Friday, September 26, 2008

Husain's Response

To the comments on the previous post, Husain responds at length. Since he doesn't have a blog of his own, and since this is so much fun right here, this is his response in full.

**

Husain says:

I am a little puzzled at the charge of being “partisan” or of passing “value judgments” because I am not, nor did I claim to be non-partisan or value-neutral on this issue. But perhaps I was a bit too restrained and subtle in my piece. What I really wanted to say was this: Shame on those disgusting, greedy, mean-spirited, selfish bastards for setting up a corrupt system which was designed to take advantage of the poor and the ill-informed, for making out like bandits while the going was good, and for then walking away from the loss, smugly talking about how it was the subprime borrowers’ fault that got them into this mess in the first place. Now that we’ve got that out of the way...


I shall not discuss the issue of whether my mis-spelling of Stearns takes away my right to analyze the crisis, but I will pause for a bit on the quibble with my use of “securitization”. Securitization is a fancy word for the creation of fictitious products called “securities” (which are themselves based on actual assets that are expected to generate income). This is the way the securities game was played: the get-rich-quick Wall Street crowd peddled these subprime loans that they knew very well were predatory, created a bunch of abstract securities by using the mortgage as collateral, packaged them in fancy bits called MBSs-CDOs-CMOs-whatevah, persuaded credit rating agencies to give AAA ratings to some of the securities, sold these to investors, exploited accounting loopholes to create shell companies called Special Purpose Vehicles (SPVs) in the Cayman Islands and other tax havens, and transferred the junk securities to the balance sheet of the SPVs. So by the time they were done, they had taken crappy mortgages and converted them into separate “tranches” – some became AAA securities, some lower rated ones, and some were just trash that was moved off their own books (and by the way, does anyone really believe that they did not know exactly what they were doing?). And then they did it again and again. They also gave themselves fat salaries and huge bonues (try the $490 million Dick Fuld made during his tenure as the CEO of Lehman), and engineered their own payoff in a way that allowed them to have it taxed at the 15% capital gains rate as opposed to the 35% federal income tax rate.


I agree that it is “convenient for society to blame this mess on Wall Street” but it is far more convenient to shift the blame on to “society” which should somehow “accept its own responsibility for what's happened”. What was “society’s” responsibility exactly? To divine how the opaque world of Wall Street worked? To turn away from what was being masterfully sold as a fail-safe wealth-making opportunity? To not have “voted for a government that believed in minimal oversight” (let us leave aside the fact that less than 2/3rd of the population is of voting age, half of them vote, and half of those did not vote for this administration)? This is a logic of collective punishment that also makes a scapegoat of the victim.


Agreed that it was the (very understandable) desire to make money on increasing property values that made several middle- and working-class families jump on the bandwagon. Agreed that they signed up for loans that they did not realize they couldn’t afford to pay (more on that below). Call this greed if you will, though you should keep in mind that buying a home isn’t just about upscaling your living digs from a crummy apartment to a home with a yard. Given how U.S. cities and towns are structured, home ownership is linked with access to decent schools, crime-free neighborhoods, and availability of open, green spaces.


But to equate this desire with the rapaciousness of the financial executives is a travesty. You can’t seriously believe that the “greed” of the poor who were eager to acquire homes and the “greed” of the masters-of-the-universe are equivalent, unless you truly don’t understand how power works.


Subprime lending – a fancy term for giving high-interest loans to the poor – was turned from a tiny niche in 1990 into a huge 20% slice of the market by 2006. It would take too long to list the ways in which these loans were predatory, but here are some of them. Seventy percent of these loans came with a pre-payment penalty; in other words, you were stuck with them even when you realized that you’d been duped. You couldn’t pay them off, refinace the loan, or pay on an accelerated basis. The loans were sold with teaser rates that were designed to “balloon” after 2 or 3 years and written in ways that made them appear cheaper than they turned out to be (by hiding taxes, insurance, and delaying interest payments). Worst of all, there was a deliberate effort to target buyers in poor communities through hard-selling and false advertising. Though they are being depicted as irresponsible and reckless, the subprime borrowers were – for the most part – victims of an elaborate scam.


The burden of this crisis is already being disportionately borne by those who were disadvantaged to begin with. Consider the following. In a population that is 66.4% white and 13.4% black, 54.7% of high-cost loans were given to blacks and 17.2% to whites. These numbers partly reflect the fact that black communities tend to be poorer than white communities. But there is also plenty of evidence to show that black families that could have qualified for a prime loan were steered towards and bamboozled into taking loans at subprime rates. See the report “State of the Dream” put out by United for a Fair Economy for more details.



Like I said, shame on the perpetrators of this, yes, unscrupulous scam.


P.S. This isn’t a disclaimer that absolves me of responsibility for this analysis, but I should say that I am no expert on this issue. I am eager to be educated by those who know better, but I think that the broad contours of this drama aren’t that difficult to figure out. By the way, if you want to read something I wrote on stuff I do know very well, here is my tribute to Ahmad Faraz, Pakistani progressive poet, who died recently:

P.P.S. I plan to cannibalize this for a follow up Q&A piece.

69 comments:

Rahul Siddharthan said...

husain - What I really wanted to say was this: Shame on those disgusting, greedy, mean-spirited, selfish bastards...

Thanks, that's so much better. Really.

Blaming the people who took loans they couldn't afford for the crisis is like blaming the poor who live in slums near the river for being flood victims. When you're going to be homeless, you take a loan to postpone the disaster. That's human nature. When you think everything is going up, you may take a loan to buy property that you can sell at a profit later. That's not just human nature, it's exactly what the investment banks did too. Why not spend the 700 billion on the families who can't afford their mortgages? Why exactly should one believe Paulson when he says credit lines will dry up if you don't bail out Wall Street? He's hardly an impartial observer: he worked at Goldman Sachs for over 30 years and was its chief executive until just before he joined the government. Why not, at the very least, ask some disinterested economists what to do?

I wouldn't blame only Wall Street. I'd blame successive governments since Reagan's time, and also Milton Friedman and his school.

swar said...

Thanks Husain for this. And Alok and Rahul Siddharthan for the sound comments.

For quite some time, I was feeling like a peasant in the middle ages forbidden by the priests to read the Bible written in the high language Latin, forced to pay indulgences to make the church filthy rich and blamed for my sins.

nowhere man said...

Just wondering..is there anything on the net which questions Henry Paulson's role in this crisis when he was the CEO of Goldman Sachs? This sub prime business started around 2003 ( I think ) and surely Paulson did approve of it when he was the CEO ? Maybe I missed a commentary on this somewhere.

gaddeswarup said...

A comment inRoubini's postlinks to
a letter from J. Kyman Bass, Managing Partner of Hayman Capital . Excerpt:
"He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt. "

??! said...

Space:
You're just enjoying getting a good rant out of Falstaff after ages, aren't you?

Falstaff said...

Fine. At least now we know where Husain is ocming from, and how unreliable and over the top a critic of the system he really is. Personally I'm amused by the bizarreness of the logic that sees the desire to make money on increasing property values as 'understandable' but then rants against the villainy of Wall Street. I'm amused by the childish notion that Wall Street is somehow special in its desire to make profit at the expense of others (as opposed to who - defense manufacturers, real estate contractors, tobacco companies, automobile companies, oil companies, pharmacos, cosmetics manufacturers, hospitals - I could go on). I'm amused that there are still people out there who see the fact that bankers are selfish and mean-spirited as a revelation. And I'm amused by the puerility of a response that consists, basically, of saying 'shame! shame!' without either considering the system of incentives that led to the problem or offering anything remotely like an alternative (what are we in kindergarten).

But whatever. As long as people refuse to recognize that crises like these are not the product of some global conspiracy by evil bankers collaborating together but the logical result of really smart people working competitively in a system designed to incentivise profit that is poorly regulated, they're condemned to fall prey to these crises again and again. If Husain et al find satisfaction in blaming Wall Street for their ills that's good for them, but recognize that that blame comes at the expense of any real understanding of the problem that would allow us to stop the problem from reincarnating in some other form. If you can come up with a way of running the economy where companies are not motivated by profit and consumers are not to be held responsible for the choices (however ill-informed they make) I'm happy to hear it, but in the absence of such an alternative, all this outrage is just the meaningless baaing of sheep just waiting to be shorn.

Banno said...

At least, I've understood a little bit of what's been happening. Though a lot of it still goes by. And that's exactly what happens when most people apply for a loan, credit card, buy shares, etc. They just don't read the fine print or understand what it's really going to mean when they don't pay an EMI or are late or just want to back out of the deal.

Falstaff said...

??!: I know. It's been a while hasn't it? I'd forgotten how much fun this is.

Rahul Siddharthan said...

falstaff: I notice you avoid any answer to Husain's point that the mortgage brokers pushed semi-fraudulent loan deals, with scams like prepayment penalty and ballooning interest in the small print. Of course you can blame the regular people for being taken in. You can also blame people for being scammed by our hospitals into unnecessary scans, MRIs, operations, drugs etc for minor ailments. I'm glad to see that you admit there is a role for regulation: that, at least, sets you apart from the loonies in charge in the US, who until two weeks ago insisted that all regulation was unnecessary and evil.

km said...

Husain:

I want to make sure I get this right. Just how is sub-prime lending a problem?

Are you recommending banks stop lending to people with poorer credit history?

Or are you saying banks should stop worrying about things like profits (and risk mitigation) and simply hold hands and sing Kumbaya?

Look, if a commercial corporation wishes to do business with a consumer with inferior credit rating, it will impose caveats.

Is that fair? Depends. But would you be completely at ease in lending money to a stranger on the street?

One could design the most altruistic, the most rigorous financial system in the world and it will still fail under certain conditions.

Systems fail. So what?

km said...

Rahul: I just re-read your response to Falstaff:

scams like prepayment penalty and ballooning interest in the small print.

My cellphone carrier has an early-termination fee in its contract. Is that a scam? Or is that simply an inconvenient contract term?

You want to know what a real scam is? Being charged 400 bucks by the deed/title company for re-financing. Now that there is a royal scam.

Rahul Siddharthan said...

km - the point is the banks were not taking the risk of subprime lending. They were converting these things into securities and selling to others, who bought them thinking anything called a "security" must be secure. And that's just one example. The whole thing is an immensely tangled web of buying and selling and shorting and arbitrage and leverage and whatnot that, by all accounts. not even the people doing the transactions fully understood.

This is not the failure of an altruistic system. This is the popping of an enormous bubble.

I still think the Robert Samuelson article that I linked to last time contains one of the best summaries I've seen. You invest $100, watch it grow to $110 -- you made a 10% profit. But you borrow $100, watch it grow to $110, and return $105 to your lender -- you made a 100% profit. Tempting, but it becomes a bad idea if you do it with all your money, and especially when everyone else does it too. Anyone can see that. Why did the big guys do it? Greed, and perhaps a belief in their own infallibilty. But as far as the CEOs and other top guys are concerned, there's also a total lack of accountability -- if they screwed it up, they got their golden parachutes anyway. It's not Dick Fuld who is affected by all this.

Veena said...

??!: Next time, don't behave like those annoying people who talk in middle of movies. Yes, obv this is about getting people to rant. For a while there, SB and I were afraid that Falsie wasn't going to bite.

Falstaff: Agree that everyone in culpable in this mess and that we a society need to think about our values and our money obsession etc. However, I am not sure whether this thinking will get us anywhere. What will we attempt - a transformation of the world as we know it? But as you say, one of the solutions to this might be greater oversight. In that case, I find it useful and practical (not fair or accurate) that people blame the Street because that might be the easiest way to effect the regulation. Otherwise we can all talk about how the society as a whole is to blame in which case no one is accountable and nothing will come of it.

Falstaff said...

rahul: I 'avoid' any answer to that because it's not worth responding to. I don't see a scam - I see a legitimate business transaction with terms that both parties agreed to, terms without which (see km's comment) these people would never have got the loans they did. If these people are too stupid to understand what they're signing, they should stay out of the market. Or they should hire someone to help them figure it out. People need to exercise their own financial judgment, it's silly to expect banks to second guess their decisions.

And how would that work anyway? Let's just try and imagine for a moment, what expecting banks to play this role looks like. Bank A decides that from now on it will only offer plain vanilla loans, and that to only to people who either have a perfect credit rating or an MBA, so as to ensure that there is absolutely no risk that the people will not be able to pay the loan back. Bank A now makes no money because a) its market share shrinks dramatically b) since the loans are basically risk free, there's effectively no return to be made. Bank A then tries to convince its investors that it's okay that they're being offered returns substantially lower than the market because they're doing it for the good of society. How long do you think it'll take for Bank A to fold? But, oh, you say, at least Bank A's actions are helping to avert a future crisis. Not really. Because when Bank A turns down someone for a loan that they're willing to take but Bank A won't give it to them because Bank A thinks it's a bad idea, Bank B comes along and offers it to them instead. The only thing Bank A's actions achieve is that it allows Bank A's managers to fulminate about "those disgusting, greedy, mean-spirited, selfish bastards" as they stand in line at the unemployment office.

You could say - well, what if all banks acted the way Bank A did. Surely then there'd be no crisis. Perhaps, but there'd also be pretty much no banking system. More to the point, there is no way that all banks are ever going to act the way Bank A does. That kind of cartelisation isn't just impossible to sustain, it's also potentially illegal. How do you keep someone from offering a loan to a borrower who is willing to take it and where the lender sees the potential to make money?

Plus, unlike the bankers in Husain's paranoid fantasy world, real bankers are not trying to make loans that they know will fail. On the contrary, most mortgage institutions that I know are working very hard to keep from making loans to people who can't repay them, and do actively refuse credit to people they deem unworthy, and that's just as true for sub-prime lending as it is for anything else. All sub-prime lending means is that you're making riskier investments in the hope of higher returns, it does not mean you'll lend to people who are clearly going to default. You can argue that banks did a poor job of this, and that they didn't screen out enough people (although I'm not sure even that is true - ex ante the loans may have been perfectly reasonable), but that's a story about incompetence, not malign intent.

Finally, I've never for a moment said that there shouldn't be regulation, or that we shouldn't blame the government for not acting sooner (though again, I tend to see the government as incompetent rather than evil). On the contrary, my whole point is that if we believe that people are too stupid to make responsible decisions for themselves then it's the government's responsibility to step in and protect them - that's their role, NOT Wall Street's. Of course, many people would argue that the government should not play nanny and should let people make their own independent choices - which is why we haven't had more regulation. And frankly, I'm okay with that too, so long as people are willing to accept responsibility for the consequences. You can't demand the right to make your own choices and then blame other people when the choices you make turn out to be bad ones.

??! said...

veena:
Ouch. Putdown. Ok, I'll add my bits.

Falsie:
I get that you're saying we shouldn't blanket-blame Wall Street for the mess. And that the problem is more deep-rooted.

But are you seriously suggesting that Wall Street - and Main Street - are not to blame for aggravating the problem? Sure, the system was fallible and poorly-regulated. Sure, they were driven in making a profit etc.

But just because they could, shouldn't been they should have. There are indicators from way back that this was going to collapse, yet the warnings were deliberately ignored.

I'm not saying blame only them, but I can't see how you can say "don't blame them, this is how they are". Using that logic, we can extend it to all criminals ("no no, you don't understand, he had to murder those people").

??! said...

Falsie:
Ok, we just cross-commented. So I get some of the answers in that last comment of yours.

But I'd suggest (and considering your normal cynical self, I do this with great trepidation) that you're being naive in suggesting that banks and financial institutions wouldn't be giving out risky loans.

To clarify, the bank wouldn't. But the managers, the salespersons, and all those people who needed to meet targets to get their bonuses - they would. And obviously, did.

Falstaff said...

veena: Not really. The trouble with this villainisation is that it leads to 'regulation' that involves government working against Wall Street rather than with them, which, given that the government is probably less competent than the Street is a bad idea. Any sensible regulation needs to start with a real understanding of the problem, which facile generalizations about the villainy of bankers is likely to obscure. If we accept the easy answer that the whole mess happened just because bankers were out to scam people, we're unlikely to come up with regulation that will work.

Besides, as Alok would say, that's instrumental reasoning - you can't blame someone unfairly just because it may lead to useful outcomes.

Also, while I recognize that social change is hard, I have no reason to believe that effective regulation is any easier. Acknowledging that society has a addiction to unwise borrowing is an important first step towards creating a world where such crises are effectively contained. And financial crises like these are actually the ideal time to engage in national soul searching. I'm not an expert, but my anecdotal sense is that the Great Depression did have a serious effect on social values that lasted for a long time. What we need, if you ask me, is not so much government regulation as non-profit initiatives to provide pro bono financial advice to people in the sub-prime market. And half-baked diatribes that absolve borrowers of all blame and demand that Wall Street be held accountable for the poor judgment of home-buyers make consideration of those alternatives more difficult.

Falstaff said...

??!: Of course I'm not saying that Wall Street isn't to blame. I'm saying that they're just as much to blame as everyone else. So if you believe that homebuyers aren't to blame because they were just doing what was natural, then Wall Street isn't to blame either, because they were doing what was natural to them. You either blame both or you blame neither.

Plus, frankly, what I'm having difficulty understanding is not so much the blame as the outrage. So Wall Street is ruthless and driven exclusively by profit. That's how it's supposed to be, isn't it? That's what they're there for. I don't understand how people can be outraged that by that.

Finally, of course banks are making risky loans - that's what banks do. But nobody is making loans with the deliberate intention of going bankrupt (or at least the vast majority of bankers aren't). Yes, some banks are badly managed and make more bad loans than they should. Yes, some bankers err on the side of overlending (though again, this is because their incentives are poorly set up, not because they're greedy, mean-spirited selfish bastards who want to steal from the poor to give to the rich). But that doesn't amount to system-wide fraud.

??! said...

Agreed, with those clarifications.

Alok said...

falstaff: I hope you're being deliberately provocative. Do you really believe that it is just a case of two idiots entering into a transaction? You don't even need an economics textbook to tell you that there are things called "externalities". Most likely none of us had anything to do with the sub-prime market still we are all getting affected because of those transactions. Banks are fragile institutions and everybody in the economy has a stake in their well-being, that's why we have so many checks and balances. You probably think that regulators and economists who had the assignment to make sure that incentives are properly aligned bungled, that would be okay. Though I think those regulators are themselves in cahoots with the wall st (may be a case of meta-incentives going wrong). But your saying it is all normal and some truism about society's fault aren't of much use.

Second thing, in that loan transcation it is the banker's responsibility to assess the risk. that's what his job is and that's what he is being paid for and that's what is so called brilliant mind is there. most of these people (or least the behind the scenes people) have phds in mathematics and physics just so that they can model risks and find how much a security or an instrument is really worth. Probably the model which calculated the value of MBSs wasn't proper or they deliberately took those risks, in either case it is they who are to blame not the people.

I still can't believe that you see this as normal state of affairs in a captitalist system...

Alok said...

Ok I just saw your later comments. I agree unwise borrowing and spending is a major social evil too and it requires some soul searching.

km said...

Alok:

Do you really believe that it is just a case of two idiots entering into a transaction?

You just summarized Commerce in one sentence!

km said...

And who woulda thunk Space Bar's blog would draw out monocle-wearing capitalists and stinking hippies?

??! said...

KM:
I know! All those people coming here for poetry and random international film tips must be cursing google for directing them here.

Veena:
Ok, shutting up now.

Falstaff said...

alok: Here's what is expected to happen: a) Regulators put in place restraints to keep stupid, ill-informed people from making bad decisions b) Managers in financial service firms manage risk effectively to ensure that their investors earn high returns.

Here's what's not expected to happen: Financial service firms forego opportunities for profit that they could legally make because they care for people, don't want to take advantage of them.

Did regulators fail to do their job? Possibly. Did managers fail to manage risk in a way that would maximize returns to their investors? Yes. Were managers therefore incompetent? Yes. Should be therefore blame them for their incompetence? Yes.

Nowhere in that argument is their place for childish grandstanding about how evil Wall Street is. Financial service firms are supposed to be 'greedy' and 'selfish' (which, when you take away the idiotic value judgments just means they are supposed to make money), they are not supposed to be incompetent. Blame them for not managing risk properly all you want, but recognize that that's very different from blaming them for being 'selfish bastards' - particularly because painting this fantasy picture of banks as villains keeps us from asking intelligent questions about why they got the risk models wrong.

As for blaming society vs. blaming Wall Street, I don't know how one is more 'useful' than the other. If the problem is really that bankers are greedy, etc. etc. then what's the solution? How do we make bankers not-greedy without changing society as a whole? Do we place children who show exceptional math ability at the age of two in a special enclave where they can be brought up in a spirit of open-hearted generosity away from the social influences that make everyone else greedy? Do we stop recruiting bankers from business schools and hire only from monasteries so that all bankers, no matter how clueless, are pure of heart? Making points about the greediness of bankers is just as useless as making points about the greediness of society more generally, and the latter has the advantage of at least being valid. Besides, the 'let's blame the bankers' bandwagon has enough people riding it already, it's about time someone started asking questions about the social structures that underlie the greediness of bankers, especially in the face of arguments that explicitly deny that society more generally bore any responsibility for the crisis.

Alok said...

That's a good summary and I think I agree. People probably would want to take the "incompetence" argument one step further, into the domain of ethics which you are very firmly reluctant to do yourself.

Rahul Siddharthan said...

Sheesh, I leave the internet for 3 hours and look what happens.

Falstaff - I see where you're coming from, and you may like what people like Ron Paul say. They'd also probably agree that if you fail to read the fine print it's your own damn fault. And that it would be ok to sell potent drugs over the counter and market them as miracle cures and hide the side effects in small print. You, the customer, should read the small print and decide, and the government should get out of the game. (Ron Paul is consistent -- he doesn't support the bailout.) I think it is all excellent in theory but not so much in practice.

As you say, firms are supposed to be selfish and greedy (ie, make money and look after their own interests), and they are. But that is not an end in itself but a means to an end. Capitalism / free-market economics (at least, the sort that I like) does not claim that those traits are virtues, only that you can make use of them for the greater good. Aristocrats and landlords and emperors were selfish and greedy too. What is also required is transparency and competition. Competition, of a sort, existed but transparency was totally lacking.

You go on to say that they are not supposed to be incompetent -- and I think that (ie, the idea of a rational agent) is the biggest fallacy in economics. Even if individuals are competent, they may not be working for the good of the firm -- indeed, the whole culture of bonuses and short-term rewards ensured that they weren't. Plus they may not be competent: they may think they're smarter than everyone else or smart enough to handle any market situation, but they may be deluding themselves. There's no question Nick Leeson was smart -- extremely smart -- and greedy and selfish and everything else. It didn't help him and it collapsed his bank.

Lekhni said...

I agree with Falstaff a lot. Also with KM's response.

From Alok's and others' comments, it seems to me there is some confusion between banks and investment banks. which is understandable, because the term "banking" is used interchangeably here. So let me just clarify that.

Banks - the people who lent out the loans/ mortgages/ home equity loans and so on, are regulated. They do not employ any PhDs, (unless they are PhDs in English literature). Banking is not that well paid either.

Also, most banks are small - there are regional banks, local banks, credit unions and all kinds of mom-and-pop banks out there. None of these outfits can really take on the risk of mortgage loans on their balance sheets.

So they pass it on to Wall Street - actually Fannie and Freddie. When people blame Wall Street, they are blaming Fannie & Freddie (more Freddie than Fannie) and then the i-banks for trading in MBS securities and CMOs and so on.

But Wall Street didn't borrow the money profligately in the first place, nor did Wall St lend it out.
Wall St definitely shares some of the blame, but the problem didn't start there.

And as for Husain's post, Falsie, KM and others have written enough in rebuttal. I found the post so horrifying that I didn't even know what to respond, or where to begin :(

I greatly admire you guys for your patience in trying to reason with such.. :)

Rahul Siddharthan said...

lekhni (and others) -- have you not paused to ask why such a crisis has not occurred in the past? (Yes, crises have occurred of comparable magnitude but their origins were different).

Yes, mortgages are done by regular banks and the weird instruments are done by the investment banks. km asks, what's wrong with giving subprime loans, what are these people supposed to do? lekhni says banks can't afford the risk and pass it on to Wall Street. Precisely. But banks have no business dealing in such risky loans, and as Falstaff repeatedly says, customers have no business taking loans they have little chance of paying back. And Wall Street has no business securitising these loans, without investigating them, and selling them to third parties. And none of this happened a few years ago.

This move towards debt is a very recent thing. (Another example is credit card debt which I have not seen mentioned in the context of the current crisis, but I wouldn't be surprised if it is the cause of a future crisis.) It used to be that you don't borrow unless you're confident of paying back, and you first save for the future and then spend for the present. For twenty or more years Americans have stopped doing that, and therefore they are called the engine of the world's economy. I would say the engine has run out of steam, but that's not quite correct and I've run out of metaphors.

Hm, my last paragraph is beginning to sound like Falstaff in that I'm blaming the public for their imprudence. Here's where I differ: I think the public are not perpetrators of a crisis victims of a gigantic con job. They didn't think to read the fine print (which was often very fine) and are now paying for it. The more educated among us know to be skeptical of grandiose sales talk, but most people aren't (perhaps because they haven't had our opportunities and exposure) and they don't deserve to be condemned for it.

(PS - for an example of how the mortgage lenders worked, see this article by Bob Herbert.)

Rahul Siddharthan said...

ps - I posted the Herbert link after googling, but I hadn't read it since it was published nearly a year ago. I just re-read it and my blood boils. Falstaff will probably argue either that they deserved this or that these are isolated cases.

Szerelem said...

??!: I am joining you as one of those people who talks in the middle of movies.

Btw - have you seen Colbert and Stewart (especially Stewart) this past week? They are really having a ball are they not?

Falstaff said...

rahul: I'm not saying that anyone 'deserved' it, whatever that means. I'm saying that it's not Wall Street's job to help people who are ignorant or have bad judgment - partly because Wall Street's primary responsibility is to its investors, not to the average schmuck, and partly because in a competitive market no firm can give up profit opportunities and survive. If naive borrowers are to be protected, they should be protected by the government or by consumer groups, it's silly to expect banks to cut into their own profits to do so. And it's even sillier to turn around after years of public policy that has been predicated on the assumption that people should be allowed to make their own choices and state interference should be kept to a minimum to now claim that people should not be held responsible for their actions because they were too stupid to make good decisions, but that banks who operated within that paradigm are somehow evil.

for the record, I agree entirely with your point about the crisis being precipitated by an increase in the public appetite for debt. Which is why I've been saying all along that we need to think about changing social norms and values. If people want to take debt that they can't repay there is no real way to stop them - no matter how much banks self-regulate someone or the other will give them the money. Any real solution to the problem requires that we attack the demand for imprudent debt at least as aggressively as we attack the supply. And pretending that it's all Wall Street's fault keeps that from happening.

Veena said...

??!: See, this is much better. You have to do your part in the drama - not turn around and question director in the middle of it :)

Falstaff: Don't necessarily disagree. But three things where I differ:

1. I know where you are coming from but to me, government working together with Wall St on regulation (especially the government currently in power) is a little frightening

2. I think for soul searching to happen, things needs to get far worse than today and not sure if we will get there

3. I see the point of providing financial advice to borrowers, but unlike you don't see it any more necessary than greater oversight on the other end

Szerelem: You are alright. Anything that mentions Stewart and Colbert is not interruption. Yes, I know, Stewart has been particularly entertaining this past week. Did you watch the loan interview episode? Can't get that out of my head.

SB: I am done acting cop on your comments section. Can you come and take over?

Rahul Siddharthan said...

falstaff - now we're getting somewhere. Where did this public desire for debt come from? Why, from Wall Street banks. (Even in India, it was Citibank who was the first to aggressively market credit cards.) People should not have been dumb enough to believe that they can borrow without consequence, but they were, and are, dumb enough.

You seem to be saying that what the banks did is OK because the laws allowed and, indeed, encouraged it. And also that any bank that did not follow such practices would not survive. I agree that the lawmakers should be equally blamed (and said so earlier). But I wouldn't call it OK: that's like saying swindling you is OK if you tell me that you trust me and don't crosscheck.

To return to an earlier point about prepayment penalties, km wrote:

My cellphone carrier has an early-termination fee in its contract. Is that a scam? Or is that simply an inconvenient contract term?

The cellphone provider could claim they're lowering their costs, and passing the lower costs to you, if they give you a 2 year contract; so if you terminate early, they lose and recover from you. I don't see how that applies to loans. You take money from them; if you repay in full, ahead of time, there's no way they lose. (You've already paid interest on whatever time you've already held the money.) What really happened, of course, is that they lent out your money to someone else on the assumption that you will take a long time to repay: but in that case, why not just loan your repayment to someone else? Or maybe they're just trying to make money. I call it a scam.

The other thing about cellphone carriers in the US is that they subsidise the handset (another possible reason for early-termination penalties), but also lock it so that you can't migrate and can't even install any software or ringtones of your choice. I prefer the Indian setup where you buy the handset separately and can do what you like with it. Maybe that's just me.

Also, is it just me or are the US residents more pro-Wall-Street on this thread?

wildflower seed said...

Falstaff's arguments are disingenuous.

In 1998-2000, I worked as a strategy consultant with two of the three bulge-bracket investment banks on Wall Street. During these two engagements, I got to see both the trading operations and the investment banking operations of these banks real up close. At one of these banks, the project involved extensive work with the risk management team on the equities desk. The timing for me to learn about Wall Street could not have been better - LTCM had just collapsed and the Internet bubble was waiting to burst. In Fall 2005, I interviewed with three other investment banks, among them Lehman and GS, for a position in their bonds/derivatives/economics research teams. This time around, I got to observe closely yet another aspect of investment banking. In my interviews, I watched closely for signs that the bosses in these divisions were preparing themselves for the impending real estate crisis, which people like Nouriel Roubini had issued strident warnings about already. I found that everybody in these research divisions was in vehement denial of the bubble. I was perplexed. In 2007, a friend who works on Wall Street told me that the bonuses in 2006 had been spectacular (VPs in investment banks getting $750,000 in bonus). Then I understood.

During my stint as a consultant, I also worked for a metals company.

I found that Wall Street *is* special in its attitude of greed. There is a lot of swagger and sense of entitlement on the Street. There is animal pride, and there is animal recklessness. Which is such an irony because nothing *real* ever exchanges hands on Wall Street. I did not find this repugnant, perverse attitude among the high-level executives of the metals company I worked for. There I found profit-seeking for sure, but there was also a humility and a sense of responsibility towards the consumer. Granted, there have been companies like Enron and Worldcom, but these were cases of corruption in which Wall Street participated with full knowledge.

Hussain has allocated blame rightfully, I feel. Kudos.

wildflower seed said...

Rahul,
I live not far away from Wall Street, and I am livid at these people. Livid that these liars and cheats can crap all over the place and then we have to clean up after them. Bullshit stinks, and now Paulson et al. are trying to make the shit shine. Sorry, Hank, but shit dont shine.

We need to call out these people and make public spectacles of them. Things have finally reached such a head (election year and all) that this may yet happen. I am waiting and watching.

wildflower seed said...

Falstaff, the logical end point of what you are suggesting - that regulation keep out the stupids, but not come in the way of the smarts - is the implosion of financial markets. This is well know in finance theory as the "No Trade Theorem" which says that if everyone were rational, there would be no trades. Financial markets would not exist without irrational people.

Besides, the notion that greed can be separated from incompetence, is ridiculous. What began as greed and multiplied as rapaciousness ended up as incompetence. So maybe we should blame just the disembodied incompetent now?

In a recent opinion piece, Joe Stiglitz suggested that regulation will help prevent a similar crisis, but the ingenuity of the smarts will necessitate new regulation, only after a new crisis happens.

This bailout/regulate approach has been tried and tested before. Has it worked? I think the evidence is overwhelmingly in favor of "Not".

Falstaff said...

wildflower: You know, you're right. Regulation won't help. Standing around patting each other on the back and bitching about how evil bankers are - now THAT's sure to work. Because, of course, there's nothing that scares a banker more than the idea that someone might actually say, in public, that he / she was (gasp!)greedy or that he / she actually made money off other people (oh! horrors! A banker who makes money! Who would have thunk it?)

If you'd been paying attention you'd have noticed that I've never said regulation is the only solution, and I certainly haven't ever expressed support for the bailout. Stiglitz's point about the problem coming back in some other form is precisely why we need social change, precisely why it would be a good idea to have pro bono financial advice for low-income households, and precisely why we need to be talking about what we can do on the demand side instead of climbing up on moralizing rocking horses and shouting 'shame! shame!' at the top of our petulant little voices.

gaddeswarup said...

I still do not understand. I have browsed through the comments of this and the earlier post. I cannot say that I have understood them or read them carefully. It seems clear that Wall Street played a lot of tricks, some unethical and sometimes with the collusion of the government whether democerats or republicans. But it seems that many 'common' Americans went along as long as a considerable number of them were getting a piece of the pie. Look at Bush's approval ratings during the early parts of Iraq war or their belief in WMDs or the recent preoccupations with oil prices. If somebody can reduce the gas prices, it seems to me that many will vote for him whatever happens to the rest of the world. I remember speaking to common people in Michigan (including some on dole) who said that they sacrifised for the Iraq war and that the Americans should get the oil contracts. It seems to me that greed and blindness to the rest of the world percolated to the common people.
The discussion also seems to ignore what seem to be two important factors. The US currency stopped the anchorage to gold in 1971 during an expensive war and the current crisis comes with the Iraq war.
I think that these crises seem to pile up and get bigger (I think that LTCM is very similar). I do not know whether these are contradictions of capitalism as Marx said or just technical Minsky moments. There seem to some commentors who understand economics better; perhaps they can explain.

Lekhni said...

Rahul,

Why has such a crisis not occurred in the past? Of course it has - LTCM was a similar case of taking on too much risk, and one institution being so big it could bring down the entire system if it wasn't bailed out. Of course the details are not exactly similar - you can't people to make the exact same mistake again, do you? Only similar mistakes ;)
(Read "When Genius Failed").

I agree that the public's increased appetite for debt was a big part of the problem. I will go further, it wasn't just credit cards. People took out 2nd mortgages and home equity loans against their appreciating home equity, and then spent the money on stuff like apparel and jewelery! They watched shows like the one on A&E "Flip this House!" Of course they were culpable, and of course they knew what they were doing.

I read the Bob Hebert op-ed you linked to. It's perfectly possible that some lenders used predatory practices. But for one thing, I wouldn't take a loan I didn't want and couldnt repay, no matter how many times someone asked me. (I'd register myself in the Do Not Call registry).

Also, I wonder what the percentage of such people is - unless someone comes up with actual numbers, I am assuming the majority of banks in the country followed good business practice and did not do predatory lending. (Think of the lawsuits that would follow if those borrowers really had a good case).

Anonymous said...

I think men are neither evil nor good, but in general deluded. To say hitler was not evil would be a blasphemy to today's pop culture. The delusion is self-inflicted but also provoked by the system in which they live. Economics in itself might not have any ethics / values. It might just be a path or way that allows people to make choices. But that is were proponents of such a definition form a contradiction in terms. They purport to use economics for the distribution of resources among the population and come up with the idea, but dissociate themselves once the form goes all bloated - oh, the idea was good but its man's uncontrollable desire that caused the economy in crisis. Since economics inherently separates itself from values, because its hands are tied due to precisely the subjective nature of the value system, it forms a necessary evil (unlike humans). What's the solution then?

"Who could win the rabbit? ... Sometimes I cannot find my good habits"

wildflower seed said...

I think "shame, shame" has to be a critical component of the revaluation strategy Rahul is proposing. That is how social learning happens. By the way, one of the reasons the bailout is running into trouble is because the "shame, shame" voice has risen to such astonishing proportions that no bailout strategy that does not also demand accountability will work. This is the aggregative value of individual, petulant, little voices.

Rahul Siddharthan said...

wildflower seed: offtopic - so you're in NYC now?

falstaff: at this point I can't make out whether you object to criticism the Wall Street attitude on the grounds that such criticism is incorrect or that it is unproductive. So far I assumed your argument was the former. But maybe you're just saying there's no point in our standing around complaining about it. Even then, I disagree. First, it's good to let off steam. Second, even if Paulson and Bernanke don't read this blog, they probably know people who know people who read this blog. If the constituents in the US hadn't been calling foul on the bailout (or, as you put it, "climbing up on moralizing rocking horses and shouting 'shame! shame!' at the top of [their] petulant little voices"), it would already have passed without change. The reason people are outraged at the proposal is precisely that they're outraged at the behaviour of Wall Street over the years. Supplying an outlet to that outrage is healthy and important. As for me (and I assume many others here) who is not directly affected by all this, I can still express my outrage just as I can express outrage over the Iraq war.

Falstaff said...

rahul: I'm saying it's incorrect. The point about it being unproductive (which I also think it is) is just in response to wildflower's comment about how regulation doesn't work, which is rich coming from someone who's best alternative is accusing bankers of being 'greedy'.

wildflower seed said...

Rahul : No, I am in Philly, actually.

wildflower seed said...

Falstaff : I did not say it was my best alternative, did I? I think both bailout and regulation are appropriate. What is not appropriate is a sidestepping of the issue of who actually should bear the burden of this bailout. Unless blame is allocated rightfully, this issue cannot be resolved. Bailout/regulation strategies have not worked in the past because they have not adequately addressed this component.

Space Bar said...

Thanks to all of you who commented. I have to say that all of it helped, if not to clarify my thoughts, to at least understand the variety of positions there are on this issue.

My position is tentatively this: If I was an American citizen, I would insist that blame be allocated somewhere, not to some intangible entity like 'society' but a bunch of people who will be held responsible.

I agree that greed is not confined to some elite coterie of bankers; that anyone who wanted to make a fast buck was culpable. I would want, however, that those who were not culpable - did not take loans they could not afford to repay, did not invest in dubious whatevers - not be asked to bear the burden of the bailout.

I'm also all for pro bono anything that might help people understand what they might not be able to without help; I'm just not sure how likely that is to happen in a country that appears to me,from where I sit, to be overworked, with its working population heading towards it's collective retirement without a safety net. I could be wrong about this, but I don't think so.

But this was fun.

Falstaff said...

"I would want, however, that those who were not culpable - did not take loans they could not afford to repay, did not invest in dubious whatevers - not be asked to bear the burden of the bailout."

Pretty. Very pretty. But meaningless. How do you suggest we do that? Do we set up a parallel economy for all the 'innocent' people? "Congratulations! You've been deemed Pure of Heart by the Department of Homeland Outrage. You get to be part of Economy 2.0."

And how, exactly, do we define 'dubious'? Nobody sat down and said "I'm bored. Let's take down the economy." A lot of people made a lot of risky investments in the hope of high returns, and the investments didn't work out. Yes, that means that people who didn't make risky investments also get to pay the price, but that's precisely why it made sense to make the risky investments in the first place - if you didn't take the risk you still got the downside without sharing in the upside.

Look, I understand that people have a need to allocate blame, if only to establish their own moral superiority. I understand how attractive this fairy-tale idea that the world is made up of innocence and evil is. I understand that people feel life is unfair and want to transfer that feeling to the nearest convenient scapegoat. I understand that as the purest embodiment of a social ethos and as 'people who made money while the rest of us were going broke' Wall Street is a natural target for resentment. And I understand why, as an American citizen, you would want to be able to point fingers at a particular subset and see them punished so you could lull yourself into a false sense of complacent security.

I understand all that. All it adds up to, though, is a witchhunt. And I, for one, refuse to be part of that.

Space Bar said...

Falstaff: I don't see that you're making any useful suggestions either. And you're definitely better qualified to offer one than I am.

All you seem to be doing is occupying a different sort of a moral highground.

Falstaff said...

SB: You're right. I'm not. Because I don't believe we can keep these kind of crises from recurring without fundamentally changing the social ethos, and I'm not sure how we do that - beyond working through non-profits to instill greater financial prudence and having a larger conversation about what we value as a society. I know that isn't terribly compelling as a solution, but I think accepting that there is no easy solution is better than randomly assigning blame for it to the first available scapegoat. I'm not saying I know the answers (at this point I don't think anyone does), I'm saying that giving Wall Street a bad name and hanging it is not the answer and to the extent that kind of villain-making derails the real conversations we should be having we need to get past it. I'm perfectly willing to admit that I don't know how to solve the problem, I'm not willing to let overwrought emotional statements that do nothing to bring us closer to the solution go unchallenged.

And no, I'm not claiming moral high ground. I'm just saying that being an adult means recognizing that a) meaningful freedom of choice requires an individual to take responsibility for his or her own actions, and, by extension for his or her own mistakes and b) being part of a society means being exposed to the negative consequences of other people's mistakes. This is not a question of principle - it's simply a fact of life. Do I feel frustrated that these crises keep happening? Yes. Do I feel annoyed that I'm going to have to bear part of the cost for this latest meltdown? Yes. Do I feel the need to blame someone for my annoyance or express outrage over it? No.

It's clear to me that I could have been financially better off by jumping on the money making bandwagon. I chose not to. Do I regret not doing that? No. Am I going to resent other people for doing it? No. That's not a claim for moral superiority. It's just my way of looking at the world.

Space Bar said...

Falstaff: Those are some excellent points you've made in your last comment. While I see what you're saying, that it's in the nature of the way societies are organised that people who do not take risks often take the fall along with those who do, I personally feel unable to be as stoic about it as you're being.

I think justice - another necessary arm of any social organisation, you'll agree - demands that responsibility be assigned proportionally and those who are not to blame do not suffer.

I said it better in a mail to Veena but never mind.

Veena said...

Falstaff: The last comment is right on. And I am back to feeling like I am talking to Falstaff.

I think I agree(as many others commenting on this thread seem to do) that society is culpable and that we need conversations about social values if we are to look at some sort of a lasting solution. (We all seem to differ on the extent to which the average subprime borrower is culpable and/or to why he didn't / couldn't read the fine print but lets not go there now)

However, if in the country that you live in, if one were to talk of society's culpability right now, some of us think (Rahul pointed this out a couple of times) that it would get hijacked - for instance that $700B bill would have passed without a whimper. It would become the perfect excuse for not doing anything. I know exactly what you are going to say to that (the digested version at least) but this is just a partial explanation for why I feel uncomfortable agreeing totally with you.

Falstaff said...

SB: "Though justice be thy plea, consider this / That in the course of justice none of us / should see salvation"

Actually, that play is amazingly apt for this discussion. I'm sure there are people out there who see Shylock as a disgusting, greedy, mean-spirited and selfish bastard. I happen not to be one of them. Invention of the human indeed.

Space Bar said...

Falstaff: Now you've completely disarmed me. What can I say?

You should have invoked Shakespeare earlier.

Falstaff said...

veena: Maybe. Though I'm not sure that misdirecting the blame and creating the illusion that it all happened because Bankers are Sith Lords is likely to lead to any useful solutions either. What it is likely to do is allow the McCain-Palins of the world to advance their anti-elitist agenda. "Look at all these fat cat bankers who screwed you over. You don't want people they went to college with making national policy, do you? No, what you need is to put a maverick in power - people who are outside the system, who are mavericks, who are pure of heart; people who will make decisions based not on the voice of reason but the voice of God." If there's one thing the GOP is good at, it's channeling outrage. And if there's one thing the Bush years should have taught us, it's that outrage is not a useful input into national policy.

Alok said...

this comment thread has already generated enough noise but I couldn't help adding some more moral outrage over falstaff's last comment which smacks of intellectual arrogance. It is really time now that these so-called intelligent people stop telling us common men and women that our ethical judgments are wrong just because we don't understand their legalese and jargons and mathematical equations. This actually fits in the general trend of depoliticisation that we see in the world today in which all real and concrete political problems of justice, equality etc are being transformed into purely technical problems (if not being obfuscated into purely "cultural" problems, problems of "perceptions"), technical problems for those technocrats with their intelligent brains to be solved. this world is too complex for you stupid people (who, gasp and horror! never went to college!!) with their petulant judgements and emotions ( more horror!), leave everything to us! that's what your argument comes down to, isn't it? nobody is to blame, it is just the rule of the game! everybody was just being "rational"... and lastly with all due respect I feel that your cynicism is finally just a pose and not earned at all and because of which you come out to be much more morally self-righteous than any of us here.

Alok said...

something relevant here: Saul Bellow's "Reality Instructors"

Falstaff said...

alok: *shrug*. So you're outraged. Good for you. You seem to enjoy it anyway.

nowhere man said...

"..I'm sure there are people out there who see Shylock as a disgusting, greedy, mean-spirited and selfish bastard. "

@Falstaff: Really? Interesting. Forget the value judgements but you agree with his demand of the "pound of flesh"?

@Alok : Interesting idea about "Reality Instructors" but I am afraid I didnt really get the full import of the article. He seems to argue for both the "pragmatist" and the "idealist".
And how is that relevant to Falstaff's stance?

It is a totally different matter that *if* we are in Paulson's shoes our actions might largely be different from what our "instructed reality" tells us.

Falstaff said...
This comment has been removed by the author.
Falstaff said...

nowhere man: What does 'agree' mean? Do I think it's a reasonable demand to make ex-ante? No. Which is why Antonio should never have agreed to it. But he did. If Antonio was willing to take the risk who am I to stop him? Shall I absolve Antonio of all responsibility because he is incapable of informed choice? No, I can't do that, lest the Knights of Ethical Judgment descend upon me and accuse me of intellectual arrogance. I know, why don't we all just blame it on Shylock, punish him (after all, nobody likes moneylenders anyway, right, they're all 'greedy', they're not like us) and feel good about ourselves.

The point is not that Shylock is a wonderful person, or that he isn't to 'blame'. The point is that the play isn't as simple as 'Shylock is Bad, Portia / Antonio / Bassanio are Good' - that may be the Charles and Mary Lamb version, but the play itself is far subtler and far more complicated. And any 'fair' assessment of responsibility for Antonio's predicament needs to recognize the complicity of all the other major players in creating that situation.

nowhere man said...

@Falstaff :
Shakespeare is not my forte but I do recollect my English teacher giving a revisionist interpretation of the play eons ago.But that's just that..interpretation. We will be opening a whole new can of worms if we go in that direction of "deconstruction" of plays. So well one could argue both the CharleS/Mary Lamb version and "Two rational(?) people entering a contract and honoring the sanctity of the contract" are equally valid.

The question is not what happened ex-ante. The whole issue is Shylock's stance ex-post. When he was offered to be paid in full ( if I recollect even a lot more ), he refused and demanded his "pound of flesh". And if some people call him "disgusting, greedy, mean-spirited, selfish bastard " they might just have a point.

Anyway this analogy is not exactly accurate here but the point is Wall Street should have been in a better position to evaluate it's risk and arguing that it was just "pure business" is letting them off the hook too easily.

Anonymous said...

Falstaff: "Do I feel the need to blame someone for my annoyance or express outrage over it? No." While I agree that we should not act as 'petulant' human beings, this 'petulance' needs to be applied here, for lets agree, that we are not talking about one's cat getting killed causing one great distress because the neighbor took a high risk affair of jumping off the balcony in the hopes to fly and killed the cat in the process too.

I understand that you want to go Beyond Good and Evil. I understand that you bring in question every value judgement made (implicitly, to the point of denying any presence of them). I understand you have your own view of the world. I understand all that. But do use such arguments against a 'cultured', 'educated' defense. Not against an economic system that inherently thinks in binaries.

Preeti said...

wow ... such strong opinions, such little information.. I unfortunately don't have much of a desire to inform and educate (maybe if it's raining really hard tomorrow), so I'll just throw in a couple of points:

1. Decades of US policy treating homeownership an unalienable good also contributed to the crisis. This helped legitimize arguments that attributed value to subprime lending due to its role in increasing homeownership by giving the opportunity to buy homes to those who otherwise couldn't do so.
2. While I definitely don't agree with the vilification of those who want to make money, there is clearly a need to fix incentive systems, from those driven by near-term profits to longer-term. Such incentives across the value chain would likely have helped - for instance, if mortgage broker compensation was based on long-term performance of a loan, they would not have made money if their customers could only afford their mortgage payments for the first 2 years, and needed to refi every time their ARMs reset. Similarly, incentive systems for ratings agencies, lenders, and issuers (the evil wall st banks) were all based on volumes issued, as opposed to longer term performance, which needs to be fixed.
3. Having said that, developing an appropriate incentive system is hard. Shutting down the secondary market for loans and only allowing balance sheet lending would fix the incentives issue, but would severely restrict the volume of lending that can be conducted (as enough balance sheet capacity simply does not exist in the US banking system).
4. Incentive systems for these unsuitable homeowners are among those that need to be fixed - and modifying loans or otherwise preventing foreclosure to 'preserve homeownership' is not going to do it.

ps: someone mentioned 'evil' prepayment penalties, and offered the legitimacy of early-termination provisions on cellphone contracts as a contrast. I'd like to point out that the cellphone example was actually a pretty good analog, as lenders incur significant costs in originating a mortgage, which is recovered only if it is retained for a certain period of time.

Preeti said...

Falstaff - you made a point about how if banks only made plain vanilla loans they would lose profit opportunities, would eventually fold, etc. There were several banks who only made plain vanilla loans btw (BAC, JPMC, regional banks), but managed to do ok because they had diversified revenue streams, e.g. the banks I mentioned made pots of money on deposits as most of their deposits were checking a/cs, vs. a bank (thrift) like Wamu that had it's deposits as CDs and therefore made much less money off it and needed large profits off the mortgage business. Same argument applies to Goldman vs. Lehman as well. Therefore, in looking at the winners vs. losers, diversification is a key differentiator. (which is what we seem to be heading towards)

Rahul Siddharthan said...

falstaff -- ok: I think I see where you're coming from. You don't like value judgements made on market behaviour, but you do like (and indulge in) value judgements made on poetry. Both are subjective matters; in both cases the parties concerned (investment bankers, Kapil Sibal) can claim to have been following the "rules". Some are offended morally by the bankers, some aesthetically by Sibal. I think many well-known literary figures -- Waugh, the Amises (pere et fils), Larkin -- would incline to your point of view. But Sibal's behaviour didn't cause anyone to lose their homes or jobs.

As for this Shylock business: Shakespeare portrayed Shylock not only as a greedy bastard but, very deliberately, as a Jew. We modern enlightened people may seek other interpretations but let's not assume those were the bard's own.

Falstaff said...

rahul: Oh, I don't have a problem with people making value judgments. You're welcome to make whatever value judgments you want. I just happen to think yours are laughable - which is why I continue to mock them. And you're welcome to feel outraged about my mocking them. That only amuses me more.

Salil said...

Whoa! This is some follow up post. Somebody should get Paulson and Ben to read this. It took me almost an hour to fully sift through the various comments trying to comprehend all that was written. I may not be the best placed offer any insights but here is what I think,
While we might need some accountability to effect a reform, unless we have thorough understanding of the crux of the problem, I am afraid we are not going to get far. Wall St. and the Bankers should take the fall? Why? Some say the problem is the competitive landscape, annual bonuses and the incentive system which drives people to lose sight of the fundamental principles and allow them to become more vulnerable to the impending fallout. I have to agree with Falstaff, you can’t run a business without putting a carrot at the end of the stick. That’s how everything works. In this case, it’s a juicier carrot. Also, we tend to ignore how the Wall Street came became so powerful in the first place. It is because they have key information and insight into market dynamics that the common man does not. (Remember Wall Street, the movie?) That’s why they bail out much before everyone else. It might be in their interest, not having a transparent system. But it’s certainly not malicious. However, it tends to give them a false sense of security and belief in the infallible mechanism using which they make money. Clearly they are proven wrong. Every time. There are too many financial instruments and clearly no one can map a perfect model of how the markets should behave. It goes against the basic fundamental unpredictability of the markets.

While they are certainly culpable to an extent, I would like to play devil’s advocate here. The greed has percolated down to the common man. I think that the common man would not be complaining if there was no sub-prime. He would not be aware. He would have happily sung his way to the bank, eager to get his piece of the pie. While not everyone wants to make a quick buck, most of us do. I do feel sorry for the people who were genuinely looking for investing options, hard luck!. So we should read the fine print more carefully and clearly understand the risk so that they can manage it. Putting all your eggs in the same basket was never a smart idea. There are banks for Fixed Deposits, who did perfectly well during this crisis. You have to take risk according to your risk appetite. And that’s the number one rule in the game. Yes, there will be skeptics and cynics, who will feel that how is the common man supposed to understand the opaque functioning of the street. He is not. He is supposed to look for safer bets. I am not proposing that trading should be an elitist activity. However, safeguarding the capital is of utmost priority for the common man as that’s his life savings. And that’s why this happens. We need to have people more aware about all their financial investing options. That’s the key to sound financial health. If someone chooses to place a risky bet, he should have worked out the pitfalls.
We did miss the early warning signs. Yen Carry on trading is one such example. If anyone is to blame the most, it’s the fault of the regulatory body and the government, because of their oversight the scale of the mess is unimaginable. They are a bunch of incompetent fools. Everyone has suffered. And everyone is to blame.

Rahul Siddharthan said...

falstaff - I don't feel outraged at you, initially I was trying to understand your point of view, now I'm just observing your reactions. Obviously you feel the need to "mock" -- if you actually declared your objection to anything, you'd be the whiniest person on this page and that certainly wouldn't do. Much better to accuse everyone else of petulance.

Anyway, there's a new thread open so I'll stop here.