Cost of Bush Tax Cuts

[GG]

Given that I, in 2003, was able to call the 2007 peak based on the sudden proliferation of IO and neg-am mortgages being written at both my job and my wife's job, I'd have to agree that the basis of the collapse was laid well before mid-2006.

 

These were financial innovations that gained steam eralier in the decade, and there was a lot of fear about them, but these ARMs that were going to reset weren't the trigger. If you want to see an ugly picture, look at the subprime RMBS issuance every year - then look at the number starting in 2006.

[Magox]

A 30-year housing and credit bubble? A bubble that spanned three recessions and wildly fluctuating housing prices & bond spreads? Is that really your argument?

 

Yes, that is A part of my argument. People have been living outside of their means during this 30 year housing/credit bubble. You are mistaken if you believe that I am insinuating that home prices have been inflating for 30 consecutive years. That is not the case that I am making whatsoever. The argument is that there has been a bubble of HOME OWNERSHIP during the past 30 years mainly due to government home ownership policies (tax deductions more than anything).

You know how many people have over leveraged themselves over the past 30 years mainly through using their homes as ATM machines? I'm sure you've heard of the deleveraging process that is going on, and I'm sure you know that it's not just the government, banks or corporations that are delevering, it's also households. So yes, this is a bubble that goes waaay back.

 

Should I have to remind you that correlation does not equal causation?

 

Isn't that the point I have been making with you?

 

I think you're pretty smart to recognize that Wall Street will quickly capitalize on any arbitrage opportunities, and bubbles fester & burst very quickly in this information age.

 

Absolutely, no argument here. WHich is why I said that a number of factors came together in the mid 2000's...

 

Home ownership policies did not drive the mass speculation & house flipping in AZ & Florida.

 

Again, I never implied that homeownership policies were the sole reason for the bubble, did I?

 

They did it because they had free financing from the Wall St money machine that was driven by favorable capital rules that gave them credit for holding AAA securitizations.

 

I made a similar point on numerous occassions.

 

If you want to look at a cause - see the funding book of a financial firm that failed in 2009, and invariably you will find a much higher proportion of RMBS & CMBS securities in there or short CDS exposure with companies that had the crap securitizaions. The European banks, nor AIG gave a hoot about CRA or government's push into home ownership.

 

The Europeans downturn was a case of collateral damage. It was because of their exposure they had to our housing and credit bonds more than anything. A totally useless example...Doesn't apply whatsoever.

 

In regards to AIG, how many times do I have to make the point to you that AIG's losses were due to insuring these bonds? YOu keep bringing them up, and I keep telling you this. I hope we don't have to go through this again...

 

And no, tnone of these companies ever were subject to Glass Steagall, yet they failed, but banks that were subject to GS, did not. In fact, the only "bank" that would hvae failed was Citi and only because the Solly arm would have pushed them under, not the retail or commercial bank side.

 

Once again, you are looking through things from a narrow perspective, you have to take a step back and broaden your view. You look at Citi and see that they are the only bank to have gone under and you come to the conclusion that "You see, it's not the repeal of GS that helped caused this". First off that is inaccurate, because BAC would of gone under as well if they hadn't of been bailed out, plus I have a newsflash for there have been hundreds of depository community banks that had exposure to MBS that have folded, secondly and more importantly (In which I have gone over this with you a Gazillion times) that the repeal of GS opened up the gates and gave the green light for more risk taking not just from the investment banks but from depository institutions. WHat this did was cause an explosion of Securitizations not just for conventional MBS but in SUbprime and other riskier leveraged home products.

 

Combine this with government housing policy, incredibly low interest rates for too long, rising home values an EXPLOSION of mortgage companies popped up everywhere. WHy? Because of the massive amounts of securitizations that were taking place in Housing Bonds (SubPrime) FUNDING WAS AVAILABLE FOR EVERYONE. Why not? Give a loan and make money, banks were desperate to lend that money and mortgage companies were eager to take it, and aspiring homeowners were happy and greedy to take it... Many of the people that received those Sub prime loans should have never of been approved in the first place.

 

Should I have to remind you that correlation does not equal causation?

Edited September 30, 2010 by Magox

[TPS]

I have always maintained that growth of securitizations helped fuel the bubble and we've argued this point a few times regarding the impact of the Repeal of GS, which DID HELP FUEL this bubble. I don't know if you remember, but I made the case that there was such high supply of money available through securitizations of Mortgage bonds that it created a plethora and explosion of funding for mortgage companies to pop up at every corner, creating competition and unethical practices in the mortgage industry in which there was virtually no regulation.... But none of this would of happened GG if the government hadn't of given the green light through government home ownership policies.

Ok, Take government out of the picture--no interest deduction, no implicit backing of gses, no cra, etc. Are you saying a bubble in housing could not be possible?

[Magox]

Ok, Take government out of the picture--no interest deduction, no implicit backing of gses, no cra, etc. Are you saying a bubble in housing could not be possible?

Nope, not what I'm saying at all...

[GG]

You still don't have a clue in how the industry operates and funds itself. If this was truly an asset crisis that was building for 30 years, then you would see it clearly in the data of home price appreciation and disposable income over that period. If you believe your theory, then you could also impart the conclusion from the direct correlation between mortgage rates and home prices and that trend would hold up historically.

 

Study

 

Truth is, that the historic reduction in mortgage rates has not correlated with a disproportionate rise in real estate values like what happened post 2001, and exploded in 2005 (even as real mortgage rates were increasing). So you have to look if other factors contributed to the run up, which obviously they had. The primary culprit was the difference in how financials were funding the mortgages, and the vicious cycle that was created from origination to syndication that was predicated on a continuing supply of housing. Once the machine got rolling, it was virtually impossible for anyone to stop it, because everyone benefited from that gravy train.

 

If mortgage tax deduction or CRA were among major culprits, this bubble would have festered in the '80s or '90s. But it didn't. Housing was simply a good source for the funding because it was asset based and you created a whole new credit market where one never existed and you were able to gol dplate it with AAA bonds. The fact that housing stock went up in Europe as well due to the proliferation of mortgage financing should be another clue that US government home ownership policies were tangential to the run up.

 

As for GS, how many times do people have to tell you that the actions banks & financial firms were doing in the real estate run up were not barred by Glass Steagall restrictions? Mortgage companies were not subject to GS. They could originate & sell mortgages to investment banks, who then turned around and securitized then to the investors. These rules did not change and the same thing would have happened had GS still been in place. I can argue that it probably would have been worse, because you would have had more broker dealers going down, taking down real banks with them. BTW, the only reason BoA was going to collapse is because they bought Merrill, not because of their own book. Wachovia failed because they bought a troubled S&L - again nothing that was prohibited under GS. And yes, AIG went down because of their CDS exposure, which again was outside the scope of Glass Steagall. So I'm still waiting to hear a plausible reason of precisely which provision of the Glass Steagall act would have prevented the rise of the securitization market and credit default swaps.

 

I'm also tired of the argument that Fed liquidity was the primary culprit in the crisis. I think we're seeing now that monetary policy can have an impact in the short term, but is helpless over a longer term. The forces that were aligning in the global mortgage market were too big for the Fed to fight with a 1% rate increase in 2003. By that time, the machine was in full swing.

 

Ok, Take government out of the picture--no interest deduction, no implicit backing of gses, no cra, etc. Are you saying a bubble in housing could not be possible?

 

Caveat - GSAs were a big part in that machine, so yes they did contribute a lot by helping to artificially inflate the market.

[Magox]

You still don't have a clue in how the industry operates and funds itself. If this was truly an asset crisis that was building for 30 years, then you would see it clearly in the data of home price appreciation and disposable income over that period. If you believe your theory, then you could also impart the conclusion from the direct correlation between mortgage rates and home prices and that trend would hold up historically.

 

Study

 

Truth is, that the historic reduction in mortgage rates has not correlated with a disproportionate rise in real estate values like what happened post 2001, and exploded in 2005 (even as real mortgage rates were increasing). So you have to look if other factors contributed to the run up, which obviously they had. The primary culprit was the difference in how financials were funding the mortgages, and the vicious cycle that was created from origination to syndication that was predicated on a continuing supply of housing. Once the machine got rolling, it was virtually impossible for anyone to stop it, because everyone benefited from that gravy train.

 

If mortgage tax deduction or CRA were among major culprits, this bubble would have festered in the '80s or '90s. But it didn't. Housing was simply a good source for the funding because it was asset based and you created a whole new credit market where one never existed and you were able to gol dplate it with AAA bonds. The fact that housing stock went up in Europe as well due to the proliferation of mortgage financing should be another clue that US government home ownership policies were tangential to the run up.

 

As for GS, how many times do people have to tell you that the actions banks & financial firms were doing in the real estate run up were not barred by Glass Steagall restrictions? Mortgage companies were not subject to GS. They could originate & sell mortgages to investment banks, who then turned around and securitized then to the investors. These rules did not change and the same thing would have happened had GS still been in place. I can argue that it probably would have been worse, because you would have had more broker dealers going down, taking down real banks with them. BTW, the only reason BoA was going to collapse is because they bought Merrill, not because of their own book. Wachovia failed because they bought a troubled S&L - again nothing that was prohibited under GS. And yes, AIG went down because of their CDS exposure, which again was outside the scope of Glass Steagall. So I'm still waiting to hear a plausible reason of precisely which provision of the Glass Steagall act would have prevented the rise of the securitization market and credit default swaps.

 

I'm also tired of the argument that Fed liquidity was the primary culprit in the crisis. I think we're seeing now that monetary policy can have an impact in the short term, but is helpless over a longer term. The forces that were aligning in the global mortgage market were too big for the Fed to fight with a 1% rate increase in 2003. By that time, the machine was in full swing.

 

 

 

Caveat - GSAs were a big part in that machine, so yes they did contribute a lot by helping to artificially inflate the market.

Jesus Santa Maria.....

 

We're just going in circles, like always...

[GG]

Jesus Santa Maria.....

 

We're just going in circles, like always...

 

We are, but you should note that a lot of the sources that you cite have an ideological axe to grind or are defending their long held positions, like WSJ's crusade that low interest rates were the primary cause, when there's scant data supporting that position. Same with CRA - it's a bogus argument, that in the end had a very minor effect on the run up.

[Magox]

We are, but you should note that a lot of the sources that you cite have an ideological axe to grind or are defending their long held positions, like WSJ's crusade that low interest rates were the primary cause, when there's scant data supporting that position. Same with CRA - it's a bogus argument, that in the end had a very minor effect on the run up.

bull ****! You are the one with the anti-regulation crusade that clouds you from any sort of objective analysis....

 

 

And the fact that you mention that interest rate policy played little or no role is all I need to know. What a joke

Edited September 30, 2010 by Magox

[GG]

bull ****! You are the one with the anti-regulation crusade that clouds you from any sort of objective analysis....

 

Wrongo buddy. This is one industry that should be regulated, but be done with a unified and consistent application, because people who work in the industry are too smart for your average regulator. The alphabet soup of regulatory bodies is not equipped to handle the job.

 

Perhaps you should revisit what I've been saying about regulations of financials over the past 3 yrs.

 

And the fact that you mention that interest rate policy played little or no role is all I need to know. What a joke

 

Then there should be no problem showing the data that low Fed interest rates in 2001-2003 were a major cause of the crisis, rather than the funding mechanisms of global financial houses which created their own currency and interest policy over that period.

Edited September 30, 2010 by GG

[Adam]

Just take 100% everyone and give them back what they need

[TPS]

Study

 

Truth is, that the historic reduction in mortgage rates has not correlated with a disproportionate rise in real estate values like what happened post 2001, and exploded in 2005 (even as real mortgage rates were increasing). So you have to look if other factors contributed to the run up, which obviously they had. The primary culprit was the difference in how financials were funding the mortgages, and the vicious cycle that was created from origination to syndication that was predicated on a continuing supply of housing. Once the machine got rolling, it was virtually impossible for anyone to stop it, because everyone benefited from that gravy train.

I thought this was my line?

 

Nice article. It's too bad they didn't inlcude data on how much money flowed into REITs, but those were some mighty fine returns. I do recall, that with the Enron/Worldcom, etc scandal and the tech bubble burst, a lot of was reluctant to go into stocks. Real Estate became one of the investments of choice. Maybe I'll check the Flow of Funds data and see if I can get that.

Edited October 1, 2010 by TPS

[GG]

Study

 

 

I thought this was my line?

 

Nice article. It's too bad they didn't inlcude data on how much money flowed into REITs, but those were some mighty fine returns. I do recall, that with the Enron/Worldcom, etc scandal and the tech bubble burst, a lot of was reluctant to go into stocks. Real Estate became one of the investments of choice. Maybe I'll check the Flow of Funds data and see if I can get that.

 

That is precisely what happened, but I don't think that the majority of that cash went to REITs. If it had, then the collapse would have looked differently. The big problem is that the cash & securitizations stayed within the wholesale system, with a smlaler percent going to hedge funds & other institutional investors (Chinese, Japanese) as was the conventional wisdom at the time.

[TPS]

That is precisely what happened, but I don't think that the majority of that cash went to REITs. If it had, then the collapse would have looked differently. The big problem is that the cash & securitizations stayed within the wholesale system, with a smlaler percent going to hedge funds & other institutional investors (Chinese, Japanese) as was the conventional wisdom at the time.

Not saying it all went, just saying there was a big movement into REITs, which helped make the hot markets even hotter.

[TPS]

That is precisely what happened, but I don't think that the majority of that cash went to REITs. If it had, then the collapse would have looked differently. The big problem is that the cash & securitizations stayed within the wholesale system, with a smlaler percent going to hedge funds & other institutional investors (Chinese, Japanese) as was the conventional wisdom at the time.

Finally took a look at the data. Interesting the flows from 2001 to 2008:

01 $11 bil

02 $25

03 $34

04 $101

05 $54

06 $39

Then...

07 -$27

08 -$62

So they were jumping ship after 2006.

 

 

Came across some other info looking at the Fed's purchase of MBS. Almost all of the $1 trillion purchased in 2009 was from GSE backed securities. It's the sellers I found intriguing:

Rest of World (china): $220 bil

ABS issuers $190

Brokers and DEalers $132

Private, state and local govt pension funds $85

AND MMF $213.

 

Surprisingly very little came from banks. It looks, for the most part, as if the FED was trying to save the Money Market and keep foreign investors happy.

[GG]

So they were jumping ship after 2006.

 

It wasn't quite a secret on the street that housing was way overvalued. What no one knew was how much money was roundtripped into the system.

 

Came across some other info looking at the Fed's purchase of MBS. Almost all of the $1 trillion purchased in 2009 was from GSE backed securities. It's the sellers I found intriguing:

Rest of World (china): $220 bil

ABS issuers $190

Brokers and DEalers $132

Private, state and local govt pension funds $85

AND MMF $213.

 

Surprisingly very little came from banks. It looks, for the most part, as if the FED was trying to save the Money Market and keep foreign investors happy.

 

Another nail in the coffin of the theory that Glass Steagall would have made a difference. Amazing what you can learn when you look at the actual data.

[Magox]

Another nail in the coffin of the theory that Glass Steagall would have made a difference. Amazing what you can learn when you look at the actual data.

Holy Strawman and Robin. How did you come to this conclusion? I think this explains it, you never understood what GS was all about. That list that TPS provided were the sellers of MBS to the Fed. You do realize that packaging and purchasing are two totally different things don't you? GS didn't prohibit depository institutions such as Citigroup and BAC from purchasing MBS it forbid them from underwriting and trading instruments such as MBS, CDOs and SIVs.

 

If I wanted to bring up a strawman such as you did, even though your statement was very conneresque and didn't prove anything other than you were reaching, I could say that the year before the repeal, sub-prime loans were made up just 5% of all mortgage lending and by the peak of the crisis in 2008 it reached 30%. Of course correlation doesn't always produce causation, because we know that there were other factors such as the adoption of mark-to-market accounting, the rise of adjustable rate mortgages and implementation of the Basel Accords that all influenced sub-prime lending and how those bonds were packaged. You see how strawmans work?

 

That was very weak GG, specially coming from you.

[GG]

Holy Strawman and Robin. How did you come to this conclusion? I think this explains it, you never understood what GS was all about. That list that TPS provided were the sellers of MBS to the Fed. You do realize that packaging and purchasing are two totally different things don't you? GS didn't prohibit depository institutions such as Citigroup and BAC from purchasing MBS it forbid them from underwriting and trading instruments such as MBS, CDOs and SIVs.

 

If I wanted to bring up a strawman such as you did, even though your statement was very conneresque and didn't prove anything other than you were reaching, I could say that the year before the repeal, sub-prime loans were made up just 5% of all mortgage lending and by the peak of the crisis in 2008 it reached 30%. Of course correlation doesn't always produce causation, because we know that there were other factors such as the adoption of mark-to-market accounting, the rise of adjustable rate mortgages and implementation of the Basel Accords that all influenced sub-prime lending and how those bonds were packaged. You see how strawmans work?

 

That was very weak GG, specially coming from you.

 

Really? The conclusion is simple, if GS was a major culprit, then you would see more traditional banks selling this mortgage exposure. But you didn't.

 

Take your position, "GS didn't prohibit depository institutions such as Citigroup and BAC from purchasing MBS it forbid them from underwriting and trading instruments such as MBS, CDOs and SIVs." Yet, when you examine the data, you will see that the only US "bank" that got into hot water over the structuring of RMBSs was Citi, and that was out of the Solomon side. Glass Steagall would have had not impact on Citi, because if the act wasn't repealed, then Sandy Weill doesn't sell Travelers, and the umbrella company would have still complied with the Bank Holding Company act, as the investment bank would have been under the statutory % allowing cross ownership of banks, investment banks and insurance.

 

The whole point of Glass Steagall was to prevent more tightly regulated, and depositor protected banks from taking market risks and underwriting public securities. But in the end, it was the other side, the investment banks and the insurers that were outside the scope of GS, who tanked the financial system.

 

You act as if the traditional banks didn't have trading operations prior to repeal of GS, when JP Morgan, Bankers Trust and Citibank had among the largest trading operations on the street. Nor did Glass Steagall affect the operations of UBS, Credit Suisse and HSBC who were major participants in the mortgage industry.

 

As for this: "because we know that there were other factors such as the adoption of mark-to-market accounting, the rise of adjustable rate mortgages and implementation of the Basel Accords that all influenced sub-prime lending and how those bonds were packaged."

 

I'm glad to see that you've been reading what I've been saying for three years.

 

Glass Steagall is so far down the line of culpability for the crisis, that it shouldn't even be mentioned. It had less of an impact than CRA, which is another convenient foil for ideological rantings.

[Magox]

Really? The conclusion is simple, if GS was a major culprit, then you would see more traditional banks selling this mortgage exposure. But you didn't.

 

Take your position, "GS didn't prohibit depository institutions such as Citigroup and BAC from purchasing MBS it forbid them from underwriting and trading instruments such as MBS, CDOs and SIVs." Yet, when you examine the data, you will see that the only US "bank" that got into hot water over the structuring of RMBSs was Citi, and that was out of the Solomon side. Glass Steagall would have had not impact on Citi, because if the act wasn't repealed, then Sandy Weill doesn't sell Travelers, and the umbrella company would have still complied with the Bank Holding Company act, as the investment bank would have been under the statutory % allowing cross ownership of banks, investment banks and insurance.

 

The whole point of Glass Steagall was to prevent more tightly regulated, and depositor protected banks from taking market risks and underwriting public securities. But in the end, it was the other side, the investment banks and the insurers that were outside the scope of GS, who tanked the financial system.

 

You act as if the traditional banks didn't have trading operations prior to repeal of GS, when JP Morgan, Bankers Trust and Citibank had among the largest trading operations on the street. Nor did Glass Steagall affect the operations of UBS, Credit Suisse and HSBC who were major participants in the mortgage industry.

 

As for this: "because we know that there were other factors such as the adoption of mark-to-market accounting, the rise of adjustable rate mortgages and implementation of the Basel Accords that all influenced sub-prime lending and how those bonds were packaged."

 

I'm glad to see that you've been reading what I've been saying for three years.

 

Glass Steagall is so far down the line of culpability for the crisis, that it shouldn't even be mentioned. It had less of an impact than CRA, which is another convenient foil for ideological rantings.

 

I've been saying this ever since I've been on this board that all these factors played a role in the crisis. If anyone out of the two of his have an idealogical point of view regarding this matter it is you with your overzealous non regulatory crusade over the markets. So don't come to me with your bull ****!

 

You like another poster on this board are incapable of being able to think outside of the box, I have many times gone over how the repeal of GS played a role in the crisis and just because you aren't able to grasp why and how it played a role is your issue. Not that I need others to validate my reasons but considering Roubini, Volker, Stiglitz and many others agree with my assessment, not to mention Robert Rubin's regret of the repeal of GS. Yeah, I think I will take their opinions over GG from PPP.

Edited October 20, 2010 by Magox

[GG]

I've been saying this ever since I've been on this board that all these factors played a role in the crisis. If anyone out of the two of his have an idealogical point of view regarding this matter it is you with your overzealous non regulatory crusade over the markets. So don't come to me with your bull ****!

 

Then I'm sure you'll have no problem digging up my views that the financial services industry shouldn't be regulated. This will be a fun wait. Hope you stock up on Snickers, while we wait.

 

You like another poster on this board are incapable of being able to think outside of the box, I have many times gone over how the repeal of GS played a role in the crisis and just because you aren't able to grasp why and how it played a role is your issue. Not that I need others to validate my reasons but considering Roubini, Volker, Stiglitz and many others agree with my assessment, not to mention Robert Rubin's regret of the repeal of GS. Yeah, I think I will take their opinions over GG from PPP.

 

There's no reason to think outside the box on this, because the data is plain to see and evaluate. People who think outside the box don;t need to have their opinions validated by linking WSJ & Bloomberg articles written by reporters who frequently don't understand what they're writing about.

 

To repeat, GS had no regulatory oversight over the companies that got overextended in the financial crisis. The original JP Morgan wasn't subject to the same regs as CHemical/Chase. Bankers Trust operated under different rules. So tell me how effective GS would have been to prevent financial mania, when the Fed or FDIC had no oversight over the companies that caused the vast majority of hte damage? If anything, it probably would have made the situation worse, because traditional banks' funding exposure to the investment banks could have taken down more segments of the industry.

 

GS doesn't even come close to explaining UBS, Northern Rock & German Landesbanks. It's a convenient excuse for everyone who argued against repeal of GS at the outset, just like blaming CRA is a convenient excuse for the ideologs on the other side (yet the data doesn't back it up). Rubin's admission is doubly priceless, as we're supposed to believe he wouldn't have pushed Citi/Solly into sub-primes if the act was still alive. Here's the scenario - if regulators wouldn't have allowed City/Solly merger to occur, Solly would still be independent, would still have gone full bore into subprimes, and would have been bailed out like Bear. Take it to another logical step if GS is in effect - JPM could not take in Bear. BofA can't buy Merrill. So in addition to AIG, the government has to take ownership in Bear, Lehman, Merril & Solly.

 

It's nice to wax nostalgic about the wonders of Glass Steagall, but it's another thing to actually go through the permutations and see that the situation would likely have been much worse.

[erynthered]

I was reading in Automotive news last week that there are up near 100 or so Deals on hold or have been canceled for dealership sales because of no decision of the tax cuts. Some dealers estimate that if they sell after the tax cuts end it will cost them 100's of thousands of dollars because of the capitial gains tax change.

 

Just another effect from all this.