Comments on Senator Sanders article on the Fed
Posted by WARREN MOSLER on November 8th, 2011
Dear Senator Sanders,
Thank you for your attention to this matter!
My comments appear below:
The Veil of Secrecy at the Fed Has Been Lifted, Now It’s Time for Change
By Senator Bernie Sanders
November 2 (Huffington Post) — As a result of the greed, recklessness, and illegal behavior on Wall Street, the American people have experienced the worst economic crisis since the Great Depression.
Not to mention the institutional structure that rewarded said behavior, and, more important, the failure of government to respond in a timely manner with policy to ensure the financial crisis didn’t spill over to the real economy.
Millions of Americans, through no fault of their own, have lost their jobs, homes, life savings, and ability to send their kids to college. Small businesses have been unable to get the credit they need to expand their businesses, and credit is still extremely tight. Wages as a share of national income are now at the lowest level since the Great Depression, and the number of Americans living in poverty is at an all-time high.
Yes, it’s all a sad disgrace.
Meanwhile, when small-business owners were being turned down for loans at private banks and millions of Americans were being kicked out of their homes, the Federal Reserve provided the largest taxpayer-financed bailout in the history of the world to Wall Street and too-big-to-fail institutions, with virtually no strings attached.
Only partially true. For the most part the institutions did fail, as shareholder equity was largely lost. Failure means investors lose, and the assets of the failed institution sold or otherwise transferred to others.
But yes, some shareholders and bonds holders (and executives) who should have lost were protected.
Over two years ago, I asked Ben Bernanke, the chairman of the Federal Reserve, a few simple questions that I thought the American people had a right to know: Who got money through the Fed bailout? How much did they receive? What were the terms of this assistance?
Incredibly, the chairman of the Fed refused to answer these fundamental questions about how trillions of taxpayer dollars were being spent.
The American people are finally getting answers to these questions thanks to an amendment I included in the Dodd-Frank financial reform bill which required the Government Accountability Office (GAO) to audit and investigate conflicts of interest at the Fed. Those answers raise grave questions about the Federal Reserve and how it operates — and whose interests it serves.
As a result of these GAO reports, we learned that the Federal Reserve provided a jaw-dropping $16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world.
Yes, however, while I haven’t seen the detail, that figure likely includes liquidity provision to FDIC insured banks which is an entirely separate matter and not rightly a ‘bailout’.
The US banking system (rightly) works to serve public purpose by insuring deposits and bank liquidity in general. And history continues to ‘prove’ banking in general can work no other way.
And once government has secured the banking system’s ability to fund itself, regulation and supervision is then applied to ensure banks are solvent as defined by the regulations put in place by Congress, and that all of their activities are in compliance with Congressional direction as well.
The regulators are further responsible to appropriately discipline banks that fail to comply with Congressional standards.
Therefore, the issue here is not with the liquidity provision by the Fed, but with the regulators and supervisors who oversee what the banks do with their insured, tax payer supported funding.
In other words, the liability side of banking is not the place for market discipline. Discipline comes from regulation and supervision of bank assets, capital, and management.
The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In other words, the people “regulating” the banks were the exact same people who were being “regulated.” Talk about the fox guarding the hen house!
Yes, this is a serious matter. On the one hand you want directors with direct banking experience, while on the other you strive to avoid conflicts of interest.
The emergency response from the Fed appears to have created two systems of government in America: one for Wall Street, and another for everyone else. While the rich and powerful were “too big to fail” and were given an endless supply of cheap credit, ordinary Americans, by the tens of millions, were allowed to fail.
The Fed necessarily sets the cost of funds for the economy through its designated agents, the nations Fed member banks. It was the Fed’s belief that, in general, a lower cost of funds for the banking system, presumably to be passed through to the economy, was in the best interest of ‘ordinary Americans.’ And note that the lower cost of funds from the Fed does not necessarily help bank earnings and profits, as it reduces the interest banks earn on their capital and on excess funds banks have that consumers keep in their checking accounts.
However, there was more that Congress could have done to keep homeowners from failing, beginning with making an appropriate fiscal adjustment in 2008 as the financial crisis intensified, and in passing regulations regarding foreclosure practices.
Additionally, it should also be recognized that the Fed is, functionally, an agent of Congress, subject to immediate Congressional command. That is, the Congress has the power to direct the Fed in real time and is thereby also responsible for failures of Fed policy.
They lost their homes. They lost their jobs. They lost their life savings. And, they lost their hope for the future. This is not what American democracy is supposed to look like. It is time for change at the Fed — real change.
I blame this almost entirely on the failure of Congress to make the immediate and appropriate fiscal adjustments in 2008 that would have sustained employment and output even as the financial crisis took its toll on the shareholder equity of the financial sector.
Congress also failed to act with regard to issues surrounding the foreclosure process that have worked against public purpose.
Among the GAO’s key findings is that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the GAO, the Fed actually provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.
The GAO has detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.
For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.
This demands thorough investigation, and in any case the conflict of interest should have been publicly revealed at the time.
Getting this type of disclosure was not easy. Wall Street and the Federal Reserve fought it every step of the way. But, as difficult as it was to lift the veil of secrecy at the Fed, it will be even harder to reform the Fed so that it serves the needs of all Americans, and not just Wall Street. But, that is exactly what we have to do.
Yes, I have always supported full transparency.
To get this process started, I have asked some of the leading economists in this country to serve on an advisory committee to provide Congress with legislative options to reform the Federal Reserve.
Here are some of the questions that I have asked this advisory committee to explore:
1. How can we structurally reform the Fed to make our nation’s central bank a more democratic institution responsive to the needs of ordinary Americans, end conflicts of interest, and increase transparency? What are the best practices that central banks in other countries have developed that we can learn from? Compared with central banks in Europe, Canada, and Australia, the GAO found that the Federal Reserve does not do a good job in disclosing potential conflicts of interest and other essential elements of transparency.
Yes, full transparency in ‘real time’ would serve public purpose.
2. At a time when 16.5 percent of our people are unemployed or under-employed, how can we strengthen the Federal Reserve’s full-employment mandate and ensure that the Fed conducts monetary policy to achieve maximum employment? When Wall Street was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency to save the financial system. We need the Fed to act with the same boldness to combat the unemployment crisis.
Unfortunately employment and output is not a function of what’s called ‘monetary policy’ so what is needed from the Fed is full support of an active fiscal policy focused on employment and price stability.
3. The Federal Reserve has a responsibility to ensure the safety and soundness of financial institutions and to contain systemic risks in financial markets. Given that the top six financial institutions in the country now have assets equivalent to 65 percent of our GDP, more than $9 trillion, is there any reason why this extraordinary concentration of ownership should not be broken up? Should a bank that is “too big to fail” be allowed to exist?
Larger size should be permitted only to the extent that it results in lower fees for the consumer. The regulators can require institutions that wish to grow be allowed to do so only in return for lower banking fees.
4. The Federal Reserve has the responsibility to protect the credit rights of consumers. At a time when credit card issuers are charging millions of Americans interest rates between 25 percent or more, should policy options be established to ensure that the Federal Reserve and the Consumer Financial Protection Bureau protect consumers against predatory lending, usury, and exorbitant fees in the financial services industry?
Banks are public/private partnerships chartered by government for the further purpose of supporting a financial infrastructure that serves public purpose.
The banks are government agents and should be addressed accordingly, always keeping in mind the mission is to support public purpose.
In this case, because banks are government agents, the question is that of public purpose served by credit cards and related fees, and not the general ‘right’ of shareholders to make profits.
Once public purpose has been established, the effective use of private capital to price risk in the context of a profit motive should then be addressed.
5. At a time when the dream of homeownership has turned into the nightmare of foreclosure for too many Americans, what role should the Federal Reserve be playing in providing relief to homeowners who are underwater on their mortgages, combating the foreclosure crisis, and making housing more affordable?
Again, it begins with a discussion of public purpose, where Congress must decide what, with regard to housing, best serves public purpose. The will of Congress can then be expressed by the institutional structure of its Federal banking system.
Options available, for example, include the option of ordering that appraisals and income statements not be factors in refinancing loans originated by Federal institutions including banks and the Federal housing agencies. At the time of origination the lenders calculated their returns based on mortgages being refinanced as rates came down, assuming all borrowers would be eligible for refinancing. The financial crisis and subsequent failure of policy to sustain employment and output has given lenders an unexpected ‘bonus’ through a ‘technicality’ that allows them to refuse requests for refinancing at lower rates due to lower appraisals and lower incomes.
6. At a time when the United States has the most inequitable distribution of wealth and income of any major country, and the greatest gap between the very rich and everyone else since 1928, what policies can be established at the Federal Reserve which reduces income and wealth inequality in the U.S?
The root causes begin with Federal policy that has resulted in an unprecedented transfer of wealth to the financial sector at the expense of the real sectors. This can easily and immediately be reversed, which would serve to substantially reverse the trend income distribution.
Sincerely,
Warren Mosler
November 8th, 2011 at 9:13 am
Stimulating remarks Warren. I like the emphasis in your comments on the role of Congress and fiscal policy. Congress is the seat of monetary authority in the US constitutional system, and every power the Fed has, it has because of legislation delegating Congressional authority to the Fed.
Also, while the Fed is the agency empowered to create and extinguish money under current rules, its permitted channels for spending that money into the economy and putting it to work re-activating unused capacity are very limited. But Congress can spend money on virtually anything it wants. If it wishes to spend in amounts not offset by taxes and borrowing during the same period, it needs to reclaim some of its latent direct power over monetary decisions and exercise those powers. Congress can’t pass the buck to Fed by criticizing it for failing to exercise powers Congress never delegated to them. The Fed can’t rebuild a bridge and hire the workers needed to do it.
P.S. I noted just one typo: I believe you intended “chartered” instead of “charted” in “Banks are public/private partnerships charted by government for the further purpose of supporting a financial infrastructure that serves public purpose.”
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WARREN MOSLER Reply:
November 8th, 2011 at 12:51 pm
thanks!
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November 8th, 2011 at 9:19 am
The good news is MMT is well represented in Sanders’ advisory panel on reforming Fed. policy. It will be interesting to hear their feedback on how the meetings and discussions go.
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November 8th, 2011 at 9:44 am
I was always under the impression that congress exclusively had the power of the purse, power to tax, power to create and regulate the fed, create and regulate the banking system, create and regulate the mortgage system, power to oversee the law enforcement agencies. DOH! And to think the entire time, it was the bankers and the cronies at The Fed wreaking havoc on our economy. Was I misguided.
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Robert Kelly Reply:
November 8th, 2011 at 10:03 am
@Ryan,
Congress love song to Goldman – ” Here I am baby, signed, sealed, delivered, I’m yours. You’ve got my future in your hands.”
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November 8th, 2011 at 11:09 am
“The root causes begin with Federal policy that has resulted in an unprecedented transfer of wealth to the financial sector at the expense of the real sectors.”
What policies, specifically?
“This can easily and immediately be reversed”
How, specifically?
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Tom Reply:
November 8th, 2011 at 11:14 am
@John O’Connell,
Yeh, Im curious for a few recommendations. Id like to know wheres the best place to start along these lines.
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Robert Kelly Reply:
November 8th, 2011 at 11:22 am
@Tom,
Glass-Steagall would be a good start.
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John O'Connell Reply:
November 8th, 2011 at 12:47 pm
@Robert Kelly,
Agreed, but I don’t see that repeal of Glass-Steagal was a big factor in transferring wealth to the financial sector. It just allowed the failures of the financial sector to bleed into the consumer sector and threaten the rest of us.
I think the way the Investment Banks profited was by exploitation of computers to create advantages for themselves in the markets, and by invention of new forms of derivatives and products to sell. I think they would have done that anyway, even if not allowed access to FDIC-insured capital.
(I think they profited by a decent measure of fraud, too, which we should have been more diligent about watching for. Stricter enforcement and harsher penalties might be policies that would have curbed that part of it.)
WARREN MOSLER Reply:
November 8th, 2011 at 12:54 pm
leave the fed fund rate at 0 permanently and don’t let the tsy sell anything longer than a 3 mo bill.
don’t allow publicly insured pension funds to buy equities.
narrow banking as per my proposals
etc.
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ESM Reply:
November 8th, 2011 at 5:10 pm
@WARREN MOSLER,
This really has very little do with income inequality. And Wall Street is hardly a root cause of income inequality. Increasing inequality is due to technological advance and globalization. The power of knowledge has increased by orders of magnitude in the span of a single generation. Without having access to markets and labor from around the world, it simply was not possible for an entrepreneur to make billions of dollars. Now a couple of kids at Stanford can turn a thesis project on web search into a $200B company. Or a single mom on welfare in England can make $1B from writing children’s books.
This is a good thing by the way. Not the inequality per se, but the wealth created from the underlying processes driving that inequality. Unfortunately, people tend to take all of the fruits of globalization and technological change for granted, which makes for bad public policy.
Not saying that cutting back on unproductive work by the financial sector is a bad thing. Of course it should be done whereever possible, as it should be in all sectors. But you’re never going to stop money managers from making a lot of money, and there’s no good reason to try.
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MamMoTh Reply:
November 8th, 2011 at 5:39 pm
@ESM,
Not saying that cutting back on unproductive work by the financial sector is a bad thing
You mean work that serves no public purpose?
Mario Reply:
November 8th, 2011 at 6:16 pm
@ESM,
And Wall Street is hardly a root cause of income inequality.
it depends on your definition of “root cause” I suppose, but come on buddy what are you talking about!?!? Putting semantics aside just look at the make up of the US GDP. Sheesh!!!
Now a couple of kids at Stanford can turn a thesis project on web search into a $200B company. Or a single mom on welfare in England can make $1B from writing children’s books.
this is otherwise known as anecdotal evidence and does not prove a point as much as it colors one. It’s a nice flourishing but I don’t think it stands the test of a real sample size and data plotting. These are really statistical outliers and only prove the opposite to be true.
Mario Reply:
November 8th, 2011 at 6:20 pm
@ESM,
@Mammoth
You mean work that serves no public purpose?
I don’t recall work needing to be of “public purpose.” Doesn’t that begin a rather treacherous slippery slope? It’s also a relative definition based on subjective points of view. Economies are a large and complex matrix. In my view there is room for all types of work, the question simply becomes when is enough, enough. Too big to fail is beyond enough for example. Regulation in the name of sanity and legal accountability are also beyond enough is enough. And I don’t think it’s much more complicated than that overall.
ESM Reply:
November 8th, 2011 at 6:37 pm
@ESM,
@Mario/Mammoth:
“You mean work that serves no public purpose?”
In theory yes, but in practice no. In theory all productive work serves public purpose, and enabling productive work would be a public purpose in and of itself.
In practice, public purpose is defined by a Congress composed of idiots all pandering to narrow constituencies in order to cling to political power.
For example, suppose Congress raises certain tariffs or corporate taxes, which will throttle the economy, but some brilliant investment bankers design a financial restructuring scheme to allow companies to avoid paying the increased taxes and tariffs and thereby save the economy. Is that productive work? Is it for public purpose? Perhaps it is necessary unproductive work which we could do without.
WARREN MOSLER Reply:
November 9th, 2011 at 7:46 am
which is exactly what they should be discussion. how about a rule for congress that says they have to state how anything they do serves public purpose?
ESM Reply:
November 8th, 2011 at 6:49 pm
@ESM,
@Mario:
“this is otherwise known as anecdotal evidence and does not prove a point …”
I am not using those examples to prove the point. I am using them to explain the point (two points actually). Think about how much utility a good programmer with a good idea can create today. If he creates a useful widget, it can be downloaded and used by tens, even hundreds of millions of people within weeks, even days. If each of those people were willing to pay one dollar on average for use of that widget, that creator would be a member of the top 0.01% in a flash. That simply was not possible 30 years ago.
And yes I used the rather obvious and uncontroversial example of the Google founders. But along with thouse founders there were perhaps 100 more people who became hectomillionaires from Google. And there are thousands of other companies started up in the last 15 years which have enabled tens of thousands of “lucky” employees to become multimillionaires. None of this was possible on such a scale 30 years ago.
That’s the first point. The second point is that nobody is being hurt by the process which drives the accumulation of such wealth. It accumulutes via billions of voluntary transactions. Buyers were happy to pay, just as sellers were happy to sell. Interestingly, I can’t even point to any concrete way in which I’ve paid for the Google founders and employees to get rich. I just use all of their stuff for free as far as I know. I have paid through the nose for J. K. Rowling to get rich though!
WARREN MOSLER Reply:
November 9th, 2011 at 7:48 am
and locked into a room with no food and no facilities after 13 hours of discussion the representatives of the holders of Greek debt voluntarily agreed to 50% haircuts. the old ‘we have ways to make you talk…’
MamMoTh Reply:
November 8th, 2011 at 10:56 pm
@ESM,
I do get your point, but I wanted to be sure what you meant by unproductive because I would have expected from you to say that if an activity is profitable then it is productive.
Mario Reply:
November 9th, 2011 at 3:08 am
@ESM,
I guess so ESM…however I view income inequality and income possibilities as two different things but whatever.
Mario Reply:
November 9th, 2011 at 6:08 am
@ESM,
just look at this chart ESM as it compares wages and total # employed in various sectors in NYC (including Wall St) in 1990 and in 2009. Not to be rude, but I’d love to see how you argue your way out of Wall St. not being responsible for income inequality in the US economy after looking at these FACTS AND DATA POINTS. Sophistry and word-smithing is always fun and games (or not)…until someone brings in the facts and figures. ;)
http://www.creditwritedowns.com/2011/11/nyc-employment-data.html
WARREN MOSLER Reply:
November 9th, 2011 at 7:41 am
one way my proposals substantially cut back on money manager income is by dramatically reducing the funds that need to be managed.
ESM Reply:
November 9th, 2011 at 9:59 am
@ESM,
@Mammoth:
“…I would have expected from you to say that if an activity is profitable then it is productive.”
No, I don’t believe that. Clearly, there are profitable activities that are either illegal, should be illegal, or are at best predatory or unethical.
But, and this is a really important point, I think it is often difficult to recognize the ways in which certain types of activities contribute to the world. If an activity is profitable, I would generally give it the benefit of the doubt in terms of deciding whether it was productive or unproductive and would feel I could only say something was unproductive after doing some serious research.
ESM Reply:
November 9th, 2011 at 10:12 am
@ESM,
@Mario:
“Not to be rude, but I’d love to see how you argue your way out of Wall St. not being responsible for income inequality in the US economy after looking at these FACTS AND DATA POINTS.”
Well, my argument would be that’s still bupkis in the grand scheme of things. Maybe you would claim that Wall Steet workers (most of which work in NYC) make $100K/yr too much on average? But then that’s still only $40B/yr in NYC, which is a lot for NYC, but not so much for the US in total. Also, NYC taxes are extremely high, so a lot of that is already being clawed back. Not sure how much more you want to take, but between Federal, State, City and FICA tax, the overall tax rate is about 50%.
It’s interesting that wages have tripled on Wall Street over the last 20 years. That almost exactly matches the growth in the S&P 500 index. Of course, the stock market and bond markets have grown in market cap much more than that, the number of financial products has exploded, and we’e now dealing with the rest of the world much more than we were 20 years ago. The fact that employment has gone down in the sector must mean that “real” productivity has increased quite a bit.
ESM Reply:
November 9th, 2011 at 10:16 am
@ESM,
@Warren:
“one way my proposals substantially cut back on money manager income is by dramatically reducing the funds that need to be managed.”
Does it though? There will be less incentive to save, but does that really change the amount of capital that needs to be allocated to borrowers? Isn’t the goal to have the same amount of demand for goods and services and houses and cars, so won’t businesses and consumers need to borrow just as much?
WARREN MOSLER Reply:
November 9th, 2011 at 3:47 pm
lots of ‘reallocation’
eliminating the cap on FDIC insurance, for example, means banks can compete with money funds which effectively eliminates money fund managers.
eliminating the purchase of equities by pension funds eliminates all that associated financial infrastructure.
Mario Reply:
November 9th, 2011 at 2:17 pm
@ESM,
I knew you’d come up with SOMETHING to refute those facts!!! LOL
you’re a really smart guy man. So smart that if I put a picture of a bird in front of you, you could create a “solid” proof positive arguing that picture is really an alligator. It’s really just remarkable man. Cirque du Sole doesn’t even compare.
Maybe you would claim that Wall Steet workers (most of which work in NYC) make $100K/yr too much on average?
Actually that’s not comparative analysis ESM. When we talk about income inequality, we need to do comparative analysis of facts not about one’s opinion of what is “too much.” There is actually variances from the mean and standard deviation calculations we can do to quantify such justifications. But really the fact are only as valuable as the person looking at them! As see all day long in the modern “news.”
John O'Connell Reply:
November 9th, 2011 at 2:23 pm
@Mario,
I wonder what it would look like if you put NBA or NFL salaries on that chart with Wall Street? If they showed similar increases, would they, too, be considered “responsible” for income inequality?
ESM Reply:
November 9th, 2011 at 2:54 pm
@ESM,
@Mario:
“…if I put a picture of a bird in front of you, you could create a “solid” proof positive arguing that picture is really an alligator.”
Well, alligators date back to the beginning of the Mesozoic Era and haven’t changed much in 200MM years. They were probably closely related to dinosaurs, which according to the movie Jurassic park evolved into birds. So in a way, an alligator is just a bird which hasn’t evolved. :^)
WARREN MOSLER Reply:
November 9th, 2011 at 3:59 pm
agreed. it’s a prebird
Mario Reply:
November 9th, 2011 at 3:09 pm
@ESM,
@John Connell
I wonder what it would look like if you put NBA or NFL salaries on that chart with Wall Street? If they showed similar increases, would they, too, be considered “responsible” for income inequality?
if they tanked everyone’s net assets, controlled the US government, and were bailed out before going bankrupt only to continue full steam ahead creating further division and income inequality in society then yes they would be considered responsible.
Is it news to you guys that Wall Street is gigantically skewing the wealth distribution of our society?!?!?! Did you guys just land from Venus and haven’t gotten “the tour” yet or something? Did they give you guys the blue pill or the red one?
Well, alligators date back to the beginning of the Mesozoic Era and haven’t changed much in 200MM years. They were probably closely related to dinosaurs, which according to the movie Jurassic park evolved into birds. So in a way, a bird is just an alligator which hasn’t evolved. :^)
you know…how a guy not respect that!!! Seriously brilliant man and I mean that. You should charge tickets….do you practice yoga? LOL Love ya man.
John O'Connell Reply:
November 14th, 2011 at 11:31 am
@ESM,
@Mario,
“if they [referring to the NFL and NBA players] tanked everyone’s net assets, controlled the US government, and were bailed out before going bankrupt … then yes they would be considered responsible.”
Then I don’t follow you. You presented a graph of incomes, and said it proves responsibility. I think we can agree that athletes didn’t tank everyone’s net assets, etc., but even if their graph looked just like Wall Street’s graph, you say Wall Street would be responsible but not athletes.
So, what does the graph prove?
November 8th, 2011 at 12:39 pm
“At the time of origination the lenders calculated their returns based on mortgages being refinanced as rates came down, assuming all borrowers would be eligible for refinancing.”
I don’t think so. If they did, that would have been silly. Surely they assumed that some borrowers would not be credit-worthy in the future, in case of falling rates, and that some others would default on their loans due to individual factors unrelated to the economy, and some loans would simply be paid off (due to the sale of the house) and not “refinanced” by the same borrower, regardless of whether rates rose or fell.
Allowing refinancing regardless of credit-worthiness or collateral would give limited relief to a subset of underwater homeowners, but it won’t do much for those who have lost their jobs and their savings and can’t afford any mortgage, or are doing “strategic defaults”; and it won’t help the economy or housing prices.
Housing prices could rise to former levels if we went back to former lending standards, and speculators came back into the market, creating another bubble. I don’t think that would be wise, and it might not even work, as long as people remember the last time. Until the excess supply of houses is worked off, prices will remain depressed. An improving economy won’t do it. Even the unemployed are living somewhere, and there are still lots of empty houses.
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WARREN MOSLER Reply:
November 8th, 2011 at 1:00 pm
mtgs are priced based on the fact they are ‘callable’ and get refinanced when rates come down. yes, there is a bit of an assumed lag, but this was an unexpected windfall
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John O'Connell Reply:
November 8th, 2011 at 1:10 pm
@WARREN MOSLER,
Yes, that’s one factor among many.
As long as the borrower keeps making payments, yes, a windfall. The wind will become quite calm when the underwater borrower who is not allowed to refi figures out that he’s better off terminating the relationship. In the end, the bank’s loss from the default will greatly outweigh the little bit of extra interest.
I think the banks would love to allow the refi’s in a way that would improve their chances of recovering their principal, and even share a little bit of the homeowner’s loss in order to avoid writing the loan down all the way to market price. Windfall notwithstanding.
By the way, what about PMI? Wasn’t that required for these 0% down NINJA loans? Where are all the bankrupt insurance companies?
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Matt Franko Reply:
November 8th, 2011 at 1:51 pm
@John O’Connell, John, do the banks really hold the mortgages or do they have trading depts. that trade the MBS?
Seems like the gameplan may be that they try to lay off the real credit risk to the govt agencies as quickly as possible and then lever up the MBS portfolio and make a fortune when prepayment speeds dont increase.
I believe Warren has proposed that banks not be allowed to trade secondary MBS as a change going forward, he wants them to have to keep the mortgages, but this has not been implemented yet… Resp,
John O'Connell Reply:
November 9th, 2011 at 2:10 pm
@Matt Franko,
Matt,
Every mortgage I’ve ever had was held by the bank that issued it. They were local banks, not “Wall Street” banks, until the last one, ING Direct, and they held it too.
I don’t understand your jargon about levering up the MBS, but if they were to lay off a credit risk, would they not have to pay to do that?
I like the idea of the bank not selling my mortgages, but maybe others prefer it or don’t care, so I’d not require either practice, let the market be free to service both preferences.
Matt Franko Reply:
November 9th, 2011 at 3:28 pm
@John O’Connell, John, If you look at the Fed’s H.8, you see right now in Bank Credit, Closed-end Real Estate loans are at $1.5T. So divided by say $225K per mortgage, that is a bit over 6 million mortgages.
http://federalreserve.gov/releases/h8/current/default.htm
I think existing home sales are running at about 5-6 million annual and then you have just under 0.5 million new home sales so that is probably just over one years home sales mortgage inventory on bank books right now, so eventually (probably takes a year) it looks like most mortgage debt (and risk) gets laid off to the GSEs and investors instead of staying on the banks BS. Resp,
PS Again Warren has proposals against this… PPS and singling out “the banks” as the cause of all of this is ‘missing the mark’, the problem is fiscal policy, there is too much focus on “the banks” as the big problem imo.
John O'Connell Reply:
November 14th, 2011 at 12:16 pm
@Matt Franko,
OK, I’ll accept that most mortgages are sold to the GSEs, especially ones made by Wall Street banks. Still, they have to give up something on the sale, if they are really laying off some risk, don’t they?
But I’m more interested in your other comment. I think there are two distinct problems, one being the bursting of the housing bubble, and the other being the recession. I get that the recession was caused by falling aggregate demand, and that the government sector was (at least one) source of that.
But the housing bubble would have burst eventually regardless of government fiscal/monetary policy. Too many houses were built. The price had to go down, eventually, speculators would bolt, those with 100% loans would go underwater, and the rest of the downward spiral in housing would have happened anyway.
Banks are not innocent in this, but they are not the only guilty ones. They were pressured by Congress to make loans to people who they knew would not be able to repay them. Wall Street invented derivatives to lay off risky loans on unsuspecting investors who thought they were getting AAA paper. Regulators and rating agencies were asleep at the switch. Crooked mortgage brokers and appraisers helped feed the frenzy. Otherwise solvent homeowners unwisely refinanced to the hilt, and beyond.
When the bubble eventually collapsed, as was inevitable, nobody could have imagined how much stimulus would have been required to avoid the recession. In that way the two issues are related, but I’d have to say the situation was beyond the normal functioning of government fiscal/monetary policy, and the response was actually pretty good at first, even though misdirected and inadequate.
November 8th, 2011 at 12:43 pm
For the most part the institutions did fail, as shareholder equity was largely lost.
Meaning banks were bailed out in exchange of equity, or that their shares plummeted which be only a temporary loss?
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John O'Connell Reply:
November 8th, 2011 at 1:00 pm
@MamMoTh,
I think he means like Lehman and Bear Sterns, and hundreds of regional and local banks, which are not really “Wall Street”.
I would call those the exceptions, not the “most part”. GS, JPM, BAC, C are all still intact, and were far more complicit in causing the disasters.
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November 8th, 2011 at 12:47 pm
Mr Mosler: Are you familiar with the legislation H.R.2990 introduced by Dennis Kucinich entitled the NEED Act? http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf
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WARREN MOSLER Reply:
November 8th, 2011 at 1:00 pm
somewhat
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November 8th, 2011 at 2:45 pm
Once public purpose has been established, the effective use of private capital to price risk in the context of a profit motive should then be addressed.
agreed and also this is where it gets “tricky” to say the least and all these types of conflicts of interest begin to emerge. How terrible would it really be if all of our banks were “socialized” (gasp!)…I mean seriously how much of a service do they really provide other than a clearing house, a safe place for cash, and a (hopefully) accessible outlet for cash. Surely the “free market” won’t be so effected by that being socialized…I mean they are already backed by FDIC so how much of a leap is this.
If you want a CD or something and other investment vehicles they can be done by private institutions that compete for your business.
ESM…I know you’re going to hate this idea!!! But I still really want to hear why you think it’s not a good idea. Cheers! :D
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Mario Reply:
November 8th, 2011 at 2:46 pm
@Mario,
also lending could become more or less unbiased and could also become an avenue for lawyers to sue against discrimination, etc.
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WARREN MOSLER Reply:
November 8th, 2011 at 3:15 pm
esm knows banks are govt so he doesn’t want them doing anything beyond providing a minimal financial infrastructure for the payments system either.
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Mario Reply:
November 8th, 2011 at 5:35 pm
@WARREN MOSLER,
well how cool is that! ESM and I agree. It’s a good day today and I’m happy to be alive!! I love ya ESM!! ;)
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November 8th, 2011 at 4:11 pm
“The banks are government agents and should be addressed accordingly, always keeping in mind the mission is to support public purpose.”
It seems to me that this is one of the most important statements.
A lot of implications follow from this.
So the problem is with government not regulating banks nearly enough, and letting them get hijacked by the private interests – which use public utility for their own profit.
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November 8th, 2011 at 7:38 pm
@ESM “nobody is being hurt by the process which drives the accumulation of such wealth”
All very Nozickian. Yes, the flows themselves by which such fortunes are accumulated are often harmless. But the stock state of the world, once the fortunes are accumulated, undermines the idea of equal opportunities and citizenship. Rawls would say that in the Original Position, most of us would favour a system without such inequality being feasible.
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Gary Reply:
November 9th, 2011 at 12:20 pm
@Anders,
Yes. Also the inequality concentrates a lot of power in the hands of the few, and they then use that power to change the rules that society lives by – in their favor. In the end that creates a society that is supposed to serve and provide tot he few at the expense of the rest. That leaves the society very fragile and vulnerable.
With real problems that humanity must face (energy, food, water, climate) getting more and more serious – the fragile society is the last thing we need.
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November 9th, 2011 at 9:29 pm
Warren,are you familiar with the writings of Edward Kellogg ??.
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WARREN MOSLER Reply:
November 10th, 2011 at 7:21 am
no
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