilty in 1999 and was fined $10,000, avoiding a possible prison sentence.

Cisneros oversaw a politicized HUD that mobilized to help fend off the Republicans, who gained a congressional majority in the 1994 election. The resurgent GOP initially sought to eliminate HUD as part of a plan to rein in federal spending and reduce budget deficits. HUD was one of the Republican targets, and department officials fought back in numerous ways to ward off proposed reforms.

HUD held a series of "standing up for communities" rallies, financed by taxpayers, which encouraged local officials and special interest groups to lobby against Republican budget cuts. One piece of propaganda distributed by HUD's New York office warned that the budget cuts "would dramatically expand America's underclass" and that "thousands of families, many with children, would end up homeless."23 HUD also sponsored a National Tenants Organization convention in Puerto Rico to defend the department. But that event was so political that even a HUD translator refused to take part and walked out of the proceedings in protest.24 According to HUD's inspector general, an NTO official responded that "he really didn't care whether HUD translated or not because the point was to get rid of Newt Gingrich."25

When Cisneros left HUD, he was lauded for the increase in homeownership rates that occurred on his watch. Part of his apparently winning strategy, Cisneros noted, was HUD's "ability to convince lenders, builders and real estate agents that there was money to be made in selling housing to low- and moderate-income individuals."26 Part of this "convincing" involved HUD-initiated legal action against mortgage lenders who declined higher percentages of loans for minorities than whites. As a result of such political pressure, lenders begin lowering their lending standards, which was another contributing factor to the housing meltdown in the 2000s. ...

I reckon the Crash of the 1920s was ultimately caused largely by the same thing, a mass influx of immigrants in the early 20th century overwhelming the ability of economic growth to keep pace with their housing demands. But admittedly, not being an economist, I'd have trouble making a sound case and no doubt there were other factors.

OH in "sitting impatiently at home waiting for the gas engineers to arrive with my new combi boiler" mode

[doodab]

In terms of general availability of credit, what banks are doing now - are what they should have been doing all along - restricting credit to those that can actually afford it. The mess is really just a dose of "normality" returning.

That said - I think they have gone too far in terms of commerical credit availability. That's largely because banks no longer have the means to accurately assess the risk - previously the branch manager would look you in the eye to see if you were trustworthy enough.

Agree with this so far.

Yes, they did - but governments were practically begging them to do it, and in the US, banks were virtually ordered by law to dish out cheap credit to people that couldn't afford it.

I think you might mean la la land? In the US there was widespread fraudulent selling of sub prime mortgages and certainly no law ordering it to happen. In fact there were laws against it, which resulted in prosecutions, including countrywide who were I think the biggest.

What drove it was investor appetite for high yield "safe" debt and too much capital sloshing around. I agree that governments failed to spot the problem or deal with it effectively but to suggest it was all done at their behest is bobbins.

[doodab]

We are probably never going to agree . I never liked the FSA, I never thought that they stood a chance of being effective.

Perhaps not, but that doesn't mean that what came before was.

As Gordon's apologists state and the man himself frequently repeated, but was it really? How many Australian banks have been bailed out by their tax-payers?

Good effort at cherry picking, but a fail, as actually some Aussie banks were bailed out in secret.

NAB and Westpac’s Secret Bailout Revealed

Yes I would. Northern Rock's business model was a basket-case and should never have been allowed.

Easy to say after the fact. A lot harder to spot when it's standard industry practice to a greater or lesser degree.

[Gonzo]

TBH I think the problem is that they were too smart for their own good. I wouldn't advocate artificially restricting pay or bonuses or anything like that but I do think their activities should be curtailed and subject to a great deal more oversight, and I think the reduced remuneration will follow from that as opportunities for taking the piss are reduced.

Now on that, we do agree.

[Gonzo]

The former regulatory system wasn't "perfectly good". It resulted in several bank failures and a great deal of harm to consumers among other things. I don't recall a lot of noise from the other side of the house when the old regime was replaced.

We are probably never going to agree . I never liked the FSA, I never thought that they stood a chance of being effective.

The lack of liquidity in the short term money markets was an international problem, and not something a UK government of any colour could have done any thing about.

As Gordon's apologists state and the man himself frequently repeated, but was it really? How many Australian banks have been bailed out by their tax-payers?

You might argue that Gordon Brown, or the FSA, could have legislated to prevent UK banks being so dependent on short term lending.

Yes I would. Northern Rock's business model was a basket-case and should never have been allowed.

[centurian]

The "mess" I'm referring to is the impact of the credit crunch on the wider economy both in terms of reduced availability and increased cost of finance for business, and the loss of business and consumer confidence.

In terms of general availability of credit, what banks are doing now - are what they should have been doing all along - restricting credit to those that can actually afford it. The mess is really just a dose of "normality" returning.

That said - I think they have gone too far in terms of commerical credit availability. That's largely because banks no longer have the means to accurately assess the risk - previously the branch manager would look you in the eye to see if you were trustworthy enough.

You are right to suggest that the boom never existed to the degree that people though it did, the point is that the financiers were largely responsible for the distortion.

Yes, they did - but governments were practically begging them to do it, and in the US, banks were virtually ordered by law to dish out cheap credit to people that couldn't afford it. Did Gordon Brown lift a finger to stop the housing bubble - did he tulip. He needed the banks to lend irresponsibly in order to fuel the boom. He knew that if he applied the brakes, even slightly, then people would realise that the boom was built up on a house of cards.

[centurian]

WCS. Sad but true.
On the upside, we are now paying for this by prodigiously turfing useless Public Sector drones out of some cushy non-jobs.

And said drones will go to their grave resolute in their belief that bankers were 100% to blame for it.

[doodab]

i think that the problem is that there is not enough competition in banking. Cost of entry is too high and there are too many large institutions controlling banking.

Perhaps. Personally I'm inclined to think that when people who probably shouldn't be allowed to borrow money have a selection of 110% mortgages to chose from there might be a bit too much competition.

It's almost as if the roles are reversed and the consumer became the consumed.

[doodab]

But what is the "mess" left behind.

Basically it's a financial system and economy that was never as profitable as we thought it was. Our economy is generally fine - it's just we were led to believe it was so much better, so we spent money we never had in the first place.

We are now having to make "swingeing cuts" to put the economy back where it started and unwind the fake boom that never really happened.

If your other half tells you won the lottery - and you go out of a spending spree (including buying lots of stuff on multi-year HP), but then your OH realises that the read the wrong set of numbers... Your other half didn't "lose" you the lottery money - you never had the winning ticket to begin with.

The "mess" is that the boom of the 00's never really existed, but we spent like it did.

You seem to be looking at things from the perspective of the state.

The "mess" I'm referring to is the impact of the credit crunch on the wider economy both in terms of reduced availability and increased cost of finance for business, and the loss of business and consumer confidence. There are a lot of empty shops & retail units on my local high street & in the shopping center that weren't there 5 years ago, and that has very little to do with public sector spending cuts.

You are right to suggest that the boom never existed to the degree that people though it did, the point is that the financiers were largely responsible for the distortion. Ultimately it was the banks who danced their way around capital adequacy requirements using off balance sheet vehicles and pumped trillions of dollars of make believe money into the economy by irresponsibly lending it to people who they shouldn't have. Should they have been stopped by the regulators? Yes, ideally, but it was also reasonable to think that they wouldn't be so stupid as to risk catastrophe, and indeed it seems many of them didn't realize that they were.

TBH I think the problem is that they were too smart for their own good. I wouldn't advocate artificially restricting pay or bonuses or anything like that but I do think their activities should be curtailed and subject to a great deal more oversight, and I think the reduced remuneration will follow from that as opportunities for taking the piss are reduced.

I also think it's reasonable to expect them to be flexible with regard to the Eurozone debt situation. Given the amount that governments have been prepared to lend them, it rather takes the piss when they won't return the favour.

[DodgyAgent]

The problem isn't what bankers earn, or even that some banks needed bailing out, it's the wider repercussions of the mess they made, which has had an effect on most people's lives, however prudent or otherwise they might have been. Life has been made harder for companies and in turn their employees, savers are offered -ve interest in real terms, and people, including a lot of low and mid level bankers, have lost their jobs because of it.

It seems to me that financial industry "creativity" has got out of hand, particularly in the US, and most regulators are so convinced of the benefits of free markets they no longer stop to question whether it's desirable for certain markets to exist at all. I would like to see a regulatory framework that prohibited creation and trading of complex financial products without prior regulatory oversight and approval.

Particularly in the case of many of the "toxic assets" that precipitated the cessation of interbank lending, there is recent research which demonstrates that it is simply impossible for all of the participants in a market to derive a fair value for them. Hence the over reliance on ratings agencies. It seems to me that the only regulatory intervention which could have prevented what happened would have been to prevent these assets from ever being created in the first place. This would also have discouraged sub prime lending as it would have been significantly more difficult for lenders to offload the dodgy loans.

I can't really see things getting fixed until the financial industry succumbs to effective regulation, which of course it will fight tooth and nail. Of course at that point the super profitable and ethically dubious "creative" side will disappear and it will become the boring, highly competitive and not especially profitable mechanism of capital allocation that it ought to be.

i think that the problem is that there is not enough competition in banking. Cost of entry is too high and there are too many large institutions controlling banking.

[shaunbhoy]

The "mess" is that the boom of the 00's never really existed, but we spent like it did.

WCS. Sad but true.
On the upside, we are now paying for this by prodigiously turfing useless Public Sector drones out of some cushy non-jobs.

[centurian]

The problem isn't what bankers earn, or even that some banks needed bailing out, it's the wider repercussions of the mess they made.

But what is the "mess" left behind.

Basically it's a financial system and economy that was never as profitable as we thought it was. Our economy is generally fine - it's just we were led to believe it was so much better, so we spent money we never had in the first place.

We are now having to make "swingeing cuts" to put the economy back where it started and unwind the fake boom that never really happened.

If your other half tells you won the lottery - and you go out of a spending spree (including buying lots of stuff on multi-year HP), but then your OH realises that the read the wrong set of numbers... Your other half didn't "lose" you the lottery money - you never had the winning ticket to begin with.

The "mess" is that the boom of the 00's never really existed, but we spent like it did.