Monday, September 29, 2008

Dennis Kucinich Isn't Happy

I actually agree with a great majority of his complaints. It isn't that I don't see the need for a massive bailout. I do. It isn't that I don't see the need for a bailout to be delivered quickly and effectively. I do. At the same time, though, I am unsure about pumping any money into a broken financial system without making an effort to fix that system in tandem. There is something strangely unsettling by throwing money at a problem and then talking about regulations as an aftereffect of the nightmare. I want my regulations and my accountability to be a major part of the bill now. Because accountability is important, deeply important. We hold homeowners accountable when they default on loans. We hold customers of banks accountable when they overdraw their accounts. But we do not seem to be making the same effort to hold the members of these financial institutions accountable to the same degree; and that does lend to the idea that we are a nation who does "accelerate the wealth of America upwards".


mikhailbakunin said...

Two points:

1) Regulatory restructuring is a long, painful process. This bill doesn't offer much in the way of comprehensive reform, but that's because it's a rescue bill. The concern is a near-term emergency (credit markets completely freezing up).

2) Who's accountable for this mess? That's a big question. Is it the credit rating agencies that valued MBS as top-tier securities? Is it the mathematicians who developed the risk formulas to evaluate these instruments? Is it the investment banks that purchased those securities? Is is the brokers who ignored the credit-worthiness of borrowers? Is it the banks who did the same? Is it the people who chose to buy houses they couldn't afford? Is it the people who lied on their mortgage applications? Is it the government, which encouraged lending to low-income families through legislation like the Community Reinvestment Act? Is it SEC regulators who seemed to be asleep at the wheel? Is it Wall Street euphoria? Is it average Americans who were looking for higher and higher yields from pension funds and IRAs?

There are so many culprits here.

mikhailbakunin said...

Also, this may be a completely obvious point, but doesn't Dennis Kucinich kind of look like an elf?

John said...

@Mikhail: It's the ears. Definitely.

As for the rest, it must just be my understanding of what's going on that makes the whole thing seem so ridiculous. Are they really presenting these MBS as a "buying opportunity" for the federal government? Are they promising that since we're bailing them out by buying these high-risk, currently low-value securities at a low price, we'll see a greater return on our investment? Isn't that exactly what the previous buyers of MBS thought, which led them to this current catastrophe?
I'm willing to accept that this bail-out is a tourniquet on a wildly bleeding arm of the American economy, but we shouldn't kid ourselves into thinking that we can stop the bleeding AND save the arm.
As you can see by my amputation metaphor, I need some help figuring all this out. Can anyone suggest a source of information that explains things clearly and accurately?

petpluto said...

"Is it the people who chose to buy houses they couldn't afford?"

Having worked in the mortgage industry, I feel the need to point out that most people bought houses they could afford at the moment; a majority of people who were sent to our collections department didn't buy a home and then immediately default because they'd bought something they knew they could never pay off. They were people who bought a home they could afford when gas was two dollars a gallon and when they both had jobs and when food prices weren't skyrocketing. These were people who were able to pay their bills when their lines of credit were larger (because LOCs are often directly tied to the value of the house itself, and when the housing market went belly up, were inversely affected), but were now experiencing cash flow problems. Even for people who didn't lose their jobs, the money flow became tighter. I'm not saying these people hold no accountability, but their accountability is significantly less and their lives are being affected significantly more than those in the upper echelons of Wall Street.

"Is it the people who lied on their mortgage applications?"

The amount of people who lied on their mortgage applications and actually got away with it is a negligible amount. That would be like saying the recent spike in food prices is due to the people who shoplift. People who shoplift affect prices (though most places now have a general "insurance" pricing where that cost has already been passed on to the customer), but it doesn't explain the actual and rapid spike in prices.

If, however, some bank really does have an inordinately high amount of people who lied on their mortgage applications, then the bank is still more accountable. Why? Because they employ people to catch these falsifications of documents. They have the mortgage broker, they have the closing department, they have the post-closing department, and they have quality control. Each of these departments reviews the file and all of the other paperwork along with it. If the banks were allowing so many of these applications through (and they weren't, but let's say they were), then that was a systemic banking failure on the part of 4 separate departments, who each have their own managers and supervisors and higher ups. Even if one bank screwed up that badly, it would be ridiculous. But if every bank screwed up that badly?

"Is it the government, which encouraged lending to low-income families through legislation like the Community Reinvestment Act?"

CRA banks, in a review by Traiger and Hinckley, actually found that "were substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis."

"The concern is a near-term emergency (credit markets completely freezing up)."

Yes, but -and this is a big but for me- once the crisis has passed, there will be less bipartisan need to revamp the regulatory process.

petpluto said...

And Dennis Kucinich looks more like an elf than even Barry Manilow does. And that is saying something!