Bill's Big Diamond Blog

Kiva.org

Just a quick post for folks who might be interested in microlending as a way of directly making an investment in the hard work of entrepreneurs around the world: Check out kiva.org to learn how you can make a small investment!

Hat tip to Bob Harris on this.

(Why not have a look at this fellow's loan application? Maybe you'd like to invest in his family's future?)

The 99ers— Over a Million and Growing

As if we had to ask, here's how bad it is (according to Annie Lowrie's piece in the Washington Independent):

The joblessness crisis — in the average duration of unemployment, if not the absolute unemployment rate — is unprecedented in the postwar United States. Of the 15 million unemployed in America, over 7 million have been out of work for more than six months, nearly 5 million for a year and over 1 million for two years — the worst statistics since the government started keeping count in 1948.

Bet Against the American Dream, Goldman Style

The way that Goldman Sachs got itself in front of the SEC, charged with fraud, is eerily similar to another deal that Pro Publica and NPR journalists detailed recently in their story on Magnetar, a CDO deal done to exploit the height of the housing bubble at the behest of a hedge fund that designed the CDO expressly to fail. Like arsonists buying insurance on a house they wanted to burn, the hedge fund bought Credit Default Swaps worth far more than their investment— looking not to make money on the mortgage security, but on the insurance when it went under. The story has played on a fascinating episode of NPR's This American Life and now is the subject of a Bloggingheads.tv dialogue. Read, watch and listen to understand how Wall Street gamed the bubble as you bought homes they knew would decline in value.

Hey, the story even has a song...sing along, let's, "Bet Against the American Dream."

Bet Against The American Dream from Planet Money on Vimeo.

Could FDR Fix Our Mortgage Crisis?

North Carolina Congressman Brad Miller has proposed an interesting solution to the seemingly intractable mortgage crisis affecting a vast number of American homeowners. Rather than creating a new program to deal with mortgages currently in foreclosure or underwater, Miller suggests reviving a Depression-era entity, the Home Owner's Loan Corporation (HOLC).

HOLC was originally created in 1933 by the Roosevelt Administration. It's mission was to buy up distressed mortgages from the banks and then restructure them in negotiations with homeowners. HOLC eventually turned a slight profit, according to Miller, by the time its last mortgages were paid off in 1951, but in the first years of its existence, the agency was credited with averting a threatened collapse of the 1930's real estate market and with keeping homeowners in their houses— thereby avoiding mass evictions and suffering across the country.

Current programs, like the Obama Administration's HAMP program, are not doing the job of stabilizing real estate markets and helping homeowners to make loan payments workable on salvageable mortgages. HOLC, on the other hand, has a record of being able to intervene to make terms with homeowners, whether by reducing the principle of a loan in an underwater market, renting a home back to the family living in it on a long-term basis, or devising a payment restructuring as needed.

If the program were revived, homeowners would apply to HOLC, which could pick workable situations to become involved in. The banks would then relinquish the mortgage to HOLC in exchange for a percentage of the full value of it (through eminent domain), thereby restoring some sense of reality to the balance sheets of mortgage holders. Then, negotiations between the homeowner and the agency would be agreed upon. The restructured mortgages would be signed by HOLC and the homeowner, replacing the old mortgage with one that would be more workable and be serviced by HOLC.

I'm not an expert in mortgages, but the outline of the proposal has the appealing aspect of a history of effectiveness, unlike the programs not currently working. I'd like to hear readers' thoughts on it.

Here's a link to an article in the New Republic by Congressman Miller about his proposal.

Looking for Real Cures

Today's NY Times carries an editorial that warns the Obama Administration against sticking with the economic half-measures it continues to take since the meltdown of 2008. Here we are, heading into 2010 and the US economy is still dragged down by zombie banks, loaded up with bad mortgage paper, a lack of credit for small business, little regulation on the financial markets, continued high unemployment, and a growing political obsession with closing the budget deficit while the need for more stimulus looms large. The Times editors ask whether anyone has learned the lessons of the meltdown— and if the US will avoid the fate of the Japanese 'lost decade' of the 1990's.

There are few reasons to believe the political class in the US cares enough about the long-term health of our economy to take the hard steps necessary to restore real economic health to our system. Despite this, one hopes there are enough voices out there to keep discussion alive about actually fixing those banks that are still zombies, instituting some serious new regulatory barriers to prevent the next bubble, and putting our people back to work. We must get our priorities straight in the United States— or we'll be looking at another economic collapse in only a matter of time.

NY Times Backs Investigation of Trading Practice

In a NY Times Christmas Eve article, Gretchen Morgenson and Louise Story revealed huge and aggressive bets that Goldman Sachs and other trading firms were making against their own clients in the CDO market during the period leading up to the financial meltdown of 2008. In addition, the reporters pointed to Goldman's continued issuance of CDO's which were designed so poorly that many of them failed within months, creating greater profits for the firm's enormous contrary bets on the same products' demise.

These practices, along with the 'triggers' that amplified the losses in the credit default swaps market (see AIG's bankruptcy) seem to have had, at the very least, the potential to create serious contagion in the credit markets. In an editorial today, the NY Times calls for an investigation into these practices and for greater regulation of the derivatives market to prevent future abuses.

In a post here on Christmas Eve, we called for investigations based on these revelations as well. It's in all our best interests to highlight these abuses and deal with the practices they reveal before the next bubble bursts.

How Traders Might Just Have Caused the Collapse— For Profit

Today's NY Times piece, Banks Bundled Bad Debt, Bet Against It, and Won, by Gretchen Morgenson and Louise Story, is a must-read for anyone interested in understanding how the credit collapse of 2008 came about. It's a challenging story, detailing some of the staggering bets that Goldman Sachs and other derivatives marketers made against products they themselves were creating, even well into the housing market collapse.

If Congress and regulators are truly serious about better protecting the credit markets, some detailed questions should be answered about whether hair 'triggers' constructed in these instruments logarithmically increased the chances of a catastrophic housing securities market collapse. What's more troubling is the evidence that some of the CDOs were marketed by the same firms that were betting heavily against the housing market. The story raises the possibility that some CDOs were hyped just so that the firms' own bets against them would payoff more richly— even as their clients were enticed to buy more and more bad housing securities products.

It's a shame that this article appears on a day that most of its readers are busier with "The Night Before Christmas" than with the Grey Lady's front page.

Learning from the Meltdown

How the financial collapse is understood and dissected will be of crucial import as Americans draw lessons from the painful experience we’re now enduring.  On the right, there’s no shortage of pundits who are ready to blame the whole thing, amazingly enough, on poor people.  After all, they claim, it was giving loans to those who can’t now pay them back that started this mess, wasn’t it?

 If we fall into the trap of believing that kind of simplistic and misleading claptrap, we stand a good chance of being mired in a long and stagnant economic mess for years to come.  It’s critical that we draw the right lessons from the collapse.  Fortunately, Joseph Stiglitz, Nobel laureate and former Chairman of the Council of Economic Advisors, has outlined five crucial causes of the collapse in January’s Vanity Fair magazine.

 Stiglitz’s piece is a very readable tour through the era of neocon economics—and it shows how a belief in markets over prudence led inevitably to the meltdown.  From throwing over competent management of our central banking, as Reagan did when he replaced Paul Volker with Ayn Rand devotee Alan Greenspan, to the refusal of Greenspan’s Fed and the SEC to regulate the WMDs of economic instruments, derivatives, Stiglitz makes the case that the belief in market “innovation” as a greater good than prudent regulation sits at the core of our current disaster.

 In addition, the ferocious combination of investment banking with commercial banks, accomplished by the repeal of Glass-Steagall during the 1990’s, allowed the alpha dogs of investment markets to dominate the financial services sector.  This hasty power shift away from the traditional separation of banking and trading spelled the demise of an era of financial firewalls, without any real discussion of new regulations that might have prevented a collapse.  To hasten this seismic cultural shift, the SEC decided in 2004 to allow investment banks to increase their debt-to-capital ratio from 12:1 to 30:1 or higher.

 Stiglitz points out that during the early part of this decade, the aftermath of the tech bubble would have ordinarily been a time of serious economic retrenchment and realignment. Instead, Greenspan hit the gas pedal, dramatically lowering interest rates.  Simultaneously, Bush’s tax cuts for the rich and a cut in the capital gains rate led to more “innovative” approaches to real estate speculation and derivatives trading, at just the moment reasonable people should have been looking for safer ground during tough times. 

 Of course, even with all the incentives for the well-to-do, the stock market wouldn’t have been as attractive an investment if there hadn’t been for another incentive: the prizes given to top executives who fudged their numbers with inflated earnings and off-balance-sheet assets.  As long as the markets rewarded CEO’s and other top execs with stock options and huge bonuses, based on constantly increasing valuations, the incentive to find a way, any way, to inflate quarterly earnings figures with every report was just too tempting to resist for many. Go ask Bernie Madoff if you think constant investment gains are easy to accomplish in the real world.

 Finally, we’re in a worse mess because geniuses like Hank Paulson and the Bush White House wouldn’t take off of their rose-colored glasses when the whole thing started to crumble.  They thought letting Lehman Brothers fail would show the rest of Wall Street the way to salvation— and that simply giving the taxpayers a bag of toxic mortgages to hold would fix the problem.  They didn’t get it till way too late, even into the fall of 2008, that the whole scenario was a house of cards and was tumbling fast. Paulson didn’t realize that letting even one card go was going to collapse the entire deck.  Paulson’s belief that bad mortgages were identifiably separable from the complex of indecipherable derivative products based on them and the insurance swaps that the market was betting on to protect those derivatives was sadly mistaken.

 Even now, the conservatives are still baying at the markets-are-always-right moon.  They lament that the whole mess goes back to legislation like the Community Reinvestment Act of 1977, once again attempting to identify the poor as the problem.  They conveniently forget that CRA loans in low-income neighborhoods have actually defaulted at a lower rate than other mortgages.  The conservatives are now also constantly repeating the mantra, “Freddie Mac and Fannie Mae did it,” even though these mortgage lenders are, surprisingly enough, on better financial footing than most of the Wall Street finance giants the government hasn’t actually taken over, but merely bailed out to the tune of $700 billion and counting (see “Fannie Mae’s Last Stand,” also in Vanity Fair).

 No, the mess is far more systemic than the conservatives would like to pretend.  But don’t think that won’t keep them from continuing to work at rewriting economic history.  They know that a simple lie, repeated endlessly, grabs more news headlines than a complex truth.  So they’ll be busy shaping simple slogans for the press and looking for demons in all the usual places.  The challenge for journalists and observers seeking real answers will be to ask themselves, “Are these the same guys we listened to before the collapse”

 Since the meltdown (and before it), observers like Stiglitz, Daniel Roubini, Paul Krugman, and other critical thinkers have done an excellent job of doing forsenic accounting on the decades-long American deregulatory experiment.  We need to take their advice and learn from the mistakes that were made in the name of a convenient combination of conservative ideology and economic self-interest for the most powerful.  Once we begin to take serious stock of how the supercapitalists got us where we are, it will be easier to make decisions on a rational basis about how we want to go forward into the post-collapse future.

Mortgage Interest Rates Still Too High

Paul Krugman has a suggestion to fight the huge spread between the rate on federal debt and mortgage rates: declare that Fannie and Freddy (already essentially nationalized entities) are backed by the full faith and credit of the US government and then if necessary, have the Treasury borrow on their behalf.

Doesn't the  lack of this kind of innovative thinking on the part of current management at Treasury make a person feel like the clock is running extra slow between now and 01.20.09?

Report: National Commission on Fair Housing and Equal Opportunity

This past week, as most of us were preoccupied with the financial meltdown and one crooked Governor with wacky hair, a national commission studying how far we’ve come (and how far we have left to travel) in the 40 years since the passage of the Fair Housing Act issued its final report.  Their findings should give Americans pause.  Here are some highlighted passages from the National Commission on Fair Housing and Equal Opportunity:

—The hearings exposed the fact that despite strong legislation, past and ongoing discriminatory practices in the nation’s housing and lending markets continue to produce levels of residential segregation that result in homeownership attainment and asset accumulation.  This fact has led many to question whether the federal government is doing all it can to combat housing discrimination.  Worse, some fear that rather than combating segregation, HUD and other federal agencies are promoting it through the administration of their housing, lending, and tax programs.  

...discrimination continues to be endemic, intertwined into the very fabric of our lives.  Ironically, even though more Americans than ever are living in diverse communities, residential segregation remains high. Sustaining the racial and ethnic stability in diverse communities remains a challenge because of perceptions and prejudices that devitalize them. And while nationally the incidence of discrimination is down, there are at least four million fair housing violations in our country every year.  That is far too many. 

—The current mortgage crisis has its roots in decades of discriminatory housing and lending practices.  Exploitative predatory lending has had its most devastating effects in communities that are predominantly Black and Latino, causing an unprecedented loss of wealth to those communities.  Given this, it is critical that the solutions that have been proposed to address our current mortgage crisis comply with the mandate that all government housing and lending programs affirmatively promote fair housing.

—Equal housing opportunity must be our collective goal.  But as recent history has demonstrated, we cannot get there working in silos.  Only together, with a mix of education, enforcement, and policy tools, working across partisan lines, with government and private partnerships coordinated at the local, state, regional and federal level, can we begin to make our dreams real.