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Post 0

Wednesday, February 2 - 2:57amSanction this postReply
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Merlin,

Will or did you post your scathing review elsewhere? I think that it would be awesome if you were to put it on both Yahoo and Amazon.

Ed




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Post 1

Wednesday, February 2 - 7:01amSanction this postReply
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I might do that, Ed. A few seconds ago on Yahoo there were 204 user reviews. Only 5 rated it F, one D, 5 C's, 4 B+, 189 A.

Update: Ed, my review is now on Yahoo. The title is "Half truths are worse than lies."

(Edited by Merlin Jetton on 2/02, 7:31am)




Post 2

Wednesday, February 2 - 8:37amSanction this postReply
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Merlin,

I found your Yahoo review and clicked on the bottom checkmark, answering that it was a "helpful" review.

Ed




Post 3

Wednesday, February 2 - 1:13pmSanction this postReply
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I saw this movie on the recommendation of an economics professor I know. I had no idea she shared the movie's political orientation.

This was a hatchet job, if I ever saw one. Did you notice how at the beginning of the movie, Iceland's banking crisis was blamed on privatization? For a refutation of that canard, see "Iceland's Banking Crisis: The Meltdown of an Interventionist Financial System" by Philipp Bagus and David Howden.

Howden.http://mises.org/daily/3499

(Edited by William Dwyer on 2/02, 1:22pm)




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Post 4

Wednesday, February 2 - 2:39pmSanction this postReply
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I remember that Inside Job had a brief segment near the start about Iceland, but don't remember the details except the banks were central. I suspect the alleged cause was deregulation with little or no further explanation.

Thanks for the link to the Mises page from which I quote.

What analysts and authors commonly miss is the reason the banking sector could expand so rapidly. Indeed, as we shall see, the incentive structure of the Icelandic economy was manipulated through government guarantees, artificially low interest rates, and monetary spigots opened wide, allowing liquidity to be flushed through the economy. In addition, Iceland's homeowners were offered tantalizingly low interest rates through the "Housing Financing Fund" (HFF), a state agency that enjoyed explicit government guarantees on its debt, resulting in reduced interest charges for homeowners.
 The makers of Inside Job missed the government's role, too.

Thus, the banking system had to continuously roll over (renew) their short-term liabilities until their long-term assets fully matured. If an event arose whereby Icelandic banks failed to find new borrowers to continue rolling over their liabilities, they could face a liquidity crisis and, more importantly, spark the collapse of the Icelandic financial system; recent events have borne out this exact scenario.
Borrow-short-invest-long has been the culprit of many crises. It was the bane of S&Ls in the  U.S. in the 1970s and early 1980s. They couldn't roll over their liabilities because they couldn't compete with money market funds. It was the bane of SIVs in the recent crisis. They were holding long-term mortgages acquired mostly by borrowing in the short-term commercial paper market. In 2008 they suddenly found themselves unable to roll over commercial paper. People who got adjustable rate mortgages based on short-term teaser rates were doing it, too. They thought they could easily roll over their liability, i.e. refinance, at another low interest rate or sell the property.

(Edited by Merlin Jetton on 2/02, 3:07pm)




Post 5

Saturday, March 12 - 8:21pmSanction this postReply
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Merlin (or anyone),

I watched this movie and the only value I got was understanding the "Securitization Food Chain." I have some sincere questions about it. I took some notes. Please tell me -- if you can-- where Fannie and Freddie fit in on the "Securitization Food Chain":

Loan payments proceed down the chain
************************************************
--home buyers
.
[get mortgage from]

--lenders -- Countrywide Financial, Wells Fargo Financial, hSBC Finance, Chase home Finance [Countrywide issued $97 Billion in loans, part or all of which were sub-prime (for $11 Billion in profit)]

[sell mortgage to]

--investment banks -- Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Sterns; coalesced many differing loans together into one complex derivative: CDOs (collateralized debt obligations); these investment banks paid rating agencies (e.g., Moody's) to evaluate the CDOs, without any liability for bad or inaccurate ratings; Lehman Brothers underwrote $50 Billion/yr in sub-prime loans; Morgan Stanley borrowed so much money (to buy even more CDOs) that it had a leverage ratio of 33:1; a tiny 3% drop in asset base would mean bankruptcy!

[sell CDOs to]

--investors (all over the world)

[purchased credit default swaps (with quarterly premiums) from]

--securities insurance companies -- AIG, etc. (AIG London issued $500 Billion in non-leveraged credit default swaps)

--and speculators also bought credit default swaps (paying quarterly premiums) from securities insurance companies in order to bet against CDOs they didn't even own
************************************************

Interestingly, the head of AIG said he could see no scenario in which it would be possible for him to lose a single dollar of money.

What drove him to say that?

Ed



Post 6

Saturday, March 12 - 9:22pmSanction this postReply
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"...the head of AIG said he could see no scenario in which it would be possible for him to lose a single dollar of money."

I can only guess why he would say something like that:
  • Maybe he meant himself personally, given all the money and golden parachute arrangements he'd made.
  • Maybe he meant that Goldman Sachs would loose a fortune if AIG wasn't bailed out, and Goldman Sach 'owned' the Treasury.
  • Maybe he is just one of those people who don't say what they really believe.
  • Maybe he is very short on imagination and really believed that nonsense.




Post 7

Sunday, March 13 - 12:10amSanction this postReply
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The Mises Institute now has a book out about Iceland's economic collapse, which they attribute, not to the "privatization" of Iceland's banks (as did the movie Inside Job), but to "the Icelandic government's policy mistakes -- the artificial creation of a boom, and the savage bust that was the inevitable outcome. The book entitled Deep Freeze by Philipp Bagus and and David Howden describes how the Icelandic business community were encouraged to borrow in Japanese Yen and Swiss Francs with their attractive low interest rates.

In the Forward, Toby Baxendale writes, "Commeth the bust, I was asked to 'rescue' many of these firms. The key problem with the banks essentially owning all the bankrupt highly leveraged businesses was that they were in turn owned by the government. The government, not wanting the lifetime of fish quotas to get into the hands of a nasty foreign creditor, would not and still does not allow them to go bust."




Post 8

Sunday, March 13 - 8:06amSanction this postReply
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Ed T. wrote:
Please tell me -- if you can-- where Fannie and Freddie fit in on the "Securitization Food Chain":
They belong with the investment banks, except that most of what they sold/sell to investors are called "mortgage passthroughs" or "mortgage-backed securities."

Fannie and Freddie securitized mortgages they bought from originators or banks and sold the resultant securities to investors (link).

(Edited by Merlin Jetton on 3/13, 8:44am)




Post 9

Sunday, March 13 - 11:37amSanction this postReply
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Thanks, Merlin.

So Fannie/Freddie were orthogonal to the original chain I depicted (rather than being their very own link in the chain)? Like this?:

Loan payments proceed down the chain
************************************
--home buyers
.
[get mortgage from]

--lenders

[sell mortgage to]

--investment banks --------------------------------------Fannie/Freddie

[sell CDOs to]

--individual investors

[purchased CDSs from]

--securities insurance companies
 
[also sold CDSs to]

--individual speculators
***********************************

And could Fannie/Freddie always find "a buyer" (investor) for every mortgage backed security (MBS)? Did they end up "selling" bad loans to the taxpayer? In other words, were they in the red (drawing on funds from government) while everyone else was in the black?

 And what is the difference between an MBS and plain ole' run-of-the-mill, bundled-loan CDOs?

Ed




Post 10

Sunday, March 13 - 1:43pmSanction this postReply
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So Fannie/Freddie were orthogonal to the original chain I depicted (rather than being their very own link in the chain)?
Orthogonal?  "Orthogonal" means perpendicular. To depict Fannie/Freddie in a chain (1) put them on the same link as investment banks,  (2) add a couple links that form a detour and return and put them on that, or (3) put them on a similar, parallel chain.

And could Fannie/Freddie always find "a buyer" (investor) for every mortgage backed security (MBS)?
They were in about the same situation as investment banks. There was plenty of demand (buyers) until demand sharply dropped due to fears of default.
Did they end up "selling" bad loans to the taxpayer?
No. Fannie and Freddie were put in receivership. They have been subsidized, and that will continue for a while. They will in the end cost taxpayers much more money than the other bailouts, because the other firms that received bailouts have mostly paid them back. 

And what is the difference between an MBS and plain ole' run-of-the-mill, bundled-loan CDOs?
There are a few types of MBS (link), but the main difference is collateral. CDOs often have collateral other than mortgages, e.g. corporate bonds (link). Note that the description includes "asset-backed securities", so there might even be such things as auto loan or credit card receivables included (link).





Post 11

Sunday, March 13 - 5:18pmSanction this postReply
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Thanks, for clearing that up, Merlin.

But what about the notion that, whatever kind of mortgage a lender is selling -- Fannie and Freddie will be there in order to buy it up, no matter what (a "lender of last resort" phenomenon)? You can make sub-prime loans all day long, because Fannie and Freddie will be there to take them off your hands.

Is that accurate or have I been misled about the central notion of Fannie and Freddie serving as a flow-valve in order to maintain a free flow of sub-prime loans (in a system that wouldn't normally support such a high concentration of sub-prime loans)?

Ed




Post 12

Sunday, March 13 - 5:49pmSanction this postReply
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But what about the notion that, whatever kind of mortgage a lender is selling -- Fannie and Freddie will be there in order to buy it up, no matter what (a "lender of last resort" phenomenon)?
That notion is false. Fannie and Freddie had underwriting standards. Underwriting standards are covered some here. They were relaxed some during the housing boom, but have been tightened since the government takeover. The lowest underwriting standards were by others (not uniform, of course) such as Countrywide and Washington Mutual (link).

(Edited by Merlin Jetton on 3/13, 7:26pm)




Post 13

Tuesday, March 15 - 12:24amSanction this postReply
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Merlin,

Let me get this straight (for the record):
Are you telling me that rich (smart) investment banks and private investors "accidentally" over-invested in housing to the tune of $600 Billion, by simple free-market mechanics? Or that rich (smart) securities insurance companies accidentally over-insured $600 Billion in often-bad loans? I would expect a market to accidentally over-invest now and again, but $600 Billion in accidental over-investment? It sounds extremely unlikely to me.

Note: I don't think you would say yes to the questions above, but I wanted to hear what you had to say on it.

Will you please go to the trouble to hazard a guess regarding apportioning a percentage estimate of blame (for the housing fiasco) to the following 10 items?:

Community Reinvestment Act ..........___%
Low (or negative) Fed Interest Rate .___%
Fannie & Freddie ............................___%
Homebuyers ....................................___%
Rating Agencies ...............................___%
Lenders ...........................................___%
Private investment banks ..................___%
Private investors ...............................___%
Securities insurance companies .........___%
Speculators ......................................___%
_________________________________
Total Blame ......................................100%

Is any line item greater than 20%?
Are any line items definitely less than 10%?
Are any line items definitely less than 5%?
Are any line items definitely less than 1%?
Is any line item 0%?

If you don't want to give narrow point estimates of apportioned blame, you could add "+/- 5%" error margins. Here's my attempt at coming up with point estimates (with error margins) with regard to proportion of blame for the fiasco:

Community Reinvestment Act ...........20% (15-25%)
Low (or negative) Fed Interest Rate  20% (15-25%)
Fannie & Freddie ............................20% (15-25%)
Homebuyers ....................................20% (15-25%)
Rating Agencies ...............................20% (15-25%)
Lenders ...........................................0% (0-5%)
Private investment banks ..................0% (0-5%)
Private investors ...............................0% (0-5%)
Securities insurance companies .........0% (0-5%)
Speculators ......................................0% (0-5%)

What are the chances that I'm right?

Ed
(Edited by Ed Thompson on 3/15, 12:26am)




Post 14

Tuesday, March 15 - 12:55amSanction this postReply
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Merlin probably has a better grasp of this than I do, but I'm wondering why Ed's list doesn't have a line for the rapidly increasing money supply, and another line for insiders sense that they could take greater risks than normal because of the belief that the government was in their corner.



Post 15

Tuesday, March 15 - 6:19amSanction this postReply
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Steve,

I'm wondering why Ed's list doesn't have a line for the rapidly increasing money supply ...

It does (second line):

Low (or negative) Fed Interest Rate 

If the Fed holds its interest rate close to zero (or makes it negative), then banks start taking out loan after loan after loan (because they get more than 0% interest in their investments, they make more profit the more they borrow).

... and another line for insiders sense that they could take greater risks than normal because of the belief that the government was in their corner.

That was supposed to be covered by "Fannie & Freddie" with the implicit guarantee of tax dollars. Is there another way to believe government was in somebody's corner here?

Ed

(Edited by Ed Thompson on 3/15, 12:59pm)




Post 16

Tuesday, March 15 - 6:53amSanction this postReply
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Are you telling me that rich (smart) investment banks and private investors "accidentally" over-invested in housing to the tune of $600 Billion, by simple free-market mechanics? Or that rich (smart) securities insurance companies accidentally over-insured $600 Billion in often-bad loans? I would expect a market to accidentally over-invest now and again, but $600 Billion in accidental over-investment? It sounds extremely unlikely to me.
The investment banks were brokers more than investors. They securitized mortgages to sell them to other investors. Many of these investors were overseas and sovereign funds, e.g. China and the municipality in Norway featured in David Faber's "House of Cards." MBS, highly-rated by the rating agencies, offered them a higher expected yield than U.S. Treasuries.

Regarding the blame, I would apportion it about 14+% each to the top 7 and 1% to the private mortgage insurers. The role of Fannie and Freddie was more long-term than short-term -- making securitization popular and the implicit government guarantee.

(Edited by Merlin Jetton on 3/15, 9:10am)




Post 17

Tuesday, March 15 - 12:02pmSanction this postReply
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Ed,

Of course the low to zero interest rates are tightly integrated with the increases in the money supply, but the two need to be mentioned (even though they come from the same villain).

You can't have a long lasting, and large bubble without the continuing injection of brand new money that is finding it's primary expression in the rising prices of the item that is in the bubble. Without that massive increase of funds chasing those houses for sale, the prices would self-correct as supply caught up to demand. That's why I mention an increase in the money supply as important.

I don't have any idea what percentage to assign, but if you were assigning categories to the possible causes, I vote to put this one in the category called "Necessary"
--------------

You asked, "That was supposed to be covered by "Fannie & Freddie" with the implicit guarantee of tax dollars. Is there another way to believe government was in somebody's corner here?

Yes, there are also the behind the scenes assurances of all the former Goldman Sachs people in the administration who bailed out AIG (saving Goldman Sachs a fortune). We might not ever know about the many implicit or explicit 'one hand washes the other' arrangements. Until we get a audit of the Fed, we don't even know what has gone on behind the scenes. It gets all mixed up with corruption in the form of campaign contributions and the hanky-panky like the Countrywide mortgages. This all added up to an environment where government acted like a nation of men not laws.
-------------

I would not assign much blame to lenders or buyers for the total fiasco. They were acting in their interests within the system that existed as they perceived. The buyers were either stupid people who were being offered what they could never otherwise have had and they took a chance that there was a tooth fairy, or they were investors who saw a chance at more highly leveraged and safer investments than anything else that existed. It is like government corruption... you don't assign as much blame to the those who give money to politicians as you do to the politicians who sell the favors. The major portion of the blame goes to those who created the system.

At this point it is clear that there are two factors involved in this question you've raised - moral blame and functional participation. The specifics of the mechanism by which actions initiated by a buyer and a lender, repeated en-mass, end up as packaged toxic assets that collapse a badly designed system can be examined for what each item in the chain contributes (what percent of the functional participation should it be assigned). But that is a technical issue, not a moral issue.

Morally, lots of people behaved badly on a an ethical level (e.g., turning their head and looking away when they start to see that this person shouldn't have a loan). But in terms of rights violations and injustice, the blame comes to the politicians as the primary evil-doers, and those they conspired with secondly.



Post 18

Tuesday, March 15 - 1:12pmSanction this postReply
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Steve,

Of course the low to zero interest rates are tightly integrated with the increases in the money supply, but the two need to be mentioned (even though they come from the same villain).

But I've heard that they aren't different anymore, because, I've been told, we don't print extra money anymore. Instead, the main (the only signficant?) mechanism to increase the money supply nowadays is to lower the Fed interest rate. If that's true, then there is a functional equivalence between money supply and Fed interest rate.

Side Note: And I also think this might have something to do with them no longer reporting the M3 money supply (even though the M3 money supply still exists).

You asked, "That was supposed to be covered by "Fannie & Freddie" with the implicit guarantee of tax dollars. Is there another way to believe government was in somebody's corner here?

Yes, there are also the behind the scenes assurances of all the former Goldman Sachs people in the administration who bailed out AIG (saving Goldman Sachs a fortune). ...

It gets all mixed up with corruption in the form of campaign contributions and the hanky-panky like the Countrywide mortgages.
Excellent points.


Ed




Post 19

Tuesday, March 15 - 1:39pmSanction this postReply
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In light of this new evidence and reasoning from Merlin and Steve, I have to alter my point estimates of moral blame:

Dirty Politicians bailing out cronies in the private sector.........................20%
Dirty Politicians using Community Reinvestment Act as a weapon.........20%

Low (or negative) Fed Interest Rate .................................................. 15%

Fannie & Freddie ..............................................................................15%

Lenders (e.g., Countrywide)...............................................................10%
Private investment banks (e.g. Goldman Sachs)...................................10%

Rating Agencies .................................................................................10%

Homebuyers .......................................................................................0%
Private investors .................................................................................0%
Securities insurance companies ...........................................................0%
Speculators ........................................................................................0%  
Each non-zero entity** above (morally blameworthy entities) used force or fraud on some level.



Ed


**Note: Each line item stands as a placeholder for the people behind it. It's silly to morally blame inanimate things like "interest rates," but there are always humans behind every line item who are, ultimately, morally responsible. The moral blame is meant for the humans behind each line item.

(Edited by Ed Thompson on 3/15, 1:46pm)




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