Finance crisis discussion, part II

(Note: More comments have been added in this thread on September 23.)

This entry will continue the thread that started two days ago.

Two main views of the reasons for the disaster have emerged so far: (1) that it was primarily the result of leftists in government forcing lending institutions to give mortgages to non-credit worthy blacks and Hispanics (an extreme version of that view is provided by Mark Levin in the linked thread); and (2) that it was primarily the result of greedy and irresponsible money men. I had breakfast today with a friend who surprised me. A race-realist who has had extensive professional experience in failed efforts to raise the intellectual performance of blacks, he nevertheless blames the crisis primarily on rich people, not on racial egalitarians.

As for the proposed $750 billion bailout, J. in Colorado has a radically different angle on how to fix the problem. He writes:

The bailout is backwards. Fix the source of the problem with subsidies of mortgage payments to reduce foreclosures and defaults. Direct help to homeowners with their mortgage payments will stop the flood of foreclosures, increase real estate prices, free up credit, stimulate the economy, and increase mortgage asset values and the capital base of financial institutions.

Karen writes from England:

Whilst the financial storm rages and people are diverted by the grand larceny of the financial sector being bailed out with tax payers’ money, the Japanese are quietly buying the assets (well, what is left of them). Nomura has acquired a major stake in Morgan Stanley and Mitsubishi has bought Lehman’s operations in Europe. The one truly conservative country of all the developed nations emerges as the winner. Japan which does not allow Third world or any other mass immigration, does not allow foreigners to acquire its major assests and does not deregulate its markets and has never forgotten its history or traditions, is proving that traditional conservatism is the only way to run a country. See this and this in the Telegraph.

Gregory F. writes:

I disagree with J. in Colorado’s opinion. His desired outcome is true; however, that would mean rewarding individuals who have failed to budget properly or take care of their assets with government funds and not asking for anything in return from these people. I would be one pissed off homeowner to see others who failed to budget properly be bailed out by the government while we do the right thing.

The institutions should sink and the homes should be foreclosed upon. The government should not bail anyone out, nor should it have interfered in the first place.

J. in Colorado replies:

It may be better to let the market rule and let everyone suffer the consequences of their bad investments. But since Bush and Congress will pass a 700 billion bailout anyway, it will be much more efficient and effective if this is spent for mortgage relief than to put it in the pockets of rich bank owners for their bad decisions and worthless paper. It is unfair to subsidize only homeowners in foreclosure, but there could be a lien on their property to repay the subsidy when the house is sold or whenever their incomes can afford it.

John B. writes:

As someone who has a personal interest in the financial condition of AIG, I note the pseudo-toughness of the position that that company and the other companies whose distress is news should not be “bailed out.”

Don’t want to “bail me out”? Fine—I don’t want to be bailed out. I also don’t want to pay for public schools or other persons’ medical care or infant formula or housing. I also don’t want anyone’s savings and checking accounts “insured” with my money and everyone else’s. I also don’t want there to be a supposed pension plan called Social Security.

I could go on—but the short of it is that I object to government’s moving money from one person to another—either directly, in the form of welfare payments, or indirectly, in the form of government service. I object to it as much as I object to government’s silencing a speaker or writer—but the Constitution addresses that.

Don’t want to “bail me out”? Fine—abolish Medicare, Medicaid, Social Security, welfare, public schooling, HUD, and all the rest of it—and then I’ll be pleased to take the hit. It won’t be a net loss, believe me.

Evariste writes:

Since you’ve turned your gaze on the financial crisis, I thought I’d send you this. It’s a two-part interview (Part one, Part two) with a hedge fund manager in some NYC literary magazine, conducted in January and March of 2007, just as the outlines of the crisis were beginning to cohere. It doesn’t necessarily contain any information that hasn’t been discussed on VFR already, but it’s still relevant. It’s a very fun and informative read, with a breezy and light tone, and it gives a behind-the-scenes flavor to what’s happening.

Some quotes:

n+1: All right, let’s get to it. Is America now a Third World country?

HFM: No, we’re a First World country with a weak currency. From time to time, the dollar’s been very weak; from time to time, it’s very strong; and unfortunately what tends to happen is people tend to just extrapolate. But in reality, over the very very long term, currency processes tend to be fairly stable and mean-reverting. So the dollar’s very weak today, but that’s no reason to believe the dollar’s going to be weak forever or that, because it’s weak today, it’s going to get dramatically weaker tomorrow.

…

But—to get back to the paradigm shifts—here was a guy who knows the market really, really well, who is a real expert in the nuts and bolts of mortgage lending, and really knew the collateral really well—but he was a true believer, and I think a lot of people were, who were in that paradigm, right, they were true believers in the paradigm. “You know what, sub-prime is a really good thing, it’s opening up home ownership to people who couldn’t get it before for reasons that didn’t really have to do with their ability to pay, but had to do with outmoded criteria for thinking about credit.” And, you know, most of these mortgages were going to pay off fine and that the housing collateral behind them was solid.

And there were other people at the firm, say, at the middle of last year, who were not mortgage experts, who were saying, you know, “I see the run-up in housing prices in some of these geographies, and I just don’t really get it. I go down to Florida and see the forest of cranes, and I just really wonder, who’s going to be in all those apartments? And I hear about all sorts of friends who are getting loans to buy apartments or houses speculatively and who are lying about the fact that it’s not a primary residence, and I see these commercials on TV, you know, about low-doc, no-doc mortgages—and there is no way, there is no way that this is not going to end badly. And I see that these mortgages are being created by this massive demand for CDO paper, by this robotic bid, and this is the perfect example of a bubble—and we should be short, we should be short sub-prime paper.”

n+1: This is what guys do? They travel around Florida, they watch TV?

HFM: Just in your normal life, I mean, like me, I trade a different market, I don’t trade sub-prime, but, you know, I travel for other reasons, and some of my partners do the same thing. And we all, a number of us thought, “This is just crazy. We should be short. This is a bubble waiting to be popped.” But the person who was the expert, the person who ran the sub-prime business, who traded sub-prime paper and issued the CDOs, he was a true believer in the paradigm: “In 2003, people said that the credit quality of the average sub-prime mortgage was deteriorating, and now look, those mortgages have performed fine. The sub-prime market works.”

And, hey, he was the expert—you defer to the expert.

Evariste writes:

On this historic occasion of traditional Wall Street’s ceasing to exist this week, I thought I’d recommend Anthony Sampson’s book, The Money Lenders. See also this.

I read it when I was 12 and gained entry to the fascinating history of the Western financial system. It was written in 1982, but it’s a great guide to everything that happened until then, telling of the rise and fall of many storied merchant banks and their essential supporting role on history’s stage.

Sampson died in 2004. He wrote a number of excellent books of this kind, in finance, oil, arms, aviation, and other fields. All are still worth reading despite being long in the tooth by now.

September 23

Karen writes from England:

Here is a BBC article in which Warren Buffett discusses derivatives and their lethal consequences. Explaining how a financial crisis could emerge from their use, he has been proved correct.

No one took this seriously at the time as the bankers were making loads of short term profit and bonuses and the politicians getting kickbacks. By the time the crisis comes, they will all have collected their bonuses and moved on and the tax payer will be left to pick up the bill.

Jeremy G. writes:

Takuan Seiyo at VDARE has written an excellent summary of America’s subprime loan and racial diversity crisis.

Robert B. writes:

Ben W. writes:

I’ve noticed that many people are wondering how “hard-nosed bankers” could have been taken in by the sub-prime fiasco. In fact most corporation executives have liberal worldviews. These days American corporations have internally instituted many different forms of affirmative action hiring and promotion. Their advertising in the media always emphasizes their “community involvement,” especially in “low income” neighborhoods. It has been my experience in the corporate world that company executives want to be one the good side of liberalism to show their morality.

My father-in-law used to say to me, when I would talk about the PC I ran into as a contractor performing government jobs, that I should do what he did—“smile and nod and then go about what I was going to do anyway.” The bankers went along with it because they had no choice. ACORN was more than willing to file class action law suits or otherwise interfere with banks that did not abide by the quota system imposed under Clinton.

One of the finest local banks in the Twin Cities metro area, Midway Bank, was taken down by Carter’s CRA—as the neighborhood they were in shifted from hard working, blue collar whites who banked money to black Americans and immigrants, the Community Re-investment Act forced them to hire unqualified employees and make loans to those who did not pay them back. I was forced to close my account with them after 22 years when I received a statement that did not even abide by normal accounting rules. When I went in to complain, I discovered to my amazement that almost everyone in there was black and no one could understand what I was getting at. For the previous five years I had simply had my personal income from my business (at another bank) electronically transferred to Midway. I was stunned at the change. Two years after I closed my account there, the bank closed its doors. We have all paid for this—if we borrowed money.

One of the ways banks offset their exposure on these loans was to charge customers with good credit ratings more than they should have paid—a point or two makes a huge difference—a hundred thousand or more on the average 30 year mortgage. My father-in-law owns a few banks. They are exclusively in rural areas with sound communities that will likely never have to abide by the CRA.

Robert B. writes:

Buddy in Atlanta writes:

This [54 percent of U.S. economy in construction] is not correct, judging from the government’s employment data. Employment is a reasonable proxy for the size of an industry. According to the latest monthly employment figures from the BLS, construction employment was 5.2 percent of total non-farm employment—7.2 million out of 137.5 million. That sounds about right to me for the size of the construction industry—five percent.”

He is wrong. He is not totaling all of what goes into construction—including the sale of vehicles for it, tools, clothing, mortgage company employees, insurance and bonding, etc. This is no laughing matter.

There are a lot of other activities in the construction industry. About a quarter of its GDP is generated by engineering construction. This includes building roads, highways and airstrips; gas and oil facilities; dams and irrigation projects; railways, telephone lines; and other types of engineering projects. Repair construction (on buildings as well as roads, highways and other projects) makes up about a quarter of the value added to the economy by this industry.

From 2002:

“Why Choose a Job in the Construction Industry when Going to College?

- Continued Shortage of Qualified Personnel—This leads to almost 100 percent placement and high starting salaries. National average starting salary for CM majors is $42,000 per year.
- Aging work force (avg. 47 yrs. old)—More jobs than students graduating now and in the future.
- Within next 10 yrs.—58.4 percent of jobs in U.S. will be construction related.
- The construction industry second largest employer in U.S. only next to all government employees including the armed forces.
- Motivated graduates can easily move up the management ladder.
- You can choose your work environment inside or outside or both.”

E. writes:

Check out VDARE.COM. It had a piece by Steve Sailer yesterday about the diversity depression and one today by a guy named Seikyu or something like that about minority mortgage borrowers. They are both well reasoned and well written.

LA writes:

Steve Sailer had a long article about the then developing subprime mortgage crisis at Taki’s Magazine last June, with many quotes showing the avowed aim on the part of government to increase minority home ownership by getting rid of the idea of creditworthiness.

One new piece of information to me is that home ownership in the U.S. had reached a plateau of 64 percent between the mid 1960s and the mid 1990s. Then, as a result of the renewed push to expand home ownership, it reached 69 percent at the middle of this decade. So in a sense, this entire catastrophe was brought about in order to increase home ownership by four percent.

Buddy in Atlanta writes:

Robert B.:

“He is wrong. He is not totaling all of what goes into construction… About a quarter of its GDP is generated by engineering construction. This includes building roads, highways and airstrips; gas and oil facilities; dams and irrigation projects; railways, telephone lines; and other types of engineering projects.”

I stand by my analysis. The figure I cited for construction employment—7.2 million—includes almost all these categories. Table B-1 of the August BLS release (page 20 of the pdf) shows the composition of the 7.2 million—viz., residential, commercial and engineering construction. That puts all construction employment at 5.2 percent of the U.S. total.

The one category that’s not included but Robert mentions—“gas and oil facilities”—actually has its own listing in the same table, labeled “oil and gas extraction,” distinct from construction employment. Not surprisingly, employment in oil and gas extraction has been *rising* all year, as higher oil prices encouraged more exploration. Employment in this category is 0.1 percent of the U.S. total.

The BLS data is here.

Robert B. again:

“He is not totaling all of what goes into construction—including the sale of vehicles for it, tools, clothing, mortgage company employees, insurance and bonding, etc.”

I made allowances for these in my original comment. At most, these ancillary industries would double the size of the construction industry, more narrowly defined.

Posted by Lawrence Auster at September 22, 2008 01:41 PM | Send