[Archived] Capitalism Didn't Kill The Banks – Socialism Did

[LanghoRover]

Read it Here thoughts anyone?...

[American]

I do agree that Fannie and Freddie were victims of the government now bashing them for what they were telling them to do years back.

I also think bundling the loans up into derivatives was fairly stupid, but the major part of this was overreaction and re-valuation of the securities.

[grizfoot]

It sounds like a load of rubbish to me. I do question how true some of the things mentioned in the article actually are.

[Mc Love]

I think the policy Clinton implemented was the most illogical thing in it

[Claytons Left Boot]

The banks in the UK went some way to 'killing' themselves through pure greed, extremely bad lending policies and a variety of other measures, not least trying to sell anything to anyone at any cost. It started in the early 80's.

Sensible folk within the industry saw it coming years ago but to no avail. No sympathy for them at all and in my opinion they deserve everything they get. Unfortunately the big wigs in the city get to resign with massive pay offs - before moving on to other mega bucks jobs - and it's the rank and file who suffer.

[LanghoRover]

I think the policy Clinton implemented was the most illogical thing in it

What forcing Banks to lend big bucks to illegal Mexicans who worked washing dishes in Burger Kings was a good Idea?.....Ok.

[rover6]

Sorry, that article seems to be typcally foolish free market fundamentalism at its worst.

I don't know anything about the Clinton policies in question and what influence they had in making banks make risky investments. (However, considering the strength of the banking industry, I very, very much doubt that they'd easily be pushed into investment decisions by any government).

However, my first main problem with this article is that it equates Clinton's policies re banks with Socialism, in a bid to advocate free market fundamentalism. No, socialism, has many facets and interpretations and you cannot rubbish it on the basis of one administrations policy in one industry. If we were to play this scatter gun attack on free marketeering, I think we could discredit it a million times over.

Secondly:

"This was not capitalism, but a dependency culture. For many, addictive dependency shifted from state handouts to private handouts based on phantom credit."

What does that mean? If I see it right, Warner is saying that, by encouraging banks to lend to poor people, socialism then induced businesses to dabble with 'phantom credit'.

What? I don't get that. Help, please!

[Wiggy]

Very similar article to the one I read a few weeks back.

Clinton and the Credit Crunch

[Claytons Left Boot]

Interesting article and a bit on the disturbing side. I can't really speak for what happened in the States but the slide in the UK, whilst gathering pace in the early to mid 90s, definitely started in the early 80s.

[tony gale's mic]

What forcing Banks to lend big bucks to illegal Mexicans who worked washing dishes in Burger Kings was a good Idea?.....Ok.

It always comes back to immigrants with you doesn't it?

[colin]

It always comes back to immigrants with you doesn't it?

TGM

He didn't actually mention "immigrants." He did mention "illegal Mexicans" which is a very strange concept indeed. What on earth is an "illegal Mexican?"

Anyway, the whole premice of that article in "The Scotsman" (Langho, can't you do any better than that to start a troll?) is so daft as to defy rational discussion. It's a bit like the Monty Python sketch where they deduced that ducks were witches because they floated.

[American]

I don't know anything about the Clinton policies in question and what influence they had in making banks make risky investments. (However, considering the strength of the banking industry, I very, very much doubt that they'd easily be pushed into investment decisions by any government).

You're right, you don't know anything about it. Fannie Mae and Freddie Mac are government chartered, so they do have to do what the government says to keep the charter. They back other banks in making mortgages, and the government told them they needed to make money available for a higher percentage of loans to low income borrowers. Low income borrowers have less money available to pay back the loans, especially if they no longer have the equity they used to in the house.

[philipl]

You're right, you don't know anything about it. Fannie Mae and Freddie Mac are government chartered, so they do have to do what the government says to keep the charter. They back other banks in making mortgages, and the government told them they needed to make money available for a higher percentage of loans to low income borrowers. Low income borrowers have less money available to pay back the loans, especially if they no longer have the equity they used to in the house.

There is nothing inherently bad in the American system in Government policy being directed to making home ownership available to the less well off.

That was the foundation of the Thatcher social revolution in the UK and created a whole class of lower income people who became strong Conservative voters and gave over a million families a stake in property and therefore a base of ownership assets they had never had before.

The problem was the way that those sub-prime assets were then packaged by the banks and used as collateral for multiple derivative products so you ended up with a poor neighourhood worth say $40m supporting perhaps $1bn of collateralised financial products from which the banks would pay out perhaps $50m real cash in staff bonuses on the paper profits they had made.

[dave birch]

Philip, according to reports here, 70% of those "loans" are still performing.

This has been a crisis of confidence, nothing less.

People panicing on the word of an "expert"

I say tomato, you say tomato,

I say sell, everybody sell.......

[American]

70% is still not a great number, considering how high the derivatives ended up being priced.

They've also sunk lower than they should, so hopefully the government's buying them up will actually make a profit (though government run and profit usually don't go hand in hand).

Interesting video from 1-2 years back: http://www.youtube.com/watch?v=2I0QN-FYkpw

[AussieinUk]

The problem was the way that those sub-prime assets were then packaged by the banks and used as collateral for multiple derivative products so you ended up with a poor neighourhood worth say $40m supporting perhaps $1bn of collateralised financial products from which the banks would pay out perhaps $50m real cash in staff bonuses on the paper profits they had made.

Slight exageration there philip. $40m securitized to $1bn CDO/CLO's?? I dont think so, but I do get your point on the leverage factor..

Philip, according to reports here, 70% of those "loans" are still performing.

This has been a crisis of confidence, nothing less.

People panicing on the word of an "expert"

I say tomato, you say tomato,

I say sell, everybody sell.......

Spot on dave.

70% is still not a great number, considering how high the derivatives ended up being priced.

They've also sunk lower than they should, so hopefully the government's buying them up will actually make a profit (though government run and profit usually don't go hand in hand).

Just to slightly clarify and to also add to what you have said.

- It was not the way these products/instruments were priced, but the method in which these derivs were packaged and importantly the (biased) 'asset rating' assigned against them.

- The US govt will make substantial money back on this financial fiasco. Maybe not a profit, but a lot of the money will come back into the US treasury coffers.

[philipl]

Slight exageration there philip. $40m securitized to $1bn CDO/CLO's?? I dont think so, but I do get your point on the leverage factor..

Spot on dave.

Just to slightly clarify and to also add to what you have said.

- It was not the way these products/instruments were priced, but the method in which these derivs were packaged and importantly the (biased) 'asset rating' assigned against them.

- The US govt will make substantial money back on this financial fiasco. Maybe not a profit, but a lot of the money will come back into the US treasury coffers.

OK, a bit of license in my numbers but I bet its not impossible to find a series of interlinked deals that produce such an equivalent leveraging ratio result somewhere in the world. I notice you didn't query the bonus figure!

The point about the UK Government taking equity ownership is exactly the same. At some point in the future (quite possibly towards the end of the next Government's first term, there will be a fantastic opportunity for UK Gov to cash in very healthily on all the banking shares they have helped themselves too.

[broadsword]

Is that bloke trying to say that the Clinton Administration was socialist?! Doesn't sound right to me.

Now normally, I find the world of finance about as stimulating as a wet fart, so I haven't really delved into this too much.

So banks were *forced* to lend vast sums of money to people who had not a hope of re-paying? How exactly is that going to help people on the lower rungs of society? I don't get it.

The popular conception is that greedy bankers earned commission selling policies which were unsuitable to people who didn't know better. I've seen that happen before, when I worked on the pensions review for FSA (as a humble administrator!) -- certainly that wasn't anything to do with socialism.

and we're seeing it with the housing market, agents were getting people to self-certify their earnings were way above what they actually earned and end up well over their head. This has lead to inflation in the market well out of kilter with wage inflation, and this is why we're heading for a painful correction.

So if the credit crunch is all to do with Uncle Joe Clinton, why is this at odds with all the other problems we've had?

I mean, even with regulation, there is the suspicion that there is naughty work going on, insider trading and all of that. The FSA just doesn't seem to get to grips with it. And how about all of that short-selling? That's not socialism either. I think the real problem is unfettered inadequately-regulated capitalism.

But I'm just the man on the Geneva trolley-bus, what do I know?

[philipl]

This is a far more rational explanation than that jokey article at the top of this thread.

[AussieinUk]

OK, a bit of license in my numbers but I bet its not impossible to find a series of interlinked deals that produce such an equivalent leveraging ratio result somewhere in the world. I notice you didn't query the bonus figure!

The point about the UK Government taking equity ownership is exactly the same. At some point in the future (quite possibly towards the end of the next Government's first term, there will be a fantastic opportunity for UK Gov to cash in very healthily on all the banking shares they have helped themselves too.

No, I didn't comment on the bonus figures, as £1bn of CDO/CLO notes, would probably generate close to what you have stated (i.e. £50m)..

Agree on your second point.