But before digging into what passes for an “argument” on CNBC's blog, let me again restate that it was not home-mortgages that caused the world-wide recession. Even if Carney weren't completely wrong about regulators forcing lenders to adopt ridiculously lax standards, it would still be the case that the global meltdown was caused by an array of “innovative” financial instruments that were cooked up in the by-then-largely-deregulated financial sector. I wrote:
"The entire subprime mortgage market was worth only $1.4 trillion in the fall of 2007, and that includes loans that were up-to-date. As former Goldman Sachs trader Nomi Prins noted in her book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street, the federal government could have bought up every single residential mortgage in the country – good, bad and in between – and it would have cost a trillion less than the bailouts.
"What brought down the global economy was as much as $140 trillion worth of financial gimmickery built on top of the mortgage industry. It was the alphabet soup of the credit meltdown – the CDOs, default swaps and other derivatives that made less than a trillion dollars of foreclosed loans into an economic weapon of mass destruction that would cost the American economy alone $14 trillion in lost wealth."
In other words, it was the massive pile of paper and heavy “leverage” built on top of those home loans that caused the financial crash. Ignoring a central argument that one can't refute is a sure a sign of intellectual dishonesty, and despite the fact that I begin my piece with this simple reality, Carney doesn't touch it at all in his rant.
Instead, he devotes his post to advancing, yet again, the frequently and decisively debunked fable about how the Community Reinvestment Act (CRA) mandated that banks loosen their standards – a narrative disassembled not only by myself and Nomi Prins, but also by Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman, former FDIC Chair Sheila Bair, the Federal Reserve Board of Governors, and many, many others. I called it a “zombie lie” because no matter how frequently it's stabbed by factual reality, there is always someone like Carney ready to dig up its remains and bring it back to life to divert attention for Big Finance.Read it at AlterNet
CNBC Editor Launches Sloppy, Dishonest Attack on AlterNet in Defense of Wall Street
by Joshua Holland
Hollands initial post and Carney's response are linked to in the post above.
Looks like the CRA kerfuffle is going to be with us at least through the '12 general. The left holds it is a "zombie lie," while the right holds it to be obvious fact.
The country is deeply divided over the facts. So what else is new.
Hollands initial post and Carney's response are linked to in the post above.
Looks like the CRA kerfuffle is going to be with us at least through the '12 general. The left holds it is a "zombie lie," while the right holds it to be obvious fact.
The country is deeply divided over the facts. So what else is new.
22 comments:
Tom, I think they are both wrong.
And Carney exhibits that he is not yet fully in MMT paradigm as he does not cite the role of a failed fiscal policy in causing the collapse of real demand.
He may have the sectoral balances equation down at some level, but he still comes up short of seeing how fiscal policy really is the key economic policy in a FFNC system....
Resp,
According to Black, Hudson, Wray, MItchell, Tavakoli, Partnoy, Webber, etc, the proximate cause of the financial crisis was widespread and pervasive fraud, enabled by capture. MMT explains this in terms of the Ponzi phase of the financial cycle described by Minsky in his financial instability hypothesis. Sub-prime housing just happened to be what touched it off.
Tom,
From Bill M just the other day:
http://bilbo.economicoutlook.net/blog/?p=17083
"As the economic crisis has dragged on and deepened, it has changed complexion. It clearly started out as a balance sheet crisis which means it originated from the excessive borrowing of the private sector driven by personal greed and an overzealous and often criminal financial sector. Hence the term GFC. It quickly moved into a real crisis (meaning it affected real GDP growth, employment and incomes) because governments around the world reacted too cautiously in terms of their fiscal intervention. However, it was clear that the fiscal responses that were introduced saved the world from another Depression. China’s fiscal intervention helped many nations including Australia. Now the crisis is all down to incompetent government policies – not before the crisis but now. Governments are now following strategies that defy the most basic principles of sound fiscal management – it is irresponsible to cut net public spending at at time when unemployment is rising. Or in other words, you don’t send more workers into the mine when the canaries start dying."
Fraud seems like it was involved in leading to a "balance sheet" crisis, where the non-govt balance sheets got maxed out (that CAN happen to the non-govt sector), but after that, blame for the real drop in demand has to be laid straight in the lap of government fiscal failure.
So Bill (and I believe Warren) identify a 2 step process. You first have solely a financial crisis that is allowed to effect the real economy and real demand.
Just to point out, Black, Webber, Hudson, and Galbraith are book sellers.
They could be working on:
"The best way to rob an economy is to own one"
"ECONNED II"
"Return to the Predator State: The Forgone Prosecutions"
Etc..
They profit off of a popular perception that fraud and criminality are alone leading to our current terrible economy. They accordingly promote the fraud angle primarily. And "toxic waste" (which is false) and other sensationalized false topics.
This is just as false as Carney and the right wing morons promoting the CRA BS or now "Obamacare" as the cause of our current dilemma.
It is a misdirection play away from what should be a focus on fiscal.
As I type this, I am looking at CNBC and there is moron David Walker on as guest host again... and HE IS ON MESSAGE. And I can tell you, he is not blaming the high fiscal deficits he insanely advocates against on fraud.
I'm concerned that an outsized focus on the fraud/criminality takes our eyes off the ball of fiscal policy.
Resp,
Sorry to see that Carney took this cheap shot and already widely discredited CRA explanation.
I was getting to like the guy. We've had a couple of email exchanges and he seemed like he was really getting it.
I asked him if he got any flack from his bosses at CNBC because of his MMT posts. I emphasized that the network loves to highlight mainstream, out-of-paradigm people like Rick Santelli, Larry Kudlow, Michelle Cabruso-Cabrera. He balked at the very suggestion that there was some kind of "party line" there a la Fox. Oh well.
Matt, the guy leading the charge about fraud being the chief cause is Bill Black. He has blogged extensively about this at the UMKC blog and elsewhere, also appearing on TV, etc. He is not pushing a book, either. Randy Wray is on board with Bill, too, often co-authoring stuff on fraud with him.They have been going after BoA in particular recently. I also recall Bill M. saying essentially the same thing a while ago in Monetary policy was not to blame.
There were a lot of factors but the magnitude of the GFC and the global balance sheet recession/depression it lead to were the direct result of toxic waste produced by massive fraudulent loans resulting in the derivates based on them going bad, exponentially increasing the implosion.
This crisis will persist until either the debt that cannot be paid is written down, or austerity forces whole countries to cough it up to the bankers through politically imposed austerity at their demand. The bankers have chosen the latter way instead of accepting any haircuts, and governments are going along with this due to their influence. The question now is whether it is politically sustainable. In many places, I doubt it is.
Of course, we know from MMT that austerity is unnecessary and governments could just buy off the bankers directly. But that would result in higher deficits, and bankers don't like 'sovereign debt," because they fear it will result in inflation and erode their savings.
So we have a combination of criminality, ignorance, stupidity, greed, and corruption all coming together, resulting in growing economic desperation, rising social unrest, and increasing political instability.
Mike, Carney came around on MMT. Maybe he'll eventually see the light on other things as well. After all, Minsky is at the heart of MMT, and this was Ponzi finance, pure and simple. Carney doesn't seem to get that yet. I wonder if he knows about Minsky.
As far as I can tell, I'm one of the last stalwarts defending the notion that the CRA played an important role in the financial crisis.
It's definitely not as simple as CRA=financial crisis.
But, as I demonstrated in a series of posts in 2009 at Business Insider, the CRA did lead to lax lending standards for mortgages. The mechanism is a bit complex, so I encourage you to read the posts. A good summary is here: http://articles.businessinsider.com/2009-06-27/wall_street/30009234_1_mortgage-standards-lending-standards-mortgage-rates/4
Of course, to get from easy mortgages to a financial crisis requires a lot more, including what I now think of as the "monetization" of mortgage securities.
Was there an equivalent to the CRA in Ireland and Spain?
Good point, Laura, and one that has never been brought up.
The real economy is recovering in the US, sloooowly. But the financial crisis is alive and well and absolutely thriving in the EZ. Doing pretty well in the UK, too. Housing and the failure of MF Global remind us that the financial crisis remains here too. Is BOA next?
Laura,
I know there was a housing price bubble in Ireland. But did mortgage standards deteriorate as much as they did in the US? I'm not sure.
Anyone know?
Tom,
I think as a true "Bank" BofA has some liquidity channels available to it that MFG did not.
One possibility is that Corzine's bankers just cut him off and made him close down his positions at losses.
I couldnt hear his testimony earlier, but one thing I want to know is why he was long the European Sovereign debt?
MMT shows how it was not a good idea to be long the European Sov. Debt as those countries are no longer monetary sovereign so they have a true funding issue.
If this long Euro Sov. debt trade was the thing that broke MFG, then this is again a major event where MMT can show what went wrong.
It does not pay to be stubborn to the truth of MMT.
Resp,
Well, after an hour or so of research and asking people on twitter, it seems as if Irish lending did not deteriorate the way US mortgage lending did. The problem in Ireland was a speculative housing bubble but not really low-quality mortgages, from what I can tell.
So no CRA needed in Ireland.
Ten Myths about Subprime Mortgages, Yuliya Demyanyk, at FRB Cleveland Commentary:
Summary: ...On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms.
How did a Relatively Small Number of Subprime Loans Cause a Record Crisis? by William K. Black at Benzinga:
...We now have the analytical basis to begin to explain the supposed paradox as to how such a relatively small number of subprime loans caused an intense global crisis. Here are the central points, which I will flesh out in future columns.
• Many subprime loans were also liar's loans
• Many hybrid loans existed with greatly reduced underwriting
• There were, and are, no official definitions of the loan categories “alt-a”, “subprime”, or the many hybrid forms
• Because there is no definition and the categories of “subprime” and “liar's” loans are not mutually exclusive, there is inherent uncertainty and a need to use judgment to form useful estimates. Credit Suisse reported (2007) that 49% of new originations in 2006 were “alt-a” loans (i.e., liar's loans). The incidence of fraud among liar's loans found in most independent studies is 80% or above. If the Credit Suisse figure is even close to accurate (and some caution is vital there), then we are suffering from over a million cases of mortgage fraud annually in 2005 and 2005 and the frauds were growing in 2007 until the secondary market collapsed. Data on criminal referrals are, when extrapolated, consistent with that level of fraud incidence. The supposed paradox arises from a factual error. Nonprime loans were common. Liar's loans grew massively and hyper-inflated the financial bubble. The size of the bubble and the fraud losses were enormous relative to bank capital. Indeed, the very lack of reliable data on the true composition of liar's loans (Fannie, Freddie, and Lehman all reported them as “prime” loans for most purposes) in mortgage portfolios and CDOs was itself one of the factors driving systemic risk. Investors, rightly, feared that most large financial institutions had huge exposures to fraudulent loans....
A Minskian Explanation of the Causes of the Credit Crisis by L. Randall Wray at Multiplier Effect:
...When the crisis began in the US in 2007, many commentators called it a “Minsky moment” or even “Minsky crisis”, after the late economist Hyman Minsky who had developed what he called a “financial instability hypothesis” over the years after 1960 and to his death in 1996. Minsky was my PhD dissertation advisor and I had already used his approach to analyze the Saving and Loan crisis. Unlike the typical explanation that invokes Minsky’s theories, I recognized that Minsky did not simply provide a “euphoric bubble” approach. Rather he argued that the transformation of the economy and especially its financial system from “robust” toward “fragility” took place over a very long span of time, indeed, over the entire postwar period. The increasingly frequent and severe crises, as well as the growth of fraud as practically normal business practice were a consequence of that transformation. Hence, we should not call this a Minsky moment or crisis but rather a Minsky half-century.....
"Fraud as a business model" by Janet Tavakoli at The Huffington Post:
On December 8, 2010, I presented an analysis to the Federal Housing Finance Agency (FHFA) in Washington D.C. of key causes of our current financial crisis: "Repairing the Damage of Fraud as a Business Model." The phrase "fraud as a business model" comes from a comment referenced in the presentation made by Richard Cordray, then the Attorney General of Ohio and the current Director of the Consumer Financial Protection Bureau, when he discussed foreclosure fraud.
Downloadable PowerPoint of Ms. Tavakoli's presentation to the FHFA included at the end of her post.
Infectious Greed: How Deceit and Risk Corrupted the Financial Markets by Frank Partnoy (Google Books)
Law professor and financial expert Frank Partnoy shows how the roots of today's global financial crisis can be found in Wall Street's "lost decade"--the time in the late 1980s and 1990s when the business world quietly made the transition from old-school Wall Street to the current complex-financial-product chaos. The fallout from this shift has produced every modern-day financial scandal, including the ones at Bear Stems, Lehman, and AIG. Infectious Greed tells this story by illuminating the linkage between the implosion of major institutions ranging from Bankers Trust to Barings Bank to Orange County, California to Long-Term Capital Management to Enron to WorldCom, charting how each new level of financial risk and complexity obscured the sickness of corporate America. Ultimately, Partnoy proves, the financial crisis of 2008 was all but inevitable--but there are some key policies we can still adopt in order to save our financial system.--From publisher description.
ECONned by Yves SMith (Susan Webber)
Why are we in such a financial mess today? There are lots of proximate causes: over-leverage, global imbalances, bad financial technology that lead to widespread underestimation of risk.
But these are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease. ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.
Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.
In terms of the big picture Ms. Webber presents, would the crisis have happened had understanding of MMT been applied instead of the faulty economics that ECONned trashes? Not likely. With an understanding of MMT would the EMU been formed as it is? Not likely.
Tom,
These folks are recognized experts in anti-fraud for sure.
I would just caution them not to allow themselves to be used by the lamestream media, who only seem to want to report sensationalism, and not report on the details of the causes of our current economic malaise and high unemployment.
Since they are experts in the frauds, even though some are coming into the MMT paradigm, the media may only allow them to be seen as supporting the thesis that it is the frauds ALONE that have led us to this point.
In a similar fashion to how Bloomberg had Prof Galbraith on recently and twisted that imo into a story where it looked like Galbraith supported reducing the deficit (and he had to comment here to clarify his position).
Many loans that went bad I'm sure would not have if government made the correct and timely proactive fiscal response instead of letting the automatic stabilizers do it.
The frauds (and CRA) cannot throw 14M people out of their jobs. No way. The problem now is FISCAL.
IMO we have to keep the pressure on the fiscal issue, and these high profile academics who are in paradigm have to start using their appearances to promote the fiscal realities as revealed via MMT in a much more overt and challenging fashion. Even if the media tries to steer them into a discussion focusing on the sensationalism of the frauds only.
Peterson and Walker and the rest of the DDC have not missed a beat in their propaganda campaigns that if successful will lead us down the same destructive path we see Europe taking with their hell bent zealousness for austerity and blood.
Resp,
Matt, Randy Wray has been writing of late about the next crisis, which he sees as being pretty imminent. Not only are TPTB not addressing lagging demand, but they are also not addressing the conditions that led to the crisis of 2008. Randy sees the next as "the big one," which I am calling the second leg down. The bad behavior is still rampant, reform has been put off or stymied, and the government is still captured. John Corzine told Congress today that he doesn't know what happened to the missing 1.2 billion dollars. WTF!
While the US economy is starting to recover weakly due t the stim of large deficits, the drag of the housing crisis is still with us and we are still in the balance sheet recession. People are already in the streets around the world. Another leg down from here is going to hurt. Looks like the EZ is going to oblige and provide the shock.
Well, after an hour or so of research and asking people on twitter, it seems as if Irish lending did not deteriorate the way US mortgage lending did. The problem in Ireland was a speculative housing bubble but not really low-quality mortgages, from what I can tell.
So no CRA needed in Ireland.
Negative equity will result in mortgages going into default, regardless of their quality. The incentive to continue making payments is gone.
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