Today in History – September 9

1971 – John Lennon releases “Imagine” album.

1965 – Los Angeles Dodgers pitcher Sandy Koufax pitches the eighth perfect game in major league history, leading the Dodgers to a 1-0 win over the Chicago Cubs at Dodgers Stadium in Los Angeles.  (I grew up going to Dodger games with my dad and remember seeing one of Koufax’s no-hitters but don’t remember if it was this one or not)

Sandy Koufax was a talented all-around athlete from Borough Park in Brooklyn, New York. His first love was basketball, and he attended the University of Cincinnati on a basketball scholarship. His impressive left arm, however, attracted the attention of major league ball clubs and in 1954 he was signed by the Brooklyn Dodgers. Despite his promising talent, Koufax won just 36 games to 51 losses from 1955 to 1961, and was incredibly inconsistent, blowing hitters away one game and walking in runs the next. Finally, advice from veteran catcher Norm Sherry turned Koufax around. As Koufax recounted in his autobiography, Sherry told him to “take the grunt out of the fastball.” It worked: From 1962 to 1966, Sandy Koufax executed what are arguably the five greatest seasons by a pitcher in baseball history. His new found control limited his walks from 4.8 per game to just 2.1, and he pitched no-hitters in three consecutive years–1962, 1963 and 1964.

1850 – California is admitted as the thirty-first U.S. state.  Mexico had reluctantly ceded California and much of its northern territory to the United States in the 1848 Treaty of Guadalupe Hidalgo. When the Mexican diplomats signed the treaty, they pictured California as a region of sleepy mission towns with a tiny population of about 7,300-not a devastating loss to the Mexican empire. Their regret might have been much sharper had they known that gold had been discovered at Sutter’s Mill in Coloma, California, nine days before they signed the peace treaty. Suddenly, the greatest gold rush in history was on, and “forty-niners” began flooding into California chasing after the fist-sized gold nuggets rumored to be strewn about the ground just waiting to be picked up. California’s population and wealth skyrocketed.

1776 – The Continental Congress formally declares the name of the new nation to be the “United States” of America. This replaced the term “United Colonies,” which had been in general use.

In the Congressional declaration dated September 9, 1776, the delegates wrote, “That in all continental commissions, and other instruments, where, heretofore, the words ‘United Colonies’ have been used, the stile be altered for the future to the “United States.”

A resolution by Richard Henry Lee, which had been presented to Congress on June 7 and approved on July 2, 1776, issued the resolve, “That these United Colonies are, and of right ought to be, free and independent States….” As a result, John Adams thought July 2 would be celebrated as “the most memorable epoch in the history of America.” Instead, the day has been largely forgotten in favor of July 4, when Jefferson’s edited Declaration of Independence was adopted. That document also states, “That these United Colonies are, and of Right ought to be FREE AND INDEPENDENT STATES.” However, Lee began with the line, while Jefferson saved it for the middle of his closing paragraph.

102 Responses

  1. I really dislike John Lennon and his post Beatles music (hell, even a lot of his Beatles work). The man was a complete douchebag.

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  2. Sometimes I hear pushback when I refer to the United States as ‘America’ as that seems to exclude the other two major countries in North America but we are the only ones that put ‘America’ right in the name.

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  3. Meh, America’s hat and huaraches.

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  4. IIRC, at one time Brazil was officially the ‘United States of Brazil”. Nowadays most countries just settle for being the “Republic of [Historic Geographic Region]”.

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  5. Scott and I missed this one yesterday……………probably because neither one of us had the time or energy to put up a history post but it’s a biggie.

    Happy Birthday: Star Trek! 47 years ago on September 8, 1966, a brand new kind of science fiction television show entered America’s living rooms…and American culture. I’m betting Gene Roddenberry had no idea this one show would go so far — especially since it had such trouble just staying on the air for a mere three seasons.

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  6. Mark – Latest Steve Pearlstein for you:

    “How the cult of shareholder value wrecked American business
    By Steven Pearlstein, Published: September 9 at 12:20 pm”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/09/how-the-cult-of-shareholder-value-wrecked-american-business/

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  7. There may be no written ‘law’ forcing companies to focus on shareholder value, but it is enforced by ambulance chasers and vulture capitalists.

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  8. Beginning Oct. 1 Rite Aid is going to have insurance agents in its stores to help with ACA enrollment.

    also, the price of private room in a skilled nursing facility is now about 94,000 a year. semi-private room $83,000

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  9. This is probably going to piss you Libertarians off but I came across this and I think it challenges your ideals as far as the historical perspective is concerned. I’m interested in reading more about this.

    Milton Friedman. In his early days, before millions were spent on burnishing his reputation, Friedman worked as a business lobby shill, a propagandist who would say whatever he was paid to say. That’s the story we need to revisit to get to the bottom of the modern American libertarian “movement,” to see what it’s really all about. We need to take a trip back to the post-war years, and to the largely forgotten Buchanan Committee hearings on illegal lobbying activities, led by a pro-labor Democrat from Pennsylvania, Frank Buchanan.

    What the Buchanan Committee discovered was that in 1946, Milton Friedman and his U Chicago cohort George Stigler arranged an under-the-table deal with a Washington lobbying executive to pump out covert propaganda for the national real estate lobby in exchange for a hefty payout, the terms of which were never meant to be released to the public. They also discovered that a lobbying outfit which is today credited by libertarians as the movement’s first think-tank — the Foundation for Economic Education — was itself a big business PR project backed by the largest corporations and lobbying fronts in the country.

    It starts just after the end of World War Two, when America’s industrial and financial giants, fattened up from war profits, established a new lobbying front group called the Foundation for Economic Education (FEE) that focused on promoting a new pro-business ideology—which it called “libertarianism”— to supplement other business lobbying groups which focused on specific policies and legislation.

    The FEE is generally regarded as “the first libertarian think-tank” as Reason’s Brian Doherty calls it in his book “Radicals For Capitalism: A Freewheeling History of the Modern Libertarian Movement” (2007). As the Buchanan Committee discovered, the Foundation for Economic Education was the best-funded conservative lobbying outfit ever known up to that time, sponsored by a Who’s Who of US industry in 1946.

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    • lms….you are missing a link.

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    • lms:

      I’m totally bewildered as to why this should change anyone’s perception of Milton Friedman or his defense of libertarianism. He was hired by a foundation to produce a paper making the argument against rent controls, an opposition that is entirely in line with his now-famous beliefs, and he did it. This paper was then used to – shocker of shockers! – rally opposition against rent control. How this makes Friedman a “shill” who “would say whatever he was paid to say” is entirely beyond me.

      I also can’t figure out what justifies the characterization of his agreement to write the paper as an “under-the-table agreement” to produce “covert propaganda”.

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      • I found the tone of the article a little shrill and histrionic, but the underlying thesis is fairly interesting and under-examined. That is, modern libertarianism which is grounded in the belief of absolute individual liberty has been most often deployed in the defense of large corporations and oligarchies. This can be seen today in various astroturf Tea Party organizations, which while not completely libertarian, follow the model of corporate money backing movement level groups surreptitiously.

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  10. Looks like Obama may have gotten lucky.

    (Reuters) – The Syrian government has accepted a Russian proposal to put its chemical weapons under international control to avoid a possible U.S. military strike, Interfax news agency quoted Syria’s foreign minister as saying on Tuesday.

    “We held a very fruitful round of talks with Foreign Minister Sergei Lavrov yesterday, and he proposed an initiative relating to chemical weapons. And in the evening we agreed to the Russian initiative,” Interfax quoted the minister, Walid al-Moualem, as telling the speaker of Russia’s lower house parliament house in Moscow.

    He said Syria had agreed because this would “remove the grounds for American aggression,” the report said.

    http://www.reuters.com/article/2013/09/10/us-syria-crisis-chemical-proposal-idUSBRE9890IZ20130910

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  11. I’d just like to know more Scott. For instance what do they mean when they say millions were spent burnishing Friedman’s reputation and what sort of things did the Buchanan Committee discover? I’ve always suspected that Libertarianism is basically the pro-business, deregulation arm of the Republican party with a little liberal (as in liberty) social policy thrown in for good measure, but I think knowing the extent of the pro-business, corporate lobbying involved in the early days sort of undermines the so-called purity aspects (again as in liberty) of the Libertarian movement.

    I’m pretty busy now until the middle of October at least, but after that I’m going to do some research. It’s funny I was never that interested in Libertarianism until ATiM. After arguing with y’all for two years now, I think it’s time I get to the bottom of it………lol. I read some of Nova’s link in the dump but thought it painted a pretty rosy picture that didn’t seem that real to me……………no offense.

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  12. yello, agree on the shrill and histrionic criticism. I find that half the stuff I read is like that. The more partisan, the more shrill. I’m always looking for nuggets of wisdom though or ideas that I can explore further. I just wish I had more time for reading and exploring some of the ideas I encounter.

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  13. Another recent article in Slate underscores the nature of moneyed interests deploying populist front organizations for goals which largely benefit the wealthy.

    History teaches us that policy threats are necessary conditions for the emergence of rich people’s movements. Such threats help to explain not just when people felt aggrieved enough to protest taxes on the rich, but also who felt aggrieved enough to support tax cuts for the rich. In every case, the pool of potential recruits extended well below the top tax brackets.

    The author of the book the article is excerpted from traces the revolt of the rich back to the institution of income taxes. It also discusses the differences between fanning populist outrage and the more traditional methods the rich have used, lobbying and campaign contributions.

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  14. As a member in good standing of the Tea Party, I got oodles of Koch money coming out my ass.

    It’s all a lie! I actually am a paid lobbyist for Phillip Morris.

    Ayn Rand was a committed communist in her private writings, Winchester paid her to be a *snort* “Objectivist!”

    God, I feel so much better now.

    Remember Yello, your political opponents are always acting in bad faith. We all know the One True Religion. Even Satan knew God was God.

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    • As a member in good standing of the Tea Party, I got oodles of Koch money coming out my ass.

      Assuming this is sarcasm, I find that to be a failing on your part. There is oodles of Koch money going somewhere and surely you deserve a portion of it.

      Remember Yello, your political opponents are always acting in bad faith.

      All political entities act in their own self-interest, as they perceive it. I really haven’t quite figured out the aspirational empathy that makes people like Joe (sic) the Plumber (sic) get overly concerned on tax rates he will never be subject to.

      Ayn Rand was a committed communist in her private writings

      Ayn Rand used Medicare to keep her medical bills from bankrupting her. But that makes her devotion to her ideology all that more poignant.

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      • yello:

        I really haven’t quite figured out the aspirational empathy that makes people like Joe (sic) the Plumber (sic) get overly concerned on tax rates he will never be subject to.

        If you can fathom why, say, Joe the white person might be “overly” concerned with Jim Crow laws that he will never be subject to (and I suspect you can), then you really shouldn’t have a hard time figuring out the above.

        Ayn Rand used Medicare to keep her medical bills from bankrupting her.

        So what? This is like criticizing an American League owner who argued and voted against the DH rule for not making his own pitcher hit despite the rules allowing everyone else to use a DH. It’s not a serious critique.

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  15. We agree! No enemies to the left !

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  16. “Ayn Rand used Medicare to keep her medical bills from bankrupting her.”

    I’ll never understand that. Force her to pay into the system and the point when she does? doesn’t make sense. of course she used it.

    “get overly concerned on tax rates he will never be subject to”

    me today, you tomorrow. you’ll run out of rich people to tax eventually. and then what is rich will be defined down.

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  17. “That is, modern libertarianism which is grounded in the belief of absolute individual liberty has been most often deployed in the defense of large corporations and oligarchies.”

    This is always the argument of various government agencies and their supporters.

    However, if you actually look at who is hurt by weak property rights and government overreach, it’s not the wealthy or well connected. It’s these people:

    http://www.washingtonpost.com/sf/investigative/2013/09/10/mistakes-put-homes-in-peril/?hpid=z2

    In Kelo v New London as well, it was all about screwing the little guy so that the real estate developers could steal peoples houses with the government acting as the intermediary in exchange for a kickback (i.e. the presumably higher tax assessments that were the rationale for the public purposes of eminent domain being used for a redevelopment project).

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  18. Next you’ll be telling me that income tax was initially sold on the premise that only millionaires would have to pay it.

    Rand was a vocal advocate of suckling on every available government teat.

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  19. “Ayn Rand used Medicare to keep her medical bills from bankrupting her.”

    The Medicare Act made private health insurance for any one eligible for Medicare illegal to compel participation. She had no other insurance option.

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  20. ” It’s funny I was never that interested in Libertarianism until ATiM. After arguing with y’all for two years now, I think it’s time I get to the bottom of it”

    I’d suggest starting with this:

    http://www.amazon.com/Free-Choose-A-Personal-Statement/dp/0156334607

    and perhaps the PBS series as well

    http://en.wikipedia.org/wiki/Free_to_Choose

    Note that you may also wish to see the John Kenneth Galbraith piece that it was a response to, The Age of Uncertainty.

    http://www.amazon.com/The-Uncertainty-John-Kenneth-Galbraith/dp/0395249007

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  21. Paterson, according to Barbara Branden in her book “The Passion of Ayn Rand,” was for a time a close friend and mentor to Rand. After retiring in 1949, Paterson left the envelope with her Social Security card unopened. According to the Cato Institute, Paterson chose to “live well enough” on her investments, although according to Branden, she moved in with friends in 1959, “ill and poor.” She died in 1961.

    Rand may have rationalized that since she had paid into Social Security and Medicare, she was entitled to receive benefits. In a 1966 article for The Objectivist newsletter, she wrote about the morality of accepting Social Security, unemployment insurance or similar payments:

    “It is obvious, in such cases, that a man receives his own money which was taken from him by force, directly and specifically, without his consent, against his own choice. Those who advocated such laws are morally guilty, since they assumed the “right” to force employers and unwilling co-workers. But the victims, who opposed such laws, have a clear right to any refund of their own money—and they would not advance the cause of freedom if they left their money, unclaimed, for the benefit of the welfare-state administration.”

    One of two biographies of Ayn Rand published in 2009, “Ayn Rand and the World She Made” by Anne C. Heller, contains a sentence about Rand’s receipt of Social Security benefits. Heller writes that Rand and her protégée, former chair of the Federal Reserve Alan Greenspan, “clashed over his leadership of a committee whose purpose was to bolster Social Security (a benefit she deplored but, unlike Isabel Paterson, accepted because she had paid into the fund).”

    Rand often spoke of moral absolutism, saying “There can be no compromise on basic principles,” but the realities of aging and illness seem to have softened her stance. Social Security, and perhaps Medicare, allowed Rand and her husband to maintain their quality of life, remain in their apartment and live out their final years with dignity.

    http://www.patiastephens.com/2010/12/05/ayn-rand-received-social-security-medicare/

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  22. “But the victims, who opposed such laws, have a clear right to any refund of their own money—and they would not advance the cause of freedom if they left their money, unclaimed, for the benefit of the welfare-state administration.””

    makes sense to me. that said, i’d be more than willing to sign away any future benefits if I could opt out now. and maybe i end up on the street. too bad for me.

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  23. Why some people see complying with a government mandate, under penalty of incarceration, as a free choice escapes me.

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  24. Nova – I believe that there was a comment the other day as to why there was all of this recent effort to rebut libertarianism by various progressive outlets given that their public position is that it’s a fringe philosophy with no significant following.

    Based on the concluding paragraph of lmsinca’s article, I believe it’s fear.

    “The notion that libertarian ideas have captured the political imagination of millions in this country is a root problem: if we’re going to escape the corporate oligarchy that is running this country–their ideas can’t possibility be the alternative solution.”

    I believe that the bi-partisan actions taken to bail out the financial system from 2008 coupled with the various wars and security state policies have made this the biggest libertarian moment in a good 30 years.

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    • jnc:

      I believe that the bi-partisan actions taken to bail out the financial system from 2008 coupled with the various wars and security state policies have made this the biggest libertarian moment in a good 30 years.

      I’d exclude the bailout from that. The bailout seems to have stoked calls for less, not more, libertarian policies. Even you seem to want more government regulation because of it, and you are one of the most principled libertarians that I know.

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  25. which isn’t gong to manifest in 3rd party wins … but something worse. a viable wings in the major parties that can form ad hoc coalitions that can influence policy.

    we’re bombing last week without the Amash and Rand in Congress.

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  26. jnc, thanks for the links. And this liberal isn’t scared, just curious. I don’t buy into Libertarianism in the least except for a few exceptions, such as civil liberties and a more isolationist foreign policy, but I’m still trying to figure out the whole financial end of it. I thought the piece was interesting on that level.

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  27. Isn’t it time to press the Somalia ejector button?

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  28. we’re bombing last week without the Amash and Rand in Congress

    How about a little credit to the Progressive Caucus in the House and Alan Grayson in particular.

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  29. i don’t think so. i think absent a push from the “non-intervention right” they fall in line.
    not that their motives aren’t sincere, but that leadership would have quashed it quickly.

    [edit == that said, it’s a crucial part of the equation. but they’re left dangling without their counterparts .. is what i mean]

    like anti-war left is anti-war gets zero play.

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  30. Nova, I think they’re important because they don’t support the President just because he’s the leader of the party. Maybe some of them signed on because it was clear R’s weren’t going to give it to him either but most of them wouldn’t vote yes anyway. It’s a numbers game and I think their volume gave the WH pause. That and the fact the the American public overwhelmingly said no way. Of course, we’re not out of the woods yet………………….most of the leadership in both parties still support a strike and the Putin deal isn’t a done deal I don’t think.

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    • lms:

      most of the leadership in both parties still support a strike and the Putin deal isn’t a done deal I don’t think.

      I wonder if O really does support a strike. I think he inadvertently boxed himself into a corner, and an “unbelievably small” strike was his only way out. Now that Putin has now provided him with a face-saving way of avoiding a strike (or avoiding a decision, in any event), I think O clings to it like middle America to guns and religion. The best thing that could happen for O now is that this issues goes to the UN, where the “international community” can wring its collective hands over it for years without actually doing anything.

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  31. i agree with what your saying. i apologize — i should have stated i was looking at this completely from a whip count view. my post was not as well phrased as i’d like.

    i’ll try again.

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  32. http://cpc.grijalva.house.gov/caucus-members/

    list of the progressive caucus, which we’ll use as a proxy for the anti-war left. about 70 members. decent sized block. but easily circumvented and isolated, particular if leadership (R and D) supports a something. Alan Grayson can go on TV all he wants, but it’s “anti-war left guy is anti-war.”

    what changed the equation here is the “tire fire” on the GOP side. If it was just the progressive making noise, i don’t think you get the level of public opposition that’s flooding the Hill. and that’s why I think we’re seeing a effective opposition.

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  33. “The bailout seems to have stoked calls for less, not more, libertarian policies. Even you seem to want more government regulation because of it, and you are one of the most principled libertarians that I know.”

    That falls under the rubric that if there are going to be bailouts going forward then the price of that is limiting what banks can take risks on.

    I believe you made a similar argument as a hypothetical one time about insisting on death panels if there was going to be a single payer health care system.

    My preference would be antitrust enforcement and no bailouts at all.

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    • jnc:

      That falls under the rubric that if there are going to be bailouts going forward then the price of that is limiting what banks can take risks on.

      Since future political bailouts (in any industry) will necessarily be a possibility going forward under any conceivable set of laws (bailouts being, of course, a matter of political will, not law) this seems to me to be simply a wholesale rejection of libertarian principles with regard to banking law.

      Plainly there is nothing (apart, again, from political will) preventing the government from bailing out car manufacturers in the future. Do you, therefore, support government limiting what kinds of cars can be made by car manufacturers?

      It’s also worth noting (as I have noted before) that, even if we take your formulation above as being an appropriate trade-off, one would have to believe that regulators will both understand and regulate risk based on its relation to increasing the possibility of necessitating a bailout, rather than based on its political popularity. That doesn’t strike me as a belief particularly suited to a libertarian outlook, and neither past nor current experience justifies it.

      I believe you made a similar argument as a hypothetical one time about insisting on death panels if there was going to be a single payer health care system.

      I make this argument not so much as a policy preference, but rather to hammer home to advocates of single payer, who routinely reject the notion of death panels, that in fact it is their preferred policy that will necessitate them. In other words, I do so as a means of arguing against the policy that creates the need.

      And as it relates to the topic at hand, I actually think that more political involvement in what banks can and cannot do is far more likely to lead to future bailouts than less political involvement. After all, it was political involvement in establishing lending policies that was primarily responsible for our most recent crisis for which bailouts became the political cure.

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  34. “lmsinca, on September 10, 2013 at 9:43 am said:

    we’re bombing last week without the Amash and Rand in Congress

    How about a little credit to the Progressive Caucus in the House and Alan Grayson in particular.”

    Yes, I really liked the Wonkblog interview with Grayson.

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  35. “yellojkt, on September 10, 2013 at 9:00 am said:

    I really haven’t quite figured out the aspirational empathy that makes people like Joe (sic) the Plumber (sic) get overly concerned on tax rates he will never be subject to.”

    I’m sure you don’t care if your neighbor’s house is robbed either.

    How does the old saying go?

    “When they came for the 1% I didn’t care because I wasn’t part of the 1%

    Then they came for me.”

    Whether you like it or not, a lot of people buy the framing of taxpayers vs non-taxpayers and the reason they do is because that’s the implicit purpose of redistribution.

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  36. Scott

    After all, it was political involvement in establishing lending policies that was primarily responsible for our most recent crisis for which bailouts became the political cure.

    I can’t believe you’re still trotting that out as if it were true. The CRA meme as opposed to the perverse lending practices developed and promoted by the mortgage industry and banks. If the government made a mistake it was in not recognizing how detrimental the loans were going to be to borrowers and regulate them out of existence.

    Nothing in the CRA suggested loaning money to people who couldn’t ever pay it back or suggesting that banks risk everything in shady real estate investments.

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    • lms:

      I can’t believe you’re still trotting that out as if it were true.

      Your disbelief notwithstanding, it remains true. You should read John Allison’s book. Allison was the CEO of BB&T Corp during the the whole financial crisis. You can find a review of his book here.

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      • it remains true.

        It’s an opinion bordering on an article of faith. Or as Allison puts it:

        “It is impossible to have a systemic failure of the financial markets without mistakes by government policy makers being the primary cause.”

        Allison now works for the Cato Institiute, a group known for non-mainstream ideas on the role of government.

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        • yello:

          It’s an opinion bordering on an article of faith. Or as Allison puts it

          Read the book. It is not an article of faith. He explains his reasoning. Although admittedly it will probably not be convincing to those who themselves worship at the alter of government.

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        • worship at the alter (sic) of government.

          Rly? That’s where you want to go?

          Is that any better than worshiping at the grave of Ayn Rand?

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        • yello:

          Rly? That’s where you want to go?

          You really do lack a sense of self-awareness. Not a criticism, just an observation.

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        • You really do lack a sense of self-awareness. Not a criticism, just an observation.

          I’m very aware that I am a particularly dark kettle.

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  37. i think the root cause was the misplaced idea that everyone should be a home owner.

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  38. I disagree Nova. The CRA was enacted in the 70’s but other things happened in the 2000’s that encouraged Wall Street to go crazy.

    5. The government policy that likely made an impact were deregulatory actions.

    In 2000, Congress passed the Commodity Futures Modernization Act, which deregulated the derivatives market, in a lame duck session as a rider to an 11,000 page omnibus appropriation bill. A banking capital “recourse rule” in 2001 allowed the ratings agencies and private bank risk modelers to decide what banks should hold against risk. In 2003 the OCC preempted and overruled Georgia’s new anti-predatory lending laws. Alan Greenspan refused to enforce regulations on, or even investigate the wrongdoing of, the new subprime market during the 2000s. The 2005 bankruptcy reforms in BAPCPA, widely viewed as friendly if not written by the financial industry, codified the market practice of letting derivatives go to the front of the line in bankruptcy, helping create the conditions for shadow banking runs.

    These government actions all fall under the rubric of deregulation, or “letting the market decide” how to manage the rules of the financial sector, and they are more relevant to the actual crisis.

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/no-marco-rubio-government-did-not-cause-the-housing-crisis/

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    • lms (from your link):

      In 2000, Congress passed the Commodity Futures Modernization Act, which deregulated the derivatives market, in a lame duck session as a rider to an 11,000 page omnibus appropriation bill.

      Sorry, lms, but this proves that this guy just doesn’t know what he is talking about. Even ignoring the fact that he simply assumes a causal relationship between derivatives market and the collapse of the housing bubble, he is just wrong that derivatives were “deregulated” in 2000. He links as evidence to another article that says:

      Prior to December 20, 2000, the OTC derivatives market was generally understood to be subject to regulation under the Commodity Exchange Act (“CEA”), because OTC products were a form of futures contracts. Under the CEA, all futures contracts were required to be traded on publicly transparent and fully regulated exchanges….On December 20, 2000, the Commodity Futures Modernization Act (“CFMA”) was passed. That legislation was rushed through Congress and enacted by both Houses of Congress on the last day of a lame duck session as a rider to an 11,000 page omnibus appropriation bill.2 The 262 page bill was presented to the Senate for the first time on the day that it passed. The CFMA removed OTC derivative transactions, including energy futures transactions, from all requirements of exchange trading and clearing under the CEA.

      The author implies that prior to 2000 OTC derivatives were subject to CEA requirements such as trading on an exchange, and that the CFMA “removed” them from these regulations. This is quite simply false. The CFMA merely affirmed in law what had always existed in practice, namely that OTC derivatives were exempted from most CEA requirements. Indeed, the very name OTC stands for “over the counter”, meaning not exchange traded.

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  39. “novahockey, on September 10, 2013 at 12:26 pm said:

    i think the root cause was the misplaced idea that everyone should be a home owner.”

    The root cause is the misplaced idea that the Federal Reserve should manipulate interest rates to boost economic growth.

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  40. “ScottC, on September 10, 2013 at 11:36 am said:

    jnc:

    That falls under the rubric that if there are going to be bailouts going forward then the price of that is limiting what banks can take risks on.

    Since future political bailouts (in any industry) will necessarily be a possibility going forward under any conceivable set of laws (bailouts being, of course, a matter of political will, not law) this seems to me to be simply a wholesale rejection of libertarian principles with regard to banking law. “

    I wanted there to be no bailouts in 2007-2009 at all, even at the expense of various banks failing. I believe you’ve been more equivocal on the merits of those, but I may be misrepresenting your position.

    What I’m not willing to tolerate is a policy of just giving the banks free money (and also letting them convert their charters from investment to commercial banks at will) every time the system blows up with no strings attached.

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    • jnc:

      I wanted there to be no bailouts in 2007-2009 at all, even at the expense of various banks failing. I believe you’ve been more equivocal on the merits of those, but I may be misrepresenting your position.

      I have been more equivocal on this question in the past, primarily due to the government’s involvement in creating the problem in the first place. But as time passes I am more and more convinced that despite the government’s role in creating the problem, the bailout probably should not have happened. As ever, more government involvement is rarely the solution, something you might want to consider when supporting yet more regulations of the banks than they already have.

      What I’m not willing to tolerate is a policy of just giving the banks free money (and also letting them convert their charters from investment to commercial banks at will) every time the system blows up with no strings attached.

      Of course “free money” isn’t really relevant, since the TARP funds were not free. They had to be, and were, paid back with interest. In fact the government made money on the deal. And neither Goldman nor Stanley were allowed to alter their status from investment bank to bank without strings. They gained access to the Fed discount window in exchange for much more stringent regulatory oversight. This is the same deal anyone makes when becoming a bank. Your objection would have more to it, I think, if they had been given access to the discount window without having to change their status.

      Like

  41. Scott, I appreciate you and jnc giving me reading suggestions but this one is written by a devotee of Ayn Rand and I just don’t think I can do it. He may be a very successful banker but I also know a lot of successful people who don’t follow her philosophy (if that’s the proper word) who have ideas that make more sense to me, both in a financial way and a political one. It’s difficult to believe but there are actual liberal economists who are also respected in their field.

    I’m interested in some of this stuff (Libertarianism), but from an academic and political stand point, not a propaganda one.

    I read both Fountainhead and Atlas Shrugged in high school and wasn’t impressed then so I doubt a revival of either philosophy will capture me now.

    Like

    • lms:

      Scott, I appreciate you and jnc giving me reading suggestions but this one is written by a devotee of Ayn Rand and I just don’t think I can do it.

      Suit yourself. I will just say that, when discussing the banking crisis, dismissing the thoughts of a highly successful bank CEO who actually navigated his own bank through the crisis simply because he is a libertarian doesn’t make a lot of sense to me. It’s kind of like dismissing Krugman’s economic analysis not for what he says, but simply because he works for a left-wing media rag.

      BTW, you may be enticed by the fact that Allison is actually pretty hard on the likes of Goldman, using the term crony capitalism.

      Like

  42. Maybe I’m missing something here Scott but I found this also. I think you might be wrong, at least a little. I have to leave now so don’t have time for much more today and it’s getting too financially technical for me anyway……………..maybe I’m wrong though. I’d be a damned fool to argue this stuff with a banker. Perhaps the word “most” was more crucial than you thought?

    I think I vaguely remember having this same conversation with you or someone at whorunsgov years ago now. I don’t really know but I still contend that the CRA and home ownership incentives didn’t cause the crash. A lot of things contributed to it and I’m sure government policy had some culpability (specifically deregulation) but really Wall Street owns this one IMO.

    The Commodity Futures Modernization Act of 2000‟s Deregulation of Swaps.

    Accordingly, on December 15, 2000, Congress passed and on December 21,2000, President Clinton signed into law the Commodity Futures Modernization Act of 2000.

    The CFMA removed OTC derivatives transactions, including energy futures transactions, from all requirements of exchange trading and clearing under the CEA so long as the counterparties to the swap were―eligible contract participants.

    Generally speaking, a counterparty to be an―eligible contract participan had to have in excess of $10 million in total assets with some limited exceptions allowing lesser amounts in the case of an individual using the swap for risk management purposes.

    Thus, the OTC derivatives market (at that time according to Secretary Summers amounting to $80 trillion notional value) was exempt from the CEA‘s capital adequacy requirements; reporting and disclosure; regulation of intermediaries; self regulation; any bars on fraud, manipulation and excessive speculation; and requirements for clearing. The SEC was similarly barred from OTC derivatives oversight except for the limited fraud jurisdiction it maintained over securities-based swaps. During the TARP hearings in September 2008, then SEC Chairman Christopher Cox warned Congress about the need for―immediate legislative action, because he viewed OTC credit derivatives market as a―regulatory blackhole.

    Click to access 2010-0630-Greenberger.pdf

    Like

    • lms:

      I think what you linked to is basically the same thing that was linked inside your original, and to which I linked in my comment…remarks by some professor named Greenberger. As I said, he is simply wrong in suggesting that OTC derivatives were more highly regulated prior to 2000, and that the CFMA represented deregulation of the OTC market by “removing” them from CEA requirements. It just isn’t true. OTC derivatives, since their first appearance in the 1980s, had always been exempted from CEA requirements. Again, that is precisely what their name has always implied….Over The Counter derivatives, as distinguished from exchange traded derivatives.

      Like

  43. “This is the same deal anyone makes when becoming a bank. Your objection would have more to it, I think, if they had been given access to the discount window without having to change their status.”

    Yes, but then they were allowed to entertain the option of changing back to avoid some of the regulations.

    http://archive.mises.org/18698/comericial-bank-charter-never-mind/

    http://finance.fortune.cnn.com/2011/10/11/volcker-rule-goldman-morgan/

    http://www.reuters.com/article/2009/06/11/us-goldman-holdingco-analysis-idUSTRE55A5SR20090611

    I couldn’t find out what they ultimately decided to do via Google.

    Like

    • jnc:

      I am fairly positive both Goldman and Stanley remain organized under the umbrella of a bank holding company. At least I have not heard that either have dumped their bank status, and I imagine such a move would be pretty big news.

      Like

  44. Scott, as I said I’d be crazy to argue with a banker on this stuff, but many things I’ve read since 2008 highlight the changes in regulation (there were some) in 2000. Wasn’t some of this the entire reason for Brooksley Born’s resignation (or was she fired, I forget)? She was part of the PWG and went against Summers, Greenspan, etc. Maybe I’m just not getting your drift but why was the CFMA promoted the way it was below if it didn’t “eliminate unnecessary regulation”, etc. etc.

    I realize I don’t understand all the technical stuff but I still think I’m right, at least to a certain extent. Born essentially blamed Greenspan to his face for his failures and responsibility for the crash. I also realize OTC derivatives weren’t the only failure in the economy. But it’s much more complicated than just political involvement in establishing lending policies. I don’t see why you can’t accept that still.

    It’s not even like I’m blaming Republicans…………………..jeeze it was Clinton’s doing and his little group of Rubinites. And then if I remember from previous research didn’t the SEC under Bush change the capital requirements?

    Your statement reminds me of one of my accepted thruths you’re always trying to nail me for when yours is really only an established fact in conservative quarters and doesn’t actually bear any resemblance to what really happened.

    On December 21, 2000, President Clinton signed into law the Commodity Futures Modernization Act of 2000 (CFMA), implementing the most far reaching amendments to the Commodity Exchange Act (CEA) since the creation of the Commodity Futures Trading Commission (CFTC) in 1975. Congress enacted the CFMA to, among other things, streamline and eliminate unnecessary regulation, promote innovation and competition, enhance legal certainty concerning the enforceability of commodity transactions and transform the role of the CFTC in overseeing the futures and over-the-counter (OTC) derivatives markets from front-line regulator to high-level supervisory agency. Significantly, the legislation also grants the CFTC limited jurisdiction over securities-based futures products.

    The CFMA scales back the jurisdictional reach of the CEA based, in part, on the category of commodity traded: excluded, exempt or agricultural. The CFMA also establishes separate, but interrelated, market- and transaction-based exemptions and exclusions (Relief) from the CEA. The exemptions and the exclusions depend, in part, on the parties involved in the transactions.

    Certain Relief is limited to transactions conducted other than on “trading facilities,” while other Relief is available for transactions conducted either on or off of such facilities. The CFMA generally accords greater Relief to electronic markets than to their non-electronic counterparts. For the first time, the CEA explicitly provides that contracts that do not comply with the provisions of an exemption or exclusion from the CEA are nevertheless enforceable.

    The CFMA also changes the regulatory regime with respect to clearing. Clearing of futures and options for certain categories of transactions no longer implicates CFTC registration requirements. In addition, clearing of swap transactions is now open to clearing organizations regulated by the Securities and Exchange Commission (SEC), bank regulators, foreign regulators or the CFTC.

    http://www.mwe.com/publications/uniEntity.aspx?xpST=PublicationDetail&pub=4648

    Like

    • lms:

      I don’t know everything that the CFMA did. It may well have eliminated regulations somewhere for something. What I can say is that it did not “remove” OTC derivatives from CEA requirements that were previously in effect. As I have already said, OTC derivatives had been exempted from CEA requirements since they were first introduced in the 1980s. That this is true is obvious on its face since, as Greenberg himself proclaimed, CEA requires that derivatives be traded on an exchange, and OTC derivatives by definition do not trade and never have traded on an exchange. That is what OTC means. What CFMA may have done is legally clarify the status of OTC derivatives such that a specific exemption from CEA was no longer required. And it may well have also eliminated any doubt as to the legal enforceability of certain OTC contracts. What it did not do is “deregulate” OTC contracts. I can tell you from personal experience that the OTC fixed income derivative contracts that I was writing in 2002 were exactly the same, in execution, content, purpose, documentation, reporting, you name it, as the OTC contracts I was writing in 1995. We did not suddenly find ourselves free to do things in 2000 that were were not previously free to do. If anything, by 2000 there was in fact more legal scrutiny of derivative contracts than previously because of some high profile losses that places like Orange County in California Proctor and Gamble had suffered due to OTC derivatives they had entered into. Suitability was a big buzzword in the late ’90s and early 2000s as derivative dealers came under legal pressure to avoid tailoring derivatives for corporate or municipal clients that had no obvious business purpose apart from allowing them to make exotic bets.

      I would also add, as I mentioned a long time ago here, not to be fooled by reporters throwing around big numbers prefaced by “the notional amount” of derivative contracts. The “notional” amount of a given derivative bears no necessary resemblance whatsoever to the value of the contract or the amount of risk represented by the contract.

      And none of this even gets into the dubious idea that OTC derivatives were somehow responsible for the collapse of the housing market, a notion that is routinely insinuated but never quite explained, and which I addressed here two years ago.

      You can believe me or not, I guess. If you want to think that what I am saying “doesn’t actually bear any resemblance to what really happened,” that is your choice. I did enjoy Atlas Shrugged, so maybe my experience in the market should be dismissed, just like John Allison’s.

      Like

  45. Scott, here’s another piece that explains what changed in OTC derivatives during that time which began earlier but culminated with the CFTC in 2000. Is this wrong also?

    That act declared O.T.C. derivatives exempt from C.F.T.C. or S.E.C. oversight. But it also declared even purely speculative O.T.C. derivatives contracts legally enforceable. The Commodities Futures Modernization Act thus eliminated, in one move, legal hurdles to derivatives speculation that dated back, not just decades, but centuries. It was this change in the law — not some flash of genius on Wall Street — that created today’s huge derivatives market. According to the Bank for International Settlements, by 2008 the notional value of the derivatives market had climbed to $600 trillion, amounting to nearly $100,000 in derivative bets for every man, woman and child on the planet.

    This “modernization” has added enormous risk to our economy, making it possible for institutions like A.I.G., Orange County, Barings and Long-Term Capital Management (not to mention Enron, Bear Stearns and Lehman Brothers) to lose very large amounts of money very unexpectedly.

    http://dealbook.nytimes.com/2009/10/07/dealbook-dialogue-lynn-stout/?_r=0

    Like

  46. I tried to read Atlas Shrugged but found it to be written at about a sixth-grade level. . . so only got about 20 pages in before abandoning it. But then, I have been a huge Tolkein fan ever since I can remember, and I’m not sure the two can mesh.

    Like

    • It’s time for one of my favorite quotes.

      “There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.“

      Like

  47. Scott. You’re obviously the expert in the OTC derivatives market so I can’t really continue to argue with you on this one point which wasn’t my original point in any event. I have to accept your comments on OTC derivatives which wasn’t actually the singular focus of the original article I linked anyway. I understand your explanation.

    You can believe me or not, I guess. If you want to think that what I am saying “doesn’t actually bear any resemblance to what really happened,” that is your choice. I did enjoy Atlas Shrugged, so maybe my experience in the market should be dismissed, just like John Allison’s.

    I don’t believe that is a fair evaluation of my position or the point I was trying to make in regards to either your comment blaming the government’s housing policy or the value of either John Allison or Atlas Shrugged, or you for that matter.

    My original point was that a lot of things happened in 2000 that changed the way Wall Street handled the real estate business and blaming government housing policy leaves all of Wall Street’s culpability absolved in some way. I suggest to you that this is one of those accepted truths on the right that doesn’t necessarily explain the entire reality of what happened. I’m not suggesting your opinion be dismissed, I’m suggesting that it’s a limited explanation of the cause. One of the problems with this framework is that it smacks of blaming the victim in a roundabout way which, in my opinion, is a libertarian hedge. I’m sure you’ll disagree but that sort of summarizes Ayn Rand’s philosophy in a very simple and un-nuanced way for me.

    In addition to that, an acolyte of Ayn Rand, who indeed may be a successful banker who also wrote an informative book, is not someone’s whose opinion I would instinctively find credible and hence I’m just not that interested in consuming the time it would take reading his book. It would be, for me, like reading a Fundamentalist Christian’s take on education. My instincts steer me clear, even though I may be missing something of value there. I have a filtering system that prevents certain experiences but it’s not necessarily a reflection on you and your recommendation.

    I would like to understand Libertarians better but that wasn’t exactly what I had in mind.

    Like

    • lms:

      You’re obviously the expert in the OTC derivatives market

      I would actually limit it by saying that I am an expert on fixed income derivatives, which is a relevant point for reasons I pointed out a long time ago. It is an error to speak of a “derivatives market” (as the media and politicians so often do) in the same way we speak of the bond market or the stock market. There are all kinds of different types of derivatives markets that operate in different ways from each other, mean different things, and have different impacts on the banking industry.

      have to accept your comments on OTC derivatives which wasn’t actually the singular focus of the original article I linked anyway.

      I understand it wasn’t the singular focus, but everything else that is said becomes suspect to me when it becomes clear he is not properly portraying the one thing I actually know a lot about. Which was my original point.

      I suggest to you that this is one of those accepted truths on the right that doesn’t necessarily explain the entire reality of what happened.

      It is not simply an “accepted truth” which was the very reason I suggested Allison’s book to you, ie because it is the best and most extensive explanation that I have seen of how government policy was at the root of the crisis, with the kinds of examples and insights that only a real insider can provide. It is perfectly fine with me if you don’t want to read it, but it strikes me as particularly ironic that you accuse me of advancing nothing more than an article of faith when you are the one who is dismissing out of hand the argument being made simply because the person making it doesn’t hew to your ideology.

      One of the problems with this framework is that it smacks of blaming the victim in a roundabout way which is a libertarian hedge.

      I don’t really understand what this means.

      I’m sure you’ll disagree but that sort of summarizes Ayn Rand’s philosophy in a very simple and un-nuanced way for me.

      I have no idea what Ayn Rand’s philosophy has to do with anything, other than your reluctance to read Allison’s book.

      Like

  48. Scott

    I understand it wasn’t the singular focus, but everything else that is said becomes suspect to me when it becomes clear he is not properly portraying the one thing I actually know a lot about.

    Fair enough. It’s a little like reading a book from an Ayn Rand devotee for me. He can talk about crony capitalism all he wants but if he’s going to blame government housing policy for the financial crisis he’s as suspect to me as you are…….opinion wise.

    The person I really followed, who explained the financial crisis and other economic issues for me in terms I could actually understand, was Simon Johnson. He talks about crony capitalism as well but he’s not a Libertarian.

    From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

    • insistence on free movement of capital across borders;

    • the repeal of Depression-era regulations separating commercial and investment banking;

    • a congressional ban on the regulation of credit-default swaps;

    • major increases in the amount of leverage allowed to investment banks;

    • a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

    • an international agreement to allow banks to measure their own riskiness;

    • and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

    The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

    http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/2/

    As for the rest I’ll just say I feel approximately the same way about Ayn Rand devotees as you feel about liberals. I think the policies that flow from her influence on Libertarianism are detrimental to society.

    UPDATE………….society as in a collection of individuals…………lol

    Like

    • lms:

      He can talk about crony capitalism all he wants but if he’s going to blame government housing policy for the financial crisis he’s as suspect to me as you are…

      I can’t help but wonder just who it is here that is advancing an “accepted truth”.

      Like

  49. hah…………..very funny, except I do believe government housing policy is at least partially to blame. I just don’t accept the fact that promoting home ownership in poor neighborhoods and other incentives via GSEs are alone in creating the amount of risk that existed when the bubble burst. You’re the one who said you blamed the government housing policy. That’s what I was objecting to. Whether I want to read Allison’s book because he’s a Libertarian or not is inconsequential to that discussion.

    Like

  50. “There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.“”

    Rand’s problem is that she didn’t have the heroes in the story right. The villains, however, she nailed.

    Like

    • nova:

      The villains, however, she nailed.

      You live in your mother’s basement and play dungeon’s and dragons all day, don’t you?

      Like

  51. Ha. I wish.

    Like

  52. Damn, I seriously played D & D with my son when he was bored and his friends couldn’t come over. He’s younger than Scott (thank God) but older than Nova. That was probably weird huh? My grandson is teaching me minecraft (no similarity to D & D except for the cult following) and likes to play under my name to make it look like I’m doing really well……………haha…………..and he’s only 7.

    Like

    • Put me in the LotR camp. I was a DungeonMaster in high school and greatly impressed my friends when I got a girl to join. I haven’t played D&D since high school but I used to take my son to science fiction conventions now and again. For Labor Day the whole family flew into to Atlanta so we could all go to DragonCon together. Here are my two sets of photos I took there:

      IMG_0158
      IMG_1762

      I read The Fountainhead just after college one chapter at a time on my lunch hour. I’m in construction and I had heard that Howard Roark was loosely based on Frank Lloyd Wright. I recently went to Taliesin in Wisconsin and everything the tour guide said reinforced my impression that FLW was a monumental dick of the highest order. As well as an architectural genius.

      My son was assigned Anthem in high school. I read it with him and we spent a lot of time laughing at how horrible it was.

      Like

  53. ^^^ mother of the the year, right there.

    Like

  54. I don’t know about that Nova. I also talked him into doing ESP experiments one year for his science project……………….lol…………….seriously. I was a very young mother.

    Like

  55. Like

  56. I still find it usefull to distinguish between the housing bubble itself and the financial crisis and associated bailouts that followed it.

    I don’t expect that any government policy could have prevented the housing bubble directly, any more than it could have prevented other bubbles such as the internet stock bubble.

    What the lack of transparency and regulation in the derivatives market did was make it more expensive to clean up and prompted the idea that a bailout of specific institutions was required to “save the system” due to all the issues with counterparties.

    Like

    • jnc:

      I still find it usefull to distinguish between the housing bubble itself and the financial crisis and associated bailouts that followed it.

      I definitely agree with that.

      What the lack of transparency and regulation in the derivatives market did was make it more expensive to clean up and prompted the idea that a bailout of specific institutions was required to “save the system” due to all the issues with counterparties.

      Since the government actually made money on the bailouts, I can’t agree that it was expensive at all, much less that derivatives made it more so. But it is true that derivatives contributed to the complexity of interconnectedness and thus the perception that the “system” was endangered by specific collapses.

      Like

      • BTW…can we please be more specific about the types of derivatives that had a genuine impact on the financial crisis? What we are talking about specifically are credit derivatives. Fixed income derivs, equity derivs, commodity derivs…none of these had any significant impact on the course of events in 2008 at all. It was credit derivatives, both the irresponsible writing of protection by AIG, and the reliance on them for protection from the wider market, that contributed to the crisis.

        Like

  57. “One of the problems with this framework is that it smacks of blaming the victim in a roundabout way which, in my opinion, is a libertarian hedge.”

    I don’t buy the argument that people who bought more house than they could afford and then didn’t make the payments are victims here.

    I’d argue that part of the problem with the progressive world view is the need to divide two sides of an economic transaction into “predators” and “victims”.

    In reality, everyone was in on the game and the goal was to transfer the risk and costs to someone else, ideally the government.

    Like

    • In reality, everyone was in on the game and the goal was to transfer the risk and costs to someone else, ideally the government.

      There is a poker saying that if you can’t tell who the patsy at the table is, it’s you. There were a lot of marks out there. In The Big Short, Michael Lewis details how lots of people including government regulators and institutional investors were getting played for suckers, which they probably were.

      There is a lot of reporting out there on bond issuers creating releases designed to fail and then betting against them.

      Like

  58. jnc

    In reality, everyone was in on the game and the goal was to transfer the risk and costs to someone else, ideally the government.

    I just don’t agree with that. I know too many people and of others who lost everything simply because they believed the same thing financial geniuses did, the housing market was going to keep going up. It wasn’t a matter of transferring risk, it was a matter of making money. And a lot of them were convinced their loans were legitimate.

    I do think you’re right that we need to separate the housing bubble from the financial crisis though to a certain extent.

    Like

  59. Nova……………..funny, that pretty much represents our little experiments. Remember I was a psych major in grad school. I should have stuck with biology instead.

    Like

  60. “lmsinca, on September 11, 2013 at 8:19 am said:

    jnc

    In reality, everyone was in on the game and the goal was to transfer the risk and costs to someone else, ideally the government.

    I just don’t agree with that. I know too many people and of others who lost everything simply because they believed the same thing financial geniuses did, the housing market was going to keep going up. It wasn’t a matter of transferring risk, it was a matter of making money. And a lot of them were convinced their loans were legitimate.”

    Can you cite an example? Were they speculating in real estate and then lost money when the market collapsed?

    That doesn’t make them a victim.

    Like

  61. jnc, not speculating, just buying a home. Our son’s best friend was on his fourth home in about 8 years. He kept moving to a bigger home as he got married and had children. In 2009 he went on temporary disability because of being injured as a firefighter. They couldn’t keep up with the payments, his injury and a new baby, and lost their home and the $130K he put down on it. He was affording it with an interest only loan (I think) which his mortgage broker said they could refi when the balloon became due. Our neighbor lost his job, his wife and his home. They’d only been there about two years, bought high and then she got sick. I have tons of these kinds of stories……..they weren’t speculating or flippers, just regular people who got caught in the buying high, some with the creative financing they were sold, and then having no way out when everything went south.

    My banker actually told me we could “borrow like a million dollars”……………..wtf would I want to do that? There was an environment of risk that was portrayed as investment.

    Like

  62. “There was an environment of risk that was portrayed as investment.”

    I don’t dispute that, but if something is too good to be true, it usually is, and absent a huge jump in income, four homes in 8 years strikes me as a bit excessive.

    I find that the “predator” and “victim” framing isn’t conducive to good analysis. The real issue here is that the loan originators were able to transfer their risk to someone else, i.e. the banks, who then transferred it to someone else, i.e. the mortgage backed securities investors, and eventually it was transferred to the government.

    My initial inclination when the argument was made that these tranches were too complicated to unwind was that then they should just ban all mortgage securitization and require each mortgage to be resold whole, and not as a tranche. You can’t foreclose on part of a house. If you can’t determine who is the party who ultimately is assuming the risk in a transaction, then the transaction shouldn’t be permitted.

    If this causes mortgage rates to go up, so be it. That merely means that the previously low rates weren’t properly pricing the risk.

    Like

    • jnc:

      You can’t foreclose on part of a house.

      I don’t understand this. How does the inability to foreclose on part of a house matter?

      If you can’t determine who is the party who ultimately is assuming the risk in a transaction, then the transaction shouldn’t be permitted.

      Perhaps I misunderstand, but I don’t think who is ultiamtely at risk on a default is ever really in question. It is pretty well defined. I would imagine that the real complication is who makes the call on what to do with the collateral (the property) upon default. Who gets to decide whether to foreclose, or to re-negotiate the terms, or how to manage the collateral after foreclosure. When a single bank owns the mortgage, there are obvious answers. When multiple investors jointly own the mortgage as in a securitization, it gets more complicated, although since these are issue that relate to the investors, I would imagine that they are addressed in the details of the securtized note itself. I assume there is some identified adminstrator in charge of making these kinds of decisions.

      Like

  63. four homes in 8 years strikes me as a bit excessive

    Not really. He started with a condo when he got his first real job, then moved to a two bedroom, then a three bedroom when he got married and finally the home they planned to raise their kids in. As I said, he kept investing his own money up front from each sale so I don’t really call that speculating.

    Predator/victim framing may not be conducive to good analysis but in many cases that’s just what it was………………..imo of course. I’m in CA and you have no idea the number of phone calls, ads, commercials etc etc that were aired here for creative loans and financing. Most people were just going about their daily lives of buying and selling homes, some borrowing too much on them obviously, and when the values dropped so precipitously, they were screwed. I’ve watched the real estate market for years and have never seen anything like it.

    I’d say about 75% to 80% of the people interested in our rental have lost their homes. The firefighter in there now went through a divorce and lost his. In the past, weathering the storms of life didn’t cause such devastation. So yeah, I think a lot of these people are victims.

    Like

  64. ” I assume there is some identified adminstrator in charge of making these kinds of decisions.”

    That’s a big assumption, and it’s called into question with all of the problems that the banks, as designated servicers, are having with mortgage modifications. Note that I’m taking the banks at their word here regarding the inherent difficulties of modifying mortgage that are owned by investment pools.

    “You can’t foreclose on part of a house.

    I don’t understand this. How does the inability to foreclose on part of a house matter?”

    It’s probably a bad way of putting my idea that you really can’t divide a whole asset like a house and therefore a mortgage that is backed by that asset shouldn’t be divisible either.

    Someone needs to have the authority to cut a deal and write off the losses, and the mortgage backed security seems to have impeded that on the back end while providing increased liquidity and lower rates on the front end.

    Like

    • jnc:

      That’s a big assumption, and it’s called into question with all of the problems that the banks, as designated servicers, are having with mortgage modifications.

      I have to admit that I am not really familiar with the problems these are posing, so it may be a big assumption. But surely there were defaults even prior to 2008 that had to be administered to. Maybe the sheer number of defaults is causing issues, but it seems odd that the very process is suddenly a problem.

      Someone needs to have the authority to cut a deal and write off the losses

      Agreed.

      Like

  65. “Predator/victim framing may not be conducive to good analysis but in many cases that’s just what it was………………..imo of course.”

    If they were lied to, then yes. If they were gambling that real estate could never go down in value and therefore an interest only adjustable rate mortgage was a good idea, then not so much.

    Like

  66. Here’s some papers on it. Google has more.

    Click to access securitization_and_foreclosure.pdf

    http://www.chicagofed.org/webpages/publications/working_papers/2011/wp_02.cfm

    Fed conculsion:

    “We study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have lower post-modification default rates by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans. ”

    Basically the rules are written in such a way that the servicers don’t want to be on the hook for a voluntary write down where their judgement could be challenged by the holders of the MBS. Foreclosure solves that.

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    • jnc:

      Basically the rules are written in such a way that the servicers don’t want to be on the hook for a voluntary write down where their judgement could be challenged by the holders of the MBS. Foreclosure solves that.

      That makes it sound like the real problem isn’t so much uncertainty as to rights/responsibility, but rather simply a disinclination to do the politically preferred thing, ie write-down rather than foreclose.

      Like

  67. It’s not just politically preferred, it’s also economically more efficient.

    Regardless, it would vastly simplify the process and eliminate the finger pointing if the mortgages were bought and sold as whole notes rather than tranches.

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