News moves at lightening speed. One minute the story is Lehman Brothers going bankrupt, the next is Barclays is now going to buy some of it, in the asset fire sale in the bankruptcy court.
AIG is like watching a building implode, in slow motion. Bank of America is buying Merrill Lynch, yet no one is questioning any of this, including their purchase of another in trouble mortgage firm, CountryWide.
So, what specifically do these Presidential candidates plan to do about all of this? Right now, we have more finger pointing of the two campaigns with little details on actual policy plans or positions.
It's yet another He said, he said. Obama claims McCain did nothing in the Senate about any of this, but ....Obama didn't either.
US Treasury Secretary claims the problem is in the housing correction. But is it? Isn't the real problem that banks, investment houses had a glorified ponzi scheme of trading default credit swaps as well as reducing actual deposits required by 150% or more to lend?
Here is McCain's Press release:
The crisis in our financial markets has taken an enormous toll on our economy and the American people -- first the decline of our housing markets followed by the collapse of Bear Stearns, Fannie Mae, Freddie Mac and now Lehman Brothers.
I am glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bailout Lehman Brothers, a position I have spoken about throughout this campaign.
We are carefully monitoring the financial markets, including the duress at Lehman Brothers that is the latest reminder of ineffective regulation and management.
Efforts must also be focused on ensuring that the deposits of hardworking Americans are protected. "It is essential for us to make sure that the U.S. remains the pre-eminent financial market of the world.
This will be a highest priority of my Administration. In order to do this, major reform must be made in Washington and on Wall Street. We cannot tolerate a system that handicaps our markets and our banks and places at risk the savings of hard-working Americans and investors.
The McCain-Palin Administration will replace the outdated and ineffective patchwork quilt of regulatory oversight in Washington and bring transparency and accountability to Wall Street. We will rebuild confidence in our markets and restore our leadership in the financial world
To sum, McCain shows how to waste words, say nothing and offer nothing on a major crisis. Now Obama's Press release
This morning we woke up to some very serious and troubling news from Wall Street. The situation with Lehman Brothers and other financial institutions is the latest in a wave of crises that are generating enormous uncertainty about the future of our financial markets.
This turmoil is a major threat to our economy and its ability to create good-paying jobs and help working Americans pay their bills, save for their future, and make their mortgage payments.
The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store.
Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.
I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years – one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It’s a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises. Well now, instead of prosperity trickling down, the pain has trickled up – from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.
This country can’t afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market – rules that would protect American investors and consumers. And I’ve called for policies that grow our economy and our middle-class together.
That is the change I am calling for in this campaign, and that is the change I will bring as President
Oh, my, my, some very good rhetorical lines, I especially enjoy the pissed up on Wall street with the Trickle upon (supply-side) philosophy but once again, no specifics on what the problem is or what his administration would actually do! So, with such massive words of nothingness can we dig out anything of what either of these candidates would actually do? Finding that out is tough and yes I did not only hunt all over their websites, votes and policy papers. I also did a hunt via their economic advisers. Here is what I found that was consistent:
- All regulation under one body, merge regulatory agencies
- Expense stock options
- No bailouts using public funds
- National standards for mortgage lending
- Strengthen the Fed oversight of non-commercial banks, new and tighter capital, liquidity standards, improved risk disclosure by financial companies
- All Regulation under one body, merge regulatory agencies
- An oversight committee over Wall Street
They both have supported Paulson's plans, both voted for Senator's Chris Dodd's housing bill, which enabled the seizure of Freddie Mac and Fannie Mae.
What I find distressing as I watch this meltdown is the lack of understanding of the underlying causes.
A sea of useless bits out there, more opinion following the herd, without a clearly spelled out reason why this has happened in the first place. How can one solve a problem when the cause is not recognized? What are the causes?
According to Robert Weissman there are 5 points in deregulation:
Regulatory Failure Number One: Failure to Manage the U.S. Trade Deficit. The housing bubble (as well as the surge in leveraged buyouts of publicly traded companies ("private equity")) was fueled by cheap credit -- low interest rates. One reason for the cheap credit was an influx of capital into the United States from China. China's capital surplus was the mirror image of the U.S. trade deficit -- U.S. corporations were sending lots of dollars to China in exchange for the cheap stuff sold to U.S. consumers.
Regulatory Failure Number Two: Failure to Intervene to Pop the Housing Bubble. Along with an influx of capital, Federal Reserve policy kept interest rates very low. There were good reasons for the Fed Policy, but that did not mean the Fed was helpless to prevent the housing bubble. As economists Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research insisted at the time, Federal Reserve Chair Alan Greenspan simply by identifying the bubble -- and adjusting public perception of the future of the housing market -- could have prevented or at least contained the bubble. He declined, and even denied the existence of a bubble.
Regulatory Failure Number Three;: Financial Deregulation and Unchecked Financial "Innovation." A key reason that mortgages were made available so widely and with such little review of recipients' qualifications was a shift in which institutions hold the mortgages. Traditionally, banks made mortgages and held them. In the new era, banks and non-bank mortgage lenders made loans, but then sold the loans to others. Investment banks packaged lots of mortgage loans into "Collateralized Debt Obligations" (CDOs) and then sold them on Wall Street, with a promise of a steady stream of revenue from interest payments. These operations were pretty much unregulated. Despite the supposed sophistication of the investors involved, no one took account of how shoddy the loans were or -- more fundamentally -- the certainty that huge numbers would go bad if and when the housing bubble popped.
Regulatory Failure Number Four: Private Regulatory Failure. It was the job of ratings agencies (like Standard and Poor's, and Moody's) to assess the CDOs and give investors guidance on how risky they were. They failed totally, likely in part because they wanted to maintain good relations with the investment banks issuing the CDOs.
Regulatory Failure Number Five: No Controls Over Predatory Lenders. The toxic stew of financial deregulation and the housing bubble created the circumstances in which aggressive lenders were nearly certain to abuse vulnerable borrowers. The terms of your loan don't matter, they effectively purred to borrowers, so long as the value of your house is going up. Lenders duped borrowers into conditions they could not possibly satisfy, making the current rash of foreclosures on subprime loans inevitable. Effective regulation of lending practices could have prevented the abusive loans, but none was to be found.
Why don't the banks have any money to cover these losses? One issue that needs to be further explored is the lack of assets to risk ratios based on new esoteric mathematical models. In other words, major risky loans abounded with no real assets to back them up in case of failure. More to come but a start is to understand these default credit swaps and derivatives
The largest financial crisis of our time and we have spin, rhetoric instead of specifics.