Sunday, September 21, 2008

The Sub-Prime Crisis: My response to a response to a response

A friend of mine—an enthusiastic supporter of John McCain, or at least an enthusiastic opponent of Barack Obama, but otherwise a nice guy—forwarded a rather cute PowerPoint presentation that provided a rather snarky interpretation of the recent fallout from the subprime mortgage crisis. (I don't know if the PowerPoint is available online anyplace—if I can find it, I'll add a link to this post.) My friend added the following:


I responded to him—and everyone else on his distribution list, most of whom, I fully believe, had already written me off as some kind of communist, or at least something of a crank—as follows:

Well, considering that Clinton ceased to be President almost 8 years ago, I'd say he's fairly thoroughly off the hook. (As far as I'm aware, the whole "subprime" mortgage boom started years after Clinton left office.) I don't know what Charlie Rangel (who used to be my Congressman in my Upper West Side days twenty-something years ago) has to do with anything; if you're talking about regulations that encouraged banks to lend money to borrowers in less expensive neighborhoods in their districts, then you're off target considering that (A) the mortgages now going into default were almost entirely *not* generated by banks and thus had nothing to do with these regulations; and (B) these regulations have been in existence for something like 20 years, and didn't cause any major problems in all that time. So I suspect Rangel is off the hook as well, although I do wish he'd use less hair gel. (Is his hair still so greasy? It used to look like an oil slick.)

Basically, the Bush administration has been in charge for almost eight years; for much of that time the administration had a Republican-controlled Congress (including John McCain, until the last few days a dedicated fan of financial deregulation), and even now the Republicans have enough strength in Congress that the Democrats can't break a filibuster or override a veto. Of course, this doesn't mean that Bush is responsible for everything that happens on Wall Street, or even in Midtown. But the fact is that (A) the regulatory infrastructure is part of the Executive Branch of government, which Bush controls; (B) many experts as well as ordinary people have been predicting for the last few years something very like what's been happening over the last weeks; and yet (C) the Bush administration did nothing about this brewing mess, through either direct executive action, promotion of legislation, or any other form of leadership. Considering that - unlike most politicians - Bush is from an old Wall Street family and has been in business for himself (mostly drilling dry holes, I'll admit), I think it would not have been out of line to expect him to have a better handle on these issues; after all, if the Republicans have anything to recommend them, it's supposed to be that they understand business and economics. I know Bush puts on a folksy image and appears clueless, but that was all supposed to be a put-on, wasn't it?

Bush, of course, is not up for re-election; and John McCain has never specialized in economics and financial matters. (He doesn't have the background for it, and I don't think he's ever pretended to be an expert on the subject. And given some of the crazy-assed derivatives of derivatives that are a large part of the current crisis, even the "experts" have a lot of trouble coping with what's going on nowadays. I've read that it's become almost impossible to come up with meaningful book values for a lot of the corporations dealing in the new financial instruments, because even the professionals can't figure out what some of these pieces of paper are worth.) For that matter, Obama isn't an accountant or a finance geek either, although he's probably got better financial chops than McCain. Neither candidate seems to be offering any magic answers, and frankly at this stage I think it's too late for magic answers; the time to prevent this crisis was four or eight years ago. (Old Arab proverb: The best time to plant a tree is twenty years ago; the second-best time to plant a tree is today.)

Considering, however, that McCain has suggested privatizing Social Security, and that he very recently suggested deregulating healthcare in much the same way the financial markets had been deregulated, I think there are some legitimate grounds for worrying about his judgment in these matters. I certainly see nothing in his record to indicate that a McCain administration would be God's gift to American (or worldwide) financial markets or to the American healthcare system.

As you may be aware, Israel for the last several weeks has been buying 100 million U.S. dollars per business day, in an effort to help prop up the U.S. dollar and keep our own currency from becoming so expensive that we can't export anything. (This seems a bit surreal given Israel's financial past, but it's true - times have changed! Our central bank's target is to increase its U.S. dollar holdings by $10 billion, which is a fair chunk of change for a nation of our small size.) We do like to do our part, of course, even if we can't support you Americans to the degree the Chinese can. And we understand that you're too busy in Iraq to do much about Iran, even though we still can't quite figure out why you went into Iraq in the first place. (You certainly didn't ask us if it was a good idea!) So we'll probably have to deal with Iran for you as well. But we are *not* prepared to solve the subprime mortgage crisis for you! Maybe the Chinese have an extra trillion dollars lying around?


At Tue Sep 23, 10:26:00 AM GMT+3, Blogger SnoopyTheGoon said...

Hi Don,

It took a sizable chunk of Fed money (eventually the US taxpayers money) to pull you out of the blogging hiatus. Now that I see the ways and means, it will be easier ;-)

Good to see you back.

At Sat Sep 27, 04:43:00 PM GMT+3, Blogger Azrolboyz said...

This comment has been removed by a blog administrator.

At Sat Oct 04, 02:12:00 PM GMT+3, Anonymous Pi said...

If the subprime problem had been handled properly, with the right financial bolstering, much of what we now see would have been averted. However, the Bush administration decided to put a little bit of cash into the real problem in the hop that it would go away.

Now they are puttin a massive financial package together to support the rich who might lose some of their cash ...

Makes you think about where the priorities lie.

At Mon Oct 06, 03:26:00 PM GMT+2, Anonymous Eyal said...

Great to see you posting again

At Mon Oct 13, 05:13:00 PM GMT+2, Anonymous Anonymous said...

This comment has been removed by a blog administrator.

At Wed Oct 15, 03:47:00 PM GMT+2, Blogger George said...

Wow Don, you woke up from your hiatus. Is this going to be a one-off?
And now to the subject matter. From what I have read on the subject, some (not sure how much) of the blame for the financial crisis can be laid at the door of the Community Reinvestment Act (CRA) introduced by Jimmy Carter and then ruthlessly enforced by Bill Clinton to force the banks to give mortgages to the poor to lever them onto the housing ladder – in reckless disregard of the fact that they would not be able to meet the repayments. However, way before this crisis erupted I was listening to an Obama speech (The man speaks beautifully but says nothing). His basic economic policy seemed to be this. We need to get more money further down the ladder and create more jobs. To do this we will reduce taxes at the lower end of the income scale and tax the sh*t out of the rich and big business. The only problem with that is that the rich and big business have the smarts to move their money to where Obama can't get at. Then all you are left with is a shortfall in federal income and higher US unemployment. Hardly seems like a recipe for success!

At Wed Oct 15, 04:09:00 PM GMT+2, Blogger Don Radlauer said...

Hi George!

I am indeed planning to post more - keep nagging me if I forget to!

I've done some reading on the subprime mortgage issue, and it appears that the whole CRA thing is a red herring dredged up by Republicans to excuse the Bush Administration from blame for the current fracas. I won't get into full detail, but here are a couple of salient points to consider:

1) The CRA was approved some 30 years ago. If it was so terrible, why did it take so long for problems to manifest?

2) The CRA does not in any way force or encourage banks to lower their standards for making safe loans.

3) The CRA does not in any way force or encourage banks to lend at 100% of a house's appraised value, or to push appraisers to approve inflated house valuations.

4) The CRA applies only to federally-insured banks and S&L's; the vast majority of the problematic subprime mortgages of the last few years were issued by non-bank lenders that are unaffected by the CRA.

5) Nobody has provided any evidence that people who received the mortgages issued under the influence of the CRA have been especially likely to default on their loans; the entire CRA-as-bogeyman thing appears to be based only on supposition. As someone with a fair bit of scientific training (and as a professional computer programmer) I have a standard way of diagnosing problems: if something suddenly stops working, the first place to look is at whatever changed just before the problem manifested. In the case of the subprime mortgage fiasco, it doesn't make a lot of sense to look at a piece of legislation that went into effect 30 years ago as the cause of a problem that started four to eight years ago; instead, look at the changes made within the last ten years.


At Mon Jan 12, 03:26:00 AM GMT+2, Anonymous locksmith mesa said...


long great post..after comeback

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At Tue Feb 10, 04:06:00 AM GMT+2, Anonymous Dr Doom said...

whatever i'm vote obama

At Sun May 03, 08:46:00 AM GMT+3, Blogger Elder of Ziyon said...

Don, I would love to contact you about your Gaza research. Can't find your email address.

Please email me at .

To whet your appetite:



At Wed Aug 05, 11:12:00 AM GMT+3, Blogger berlinvale said...

Whatever...Obama was elected!! ;)
Vale from

At Sun Aug 29, 04:41:00 PM GMT+3, Anonymous katty @ israel said...

The consequences of the mortgage crisis are natural course of events. American politicians have made so many mistakes in the field of economy and many other fields that you guys shouldn't be so surprised.

At Sat Feb 26, 08:28:00 AM GMT+2, Anonymous John said...

Lets hope that they will fix all this

At Thu Mar 10, 01:53:00 AM GMT+2, Blogger Gordon Sylvestor said...

If you follow the money trail the crisis leads directly to the actions of the federal reserve. As of this comment the Banks in Canada are raking in 4 Billion a quarter. This while personal debt is growing. Now tell me who is behind it all? Certainly not The Lee Majors Bionic Hearing Aid.


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