Sandy:

This has NOTHING to do with free markets or "cowboy capitalism" and everything to do with how government subsidies and political pressure to extend loans to non-credit worthy borrowers distorted the market.

Moreover, Dem attempts to dump the blame that they bear on the GOP is absolute CYA nonsense. McCain cosponsored a bill to raise the standards for Freddie and Fannie loans and clean up the accounting scandals in those government created Frankensteins and every single Senate Dem opposed these reforms as attempts to deny the American Dream to their constituents.
 

McCain cosponsored a bill to raise the standards for Freddie and Fannie loans....

But ... but ... but ... if you read what McSame says even within the space of a week or even from one day to the next, you can be sure that he's fer sump'tin afer he's agin it the next day, and vice versa. Of course, cherry pick and you'll find McSame in favour of any policy you want ... even if he was against it yesterday.

And here's more on this bill and related legislation.

I'd note that the bill didn't require "rais[ing] standards" for Freddie Mac and Fannie Mae loans; the primary thrust was to reorganize the existing regulatory agency into a new one, albeit with some expanded powers. That's no guarantee that such an agency would have used those powers.

Cheers,
 

Sec. 1313 of the Federal Housing Enterprise Regulatory Reform Act of 2005 states that the new Federal Housing Enterprise Regulatory Agency is required:

`(B) to ensure that--

`(i) each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls;

`(ii) the operations and activities of each regulated entity foster liquid, efficient, competitive, and resilient national housing finance markets (including activities relating to mortgages on housing for low- and moderate- income families involving a reasonable economic return that may be less than the return earned on other activities);

`(iii) each regulated entity complies with this title and the rules, regulations, guidelines, and orders issued under this title and the authorizing statutes;

`(iv) each regulated entity carries out its statutory mission only through activities that are authorized under and consistent with this title and the authorizing statutes;

`(v) the activities of each regulated entity and the manner in which such regulated entity is operated are consistent with the public interest; and

`(vi) each regulated entity remains adequately capitalized, after due consideration of the risk to such regulated entity.

This bill would have provided all the authority necessary to clean up the entire Freddie and Fannie mess before this failure.

Here are two of the Dem responses in opposition to this reform:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

When the bill came for a vote in the Senate Banking Committee, all the GOP voted for the reform, but all the Dems voted against it and made it clear that the reform would be filibustered if it was sent to the floor for a vote. As is the practice in the Senate, the GOP did not submit the bill to the floor because they lacked 60 votes because every single Dem opposed it.

Cowboy capitalism, my ass...or should I say Party of Asses.
 

Well gee, if we're going to talk about "non-credit" worthy borrowers, perhaps we should start with the banking industry itself and the the Republican gangster administration that has flushed something like $1 trillion down the toilet to fight an absolutely needless and CRIMINAL war of aggression in Iraq the last five years.

And anyone who beleives what a vile liar like Bart De Palma or John McCain or ant other Republsays about anything is just a fool.
 

"Bart":

I saw the provisions. As I said, they say nothing about "rais[ing] standards". They don't say it, and they don't require it.

As Watt said, it was a "shell game", principally changing the names of the organisation (as can be seen from the mass of the bill text just substituting the 'new' agency for the old one.

Cheers,
 

And I note that "Bart" didn't address my point that McSame says one thing one day, and the opposite the very next. In fact, that's been his major MO these last two weeks....

And then there's the Keating Five....

Yes, McSame's just the guy to trust to fix this stuff....

But two thirds of the electorate are not deceived, and know who's been running things these last seven years. The Republicans took Clinton's eight years of horrific "peace and prosperity" and fixed that right up....

Cheers,
 

arne:

I saw the provisions. As I said, they say nothing about "rais[ing] standards". They don't say it, and they don't require it.

Please. The standards for Fannie and Freddie extended tens of billions of loan guarantees to un-creditworthy borrowers which would not be paid back. This bill expressly required the new Federal Housing Enterprise Regulatory Agency to "ensure" that the regulated entities Fannie and Freddie be operated in a safe and sound manner with adequate capitalization and internal controls taking into account the risk of the loans.

The Dems who universally opposed this bill expressed their expectation that this law would be enforced against their un-creditworthy constituents in no uncertain terms.

I would take Dems' claims that you support regulation of this area seriously if you took your own representatives to task for opposing the very thing that you claim to support.
 

"...we simply have to pray that Henry Paulson...has the brilliance...to save us"

"Perhaps the events of this week prove that we don't really need a president at all, so long as we decide to treat the Treasury Secretary and head of the Fed as all-wise (or at least wise-enough) father figures who will save us"

Sandy, leaving aside the Bush-bashing (and the question of whether I happen to agree with it) these formulations of yours seem to imply a truly unmerited acceptance of both the benevolence and competency of Paulson.

There is no reason that Mr. Failure President compels our reliance on Paulson -- there may be wiser counsel in our Congress, for example.

How the events of the week could possibly prove to anyone that the Treasury Secretary or (current or especially prior) Fed chief should be treated as gurus is mind-boggling. No, it's impossible.
 

I would take Dems' claims that you support regulation of this area seriously if you took your own representatives to task for opposing the very thing that you claim to support.

# posted by Bart DePalma : 1:19 PM


Baghdad, as a guy who is on record as opposing government regulations, you don't seem like the most reliable source for information on the benefits of increased regulation.
 

Nona,

Indeed, it just blows my mind that anyone thinks there's anything to discuss with these people beyond their Miranda rights.
 

safe and sound manner with adequate capitalization and internal controls taking into account the risk of the loans.

That's about the extent of it. It also gutted parts of the securities and exchange act which applied to banks need to report securities-related transactions and loosened restrictions on banking securities activities. The act would have made it even easier for banks to hide unsound backing for financial instruments.

Its hard to see language like 'safe and sound' really making a meaningful difference with respect to banks ripping each other off. Since the people who decide 'safe and sound' are primarily political appointees, such judgment calls are shaky.
 

"Bart" DePalma:

[Arne]: I saw the provisions. As I said, they say nothing about "rais[ing] standards". They don't say it, and they don't require it.

Please.

Please, indeed, "Bart". I said the bill said nothing about "rais[ing] standards". And it doesn't. The facts are there, "Bart". If you disagree, then quote the part of the bill that mandates "rais[ing] standards".

Cheers,
 

After all, "Bart", it was you that said the bill would "raise the standards for Freddie and Fannie loans". This is simply not true.

Cheers,
 

Then there's this on the Community Reinvestment Act and the supposed influence of low-income loans on the current mess (along with some peripheral comments on the incentive to due diligence and care of those that are bundling and reselling mortgages).

Cheers,
 

i will gladly withdraw my comment about "cowboy capitalism" if it would lead to a serious discussion of the point of the posting, which is captured in the title. I note that not one person has expressed gratitude to our Constitution for imposing George W. Bush on us for another four months.
 

Prof. Levinson:

i will gladly withdraw my comment about "cowboy capitalism" if it would lead to a serious discussion of the point of the posting, which is captured in the title. I note that not one person has expressed gratitude to our Constitution for imposing George W. Bush on us for another four months.

The Constitution does have a cure for the four months ... or four years, even. Unfortunately, the spineless Democratic leadership has taken it off the table. I think they ought to do it, even with 'only' four months remaining, just to make it an object lesson to those that aspire that their tenure is contingent on "good behaviour", and that willful disregard of the laws and the Constitution are not to be tolerated even for a millisecond.

Cheers,
 

Heh. It would be a little difficult to feel gratitude towards anything that contributed even four minutes of George Bush to our government.

But on the other hand, Mr. Bush is not a problem of the system, but of the ignorant malicious people who voted for him, many of whom even now support him, and the flip side is that the parliamentary approach just allows such fools to make their mistakes faster.
 

Contrary to the assertions Bart makes, this crisis has everything in the world to do with unregulated markets and, to use a charming expression, "cowboy capitalism".

The crisis has been a long time coming. It did not just arise during the Toxic Texan's two terms, in the USA it actually goes back to the "neoconservative" or "neoliberal" (call it what you will) revolution started under Ronald Reagan in the USA and Margaret Thatcher in the UK. Classic (US) Republican Party and (UK) Conservative Party "one-nation" conservatism dedicated towards closing the gap between rich and poor (only more slowly than others wanted) was replaced by policies actually intended to increase the disparity between rich and poor.

The hallmarks of the policies were a desire to reduce the size of government absolutely, to shift from a progressive tax system towards a flat rate tax system and to shift the burden of taxation from the rich to the poor (i) by increasing the incidence of indirect taxes unrelated to income - eg by replacing state income taxation by property based taxes (and in the UK by municipal poll taxes payable in the same amount per inhabitant regardless of means) and by relying where possible on flat rate sales taxes and (ii) diminishing wherever possible the scope of safety net welfare.

This was justified by the "trickle down" theory which can be stated thus: "if you allow the rich to become obscenely rich, their expenditure will increase and they will employ a lot more people".

That is, of course, true as far as it goes. I am sure that the obscenely rich McCain family with their many houses, automobiles and private jets, will employ a goodly number of gardeners, maids, chauffeurs, pilots etc; that Mrs McCain will spend more on designer clothing than the average housewife thereby giving rise to a lot of hours work at minimum wage levels to seamstresses; she plainly spends more than most on attempted repair of the ravages of time even if not wholly successfully; and, judging by the glossy magazines, and she seems to have spent quite a bit on makeovers in monumental bad taste for the various family homes thus employing builders, architects, interior designers and the like - and I suppose the Senator's shoes will also contribute to employment - even if it is in Italy rather than the USA.

But "trickle down" at best has provided a few marginal minimum wage jobs while the neglect of industrial development has destroyed whole industries in both our countries.

The "noveaux riche" of the new policies were not to be the landed gentry or great industrialists, but a new class of "entrepreneurs" - not alas the inventors and engineers, but people who made their money out of exploiting others in one way or another - and especially from exploiting financial services.

De-industrialisation was to be replaced by services, the development of the markets, which were to be deregulated and allowed to flourish creating a whole new class of Gordon Gecko super rich, yobs whose ill-gotten gains would also "trickle down" onto the urban poor.

I'm not too sure about Wall Street, but in London, the only "trickle down" effect noticed by the urban poor was from these cowboy capitalists relieving themselves from upper floor windows of their offices after consuming an excess of Roederer Crystal at celebrations of their various "deals".

The outcome of the policies and the absence of any US regulation of the US derivatives markets (thanks to Phil Gramm), is that your banks are now considered a poor risk and the banks of other nations are now unwilling to lend. The US equivalent of the South Sea Bubble is well and truly burst.

I have been watching the questioning of the Treasury Secretary and his side-kicks in the Senate Banking Committee. It is plain that the Administration has known this was coming for some months. I am sure they hoped they could hold off the crisis until after the election. There was plainly a reluctance on the part of the witnesses to be full and frank in public.

There was scepticism and quite a degree of incomprehension on the part of the Senators. This is not going to be easy.

Politicians of all sides have been taken in by the economics of the extreme right - far more among the GOP than among the Democrats - but what is beyond dispute is that the present Administration has been seeking to cover up and minimise the crisis and has been caught in flagrante delicto.

I note that dear Bart said on another thread that he was thinking of buying gold - well, he's about 3 years late but if he'd been smart and put, say, £500k into BlackRock’s Gold & General fund then rather than now he would have done quite well. In the three years to end of August the fund has returned 106.5 per cent versus the 89.45 per cent increase in the gold price and the 50.55 per cent rise in the FTSE Gold Mines index. That a 35.33% annual return which compares well to the default interest rate on some credit card debt.

As to Professor Levinson's question on fixed-term Presidency, I thought this would end in tears on day one of Bush's 1st term.

We have sat in Europe with the Barbarians at the gates for 8 long years. Let us just pray there will not now be 4 years of McSame.

That would really spook the international markets after this latest demonstration of the custody of the US res publicae in doctrinaire Republican hands.
 

bartbuster said...

BD: I would take Dems' claims that you support regulation of this area seriously if you took your own representatives to task for opposing the very thing that you claim to support.

Baghdad, as a guy who is on record as opposing government regulations, you don't seem like the most reliable source for information on the benefits of increased regulation.

Actually, I am on record calling for Freddie and Fannie to be dismantled entirely rather than just regulated. As is the case whenever the government attempts to run any industry, Freddie and Fannie are corrupt money sinks which are bound to fail. The government's record of regulating itself is hardly inspiring.
 

bitswapper said...

BD: ...safe and sound manner with adequate capitalization and internal controls taking into account the risk of the loans.

That's about the extent of it. It also gutted parts of the securities and exchange act which applied to banks need to report securities-related transactions and loosened restrictions on banking securities activities.

That portion of the bill was not widely opposed by the Dems and has nothing to do with the Freddie and Fannie mess. The Dems I quoted were quite clear what where their concerns lay.
 

Actually, I am on record calling for Freddie and Fannie to be dismantled entirely rather than just regulated. As is the case whenever the government attempts to run any industry, Freddie and Fannie are corrupt money sinks which are bound to fail. The government's record of regulating itself is hardly inspiring.

# posted by Bart DePalma : 4:12 PM


Baghdad, Fannie and Freddie had very little, if anything, to do with this problem. And why anyone would listen to a nutcase like you on this subject, I have absolutely no idea.
 

Bart wrote:
That portion of the bill was not widely opposed by the Dems

I'd be fascinated to see your record of that, in spite of the fact that it changes absolutely nothing. How does it matter in the least the 'dems' didn't widely object? Oh wait, that's right - you're only here to pin that blame on the party you oppose - not to make any contribution of substance. I forgot.

That portion of the bill was not widely opposed by the Dems and has nothing to do with the Freddie and Fannie mess.

That's because the bill didn't pass.
 

Clue for the clueless:

Actually, I am on record calling for Freddie and Fannie to be dismantled entirely rather than just regulated. As is the case whenever the government attempts to run any industry,...

The Macs aren't run by the gummint. In fact, some have said that therein lies the problem (at least as relates to the Mac's financial difficulties): If it were the gummint running them, they wouldn't be giving out "performance bonuses" for the gents who could up the churn as much as possible, based on crappier and crappier loans. And when I mean "crappier and crappier", I don't mean low-income loans; see my link to the CRA above for info on that.

Cheers,
 

bitswapper said...

Bart wrote: That portion of the bill was not widely opposed by the Dems...

I'd be fascinated to see your record of that...

Actually, I would cite the lack of record. The argument was well documented by the Dem organ NYT article to which I linked. Not a peep about securities.
 

Bart wrote:
That portion of the bill was not widely opposed by the Dems

I replied:
I'd be fascinated to see your record of that, in spite of the fact that it changes absolutely nothing.

Bart wrote:
Actually, I would cite the lack of record.

Lack of evidence as proof notwithstanding, it still changes nothing, unless all you're doing here is trying to pin blame on your nemesis political party, as a rather cheap distraction. As long as you pitter off on which political party is 'better', the real substance and nature of the problem will take a sideline, and the discussion will be drawn down.

Wall streeters ran like dogs let off a leash right into moving traffic and promptly got hit by the reality truck, and McCain was only to glad to try to help. He certainly wasn't alone; he had plenty of decepticrats in with him. Not surprisingly, its your cheap politicking that shows why its hard for the nation to focus on practical solutions particularly during elections - its a very effective distraction. Kind of like putting potato chips in front of someone looking for a good meal. As bad as this financial crisis is, it couldn't have come at a worse time in terms of how easy it is to distract the public just now.
 

Bart said:
This has NOTHING to do with free markets or "cowboy capitalism" and everything to do with how government subsidies and political pressure to extend loans to non-credit worthy borrowers distorted the market.

Bart,
I'm a first time poster here who often enjoys the back and forth between you and others even when it devolves into juvenile name calling (which I think is never justified because it does nothing to strengthen or advance a reasonable argument). So, what prompts me to post?

The fact that if you think this crisis is primarily about bad mortgages it simply reveals that you haven't the first clue what you're talking about.

This crisis is about derivatives like credit default swaps -- essentially an unregulated financial instrument that functions very much like insurance, but with several important differences. It is about institutions like Lehman, Goldman Sachs, and other big investment banks offering to insure the value of instruments such as mortgage backed securities on the premise that the price would continue to increase ad infinitum such that they would never have to pay the insurance. When the property market started to fall and the buyers of the credit default swaps started to seek their payments from the sellers the sellers disclosed that they didn't have adequate capital reserves to meet the obligations on the credit default swaps that they had sold (because they were leveraged on their obligations in some cases as much as 30-to-1 on the capital assets they held.) To compound the problem, the easiest way for these companies to raise capital is to sell off assets (since they can't actually borrow their way out of this since they are so highly leveraged already) -- but the "safe" and "reliable" capital assets they had in the back is in, among other thing, mortgage backed securities...for which there is no market at the moment as the bubble has burst and nobody wants to buy until they're convinced that we're close to the bottom of the price decline.

And by the way, the size of the derivatives market that we're talking about here -- $45 trillion, that's $45,000,000,000,000, up from about $100 billion since 2001.

And none of us knows right now how much of that $45 trillion (which is made up almost entirely out of whole cloth -- not backed by real assets) is due to be paid out.

Remember also from the beginning of my post where I said that there was one important difference between credit default swaps and insurance? The best part is that you can buy insurance without having to own the underlying asset or exposing yourself to any actual risk.

In other words, I could buy a CDS to insure myself against the chance that, for example, my neighbor might default on his mortgage. I don't have to have an interest in his house. I could even be a renter next door -- totally unconcerned with whether the property value of the home I am living in will be affected...yet still able to essentially place a bet on whether my neighbor will meet his obligations. And if he doesn't I get paid off.

The big banking houses have been taking bets that they couldn't cover. What we're really looking at is a margin call of an amount that potentially far, far exceeds the value of all of the 51 million mortgages in the U.S. -- and it's the "smart guys" on Wall Street who got us here by neglecting to do the due diligence on the derivatives they were issuing, and who had no idea of the risk they were actually assuming.

Mortgages as the proximate cause of this crisis? Perhaps. As the underlying cause? Only if you're stupid enough to believe it.
 

jellin:

I am well aware of the derivatives. However, as you noted, the derivatives "bet" on a stable or rising real estate market, which was artificially pumped up by government subsidy and political pressure, and these derivatives failed when the non-creditworthy started defaulting and depressed the real estate market.

In short, there is no escaping the fact that the underlying bubble and its eventual burst were a product of government subsidy and political pressure to extend mortgage loans to the un-creditworthy.
 

Bart wrote:product of government subsidy and political pressure to extend mortgage loans to the un-creditworthy.

That's in interesting assertion. Which government subsidies? A little more specific information would be interesting. What was the political pressure to extend loans to the un-creditworthy?
 

Most of you enjoy expressing your frustration/disdain with Mr. DePalma. Let me repeat my own personal frustration (though not disdain) with the fact that once again most of you have enabled Mr. DePalma to hijack the discussion and move it away from any semblance of what the initial post was about. And I continue to note, for the record, that not even Mr. DePalma has expressed gratitude for the fact that George W. Bush will be able to dispense his wise leadership for four remaining months, including, of course, the 10 weeks after the election in which both candidates, one plausibly, the other less so, are running "repudiate Bush" campaigns.
 

the fact that once again most of you have enabled Mr. DePalma to hijack the discussion and move it away from any semblance of what the initial post was about

It's not our job to keep the threads on topic. If you want to keep the discussion on topic, it's up to you to stop Baghdad from hijacking them.
 

This comment has been removed by the author.
 

Well I actually have to disagree with that:

I think Sandy, Marty, and Jack deserve credit for not simply banning the troll outright, which is what most would have done long ago.

It's up to us to simply ignore him, and I well understand how difficult it is to let his disgraceful lying BS pass unremarked without letting him know just exactly what I think about him. The worst part of it is understanding just how typical he is of the Republican Party.

Nevertheless, that's what we should do: ignore him entirely -- he's just a waste of time.
 

Actually, I think a fixed term presidency may be more stable that one interruptable. After all, doesn't an administration build relationships with foreign counterparts? If administrations were to change at a higher frequency, wouldn't there be an overhead just from change itself? Perhaps worse, if public approval were a criteria for triggering a removal, wouldn't the makeup of the executive become more capricious that it already is? I have to wonder if there isn't a changeover frequency threshold beyond which the nation is handicapped in its ability to interact with other nations.

I'm not saying that four years is fine, but that fixed versus variable may be more stabilizing.
 

sandy levinson said...

Most of you enjoy expressing your frustration/disdain with Mr. DePalma. Let me repeat my own personal frustration (though not disdain) with the fact that once again most of you have enabled Mr. DePalma to hijack the discussion and move it away from any semblance of what the initial post was about.

Huh? Sandy, you made an allegation that the mortgage mess was the result of "unregulated cowboy capitalism" of the past two administrations. I directly rebutted that claim and then replied to the inevitable kibitzing.

And I continue to note, for the record, that not even Mr. DePalma has expressed gratitude for the fact that George W. Bush will be able to dispense his wise leadership for four remaining months, including, of course, the 10 weeks after the election in which both candidates, one plausibly, the other less so, are running "repudiate Bush" campaigns.

I am generally uninterested in cheerleading for politicians, however, I am extremely pleased and relieved that Mr. Bush's Treasury, SEC and Fed appointees will be managing this crisis. Given the utter paucity of anything useful from Obama and to a lesser extent McCain on the campaign trail, I would shudder to think what kind of hash their teams would make of this if it had hit in another five months instead of this week.
 

"Bart" DeSayWhateverIThinkSupportsMyCase:

However, as you noted, the derivatives "bet" on a stable or rising real estate market, which was artificially pumped up by government subsidy and political pressure,...

Evidence for this assertion?

Cheers,
 

... not to mention, if the prices were "articifially pumped up", why didn't the geenyuses on Wall Street know that and take that into account?

Cheers,
 

I am extremely pleased and relieved that Mr. Bush's Treasury, SEC and Fed appointees will be managing this crisis....

"... after all, his other appointees (like his old SoT, Rumsfeld, Gonzales, Bremer, Brownie, etc. have done such a smash-up job we ought to be happy that Dubya's cronies are hard at work taking $700B from the taxpayers' [and their chidren's] pockets)."

Getting back to Prof. Levinson's point, while we might not be able to get Congress to impeach the thug, the least we can do is ignore him, and tell him we'll take it from here, thanks. Let him veto if he wants to. That's his skin; he does that and he may find that foreign countries are not the only risky places to live once he retires....

Cheers,
 

Arne writes
Let him veto if he wants to. That's his skin;

Well, at this time the skin of his party as well, who are already starting to show rudimentary awareness of the political part of the problem this creates for them - even Ctheney is having difficulty containing them.
 

Professor Levinson wrote:-

"Most of you enjoy expressing your frustration/disdain with Mr. DePalma. Let me repeat my own personal frustration (though not disdain) with the fact that once again most of you have enabled Mr. DePalma to hijack the discussion and move it away from any semblance of what the initial post was about."

While I appreciate that Professor Levinson's interest is in constitutional reform and having a genteel ivory tower discussion about the relative merits of fixed and variable term presidencies, everybody knows that amendments to the US Constitution happen but very rarely, unfortunately rarely it may be said.

I suggest that people may legitimately think that this is a "back burner" issue particularly where there is a raging politico-economic crisis, possibly more serious than any since the Great Depression and where the potential consequence is adding about US$3,000 per head of population to the national debt - with no firm guarantee that the proposed solution will work as intended.

Various democracies provide for fixed terms for both legislature and for the executive; some have more flexible arrangements - for example the UK provides a maximum length of time that the legislature may continue without an election but not a minimum term. Various states have provisions for recall of an elected official. All systems are imperfect, but it really is remarkable that a President's popularity can go so far below the 50% mark as this one has without the people or their representatives being able to do anything about it. But to amend the Constitution would require a consensus to emerge as to what provisions to put in its place:

To make the President answerable to Congress - i.e. to require the election of a new president if a given majority of Congress passed a vote of no confidence would transform your institutions into those of a Parliamentary democracy, and the founding fathers were troubled by the idea of "too much democracy" which, given the then recent events in France was hardly surprising, yours was a revolution of the bourgeoisie after all.

Perhaps a more moderate approach would be to require individual heads of department, the Cabinet Secretaries to resign if they lost the confidence of the Congress.

Coupled with a requirement that every executive act be countersigned by a Secretary so responsible, that would give you an elective head of state not directly answerable, but who was indirectly accountable (compare the constitutional position of the Spanish Monarch who presides over cabinet meetings, is head of the armed forces, but must act on the advice of ministers).

That way, the President could be as unpopular as he wished without unduly adverse consequences for government.

Turning now to some of the matters of immediate moment, Jellin's contribution above is good on the similarities between insurance and credit default swaps.

I would, however, make one observation: to obtain an enforceable obligation one has to have what insurance law defines as "an insurable interest". I cannot go off and insure a randomly selected property against the risk of fire because if I have no insurable interest, then the contract is a mere wager on the chance of the property burning down or not - and gaming contracts are unenforceable at common law. See also the The Life Assurance Act 1774. Insurance provides an indemnity against loss - so if I suffer no loss by reason of the insured contingency - the insurance company is not obliged to pay me anything. I do not think insurance law in the USA is substantially different otherwise one could take out a policy on the life of an accused to await the death penalty - or on a NASCAR driver. Likewise the ability to insure a building in which I have no interest might be a great incentive to arson.

There are all kinds of derivatives: A "derivative security" is defined as an instrument such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset. The economic function is to transfer risk from those who do not want to bear it to those who are willing to bear it - for a fee. In this respect the derivatives market is much the same as the insurance industry. Common types of derivative securities include:-

Forward trading in commodities such as oil, or electricity - buying now for future delivery is trading in derivatives (and it was specifically this kind of trading which former Senator Phill Gramm wanted to exempt from regulation by any regulator when he slipped his little amendment into the omnibus spending bill during the Clinton/Bush transition. (As I mentioned elsewhere he was apparently moved to do so in connection with Enron). Forward trading in commodities has entirely legitimate purposes - likewise in currencies. If I know I am going to have to pay out a large sum in (say Euro) in 6 months time, I may want to take an option and buy forward to hedge the risk of the currency moving adversely to my interest. Put and call options on stocks are also a form of derivative trading. There are also contracts involving swapping fixed interest rate payment streams for adjustable or floating interest rate payment streams. A company may have borrowed money under an adjustable interest rate security such as a mortgage and is now fearful that the interest rate is going to rise. It wants to protect itself against rises in the interest rates without going through the refinancing of the mortagage. The company or individual liable for an adjustable rate looks for someone who will pay the adjustable interest payments in return for receipt of fixed rate payments. This is called a swap. A cap is a contract that protects against rises in the interest rate beyond some limit. Likewise some businesses may want protection against a price drop beyond some level. This type of contract is called a floor. A swaption (option on a swap) gives the holder the right to enter into or the right to cancel out of a swap. Similarly there are captions and floortions (options on caps and options on floors).

All these forms of trading have entirely legitimate commercial purposes. The problem is that with an entirely unregulated US market and a huge OTC market made by the US investment banks (that were), far too great a proportion of the transactions in derivative securities have been for speculation rather than for hedging. The Bank for International Settlements (BIS) estimated the notional outstanding positions on the Chicago London and Euro markets at US$81 trillion as at end March 2008. However, the investment banks (that were) operated OTC trading which estimated was worth US$596 trillion by end 2007.

A lot of money can be made - one can also come very unstuck. Barings Bank (founded in 1762 and which sold Louisiana to the USA) was brought down by a single rogue trader, Nick Leeson, with losses of US$1.4 billion.

So the root of the problem with derivatives of all kinds has been the existence of a wholly unregulated US market and an OTC market enabling investment banks and others to take position well beyond the prudential limits which apply to conventionally regulated banks.

All the evidence from the Treasury Secretary and others on the hill was the the regulation system was defective and not adapted to today's markets. And that is a defect which was known over the last 8 years.

As we know, that was because of the pathological hatred of the extreme right to any form of regulation be it financial, environmental, health or safety, which inhibits the ability of business to make a profit regardless of detriment to the public good. Strange that when it comes to moral issues, the right would be only too happy to regulate preferably by way of total prohibition: pornography, abortion, gay sex, stem cell research and sex education all spring to mind.

Bart De Palma said:-
I am well aware of the derivatives. However, as you noted, the derivatives "bet" on a stable or rising real estate market, which was artificially pumped up by government subsidy and political pressure, and these derivatives failed when the non-creditworthy started defaulting and depressed the real estate market. In short, there is no escaping the fact that the underlying bubble and its eventual burst were a product of government subsidy and political pressure to extend mortgage loans to the un-creditworthy.

I dissent in part.

The problems in the housing sector in both the USA and the UK have their origins in the Reagan/Thatcher philosophy of deregulation coupled with the antipathy of both leaders to the subsidising 'social housing' for those who could not afford to buy their own homes. There was a naked political philosophy behind this: namely that occupants renting subsidised "social housing" were more likely to vote Democratic/Labour, while homeowners were more likely to vote Republican/Conservative. [Thatcher, in particular, was very, very doctrinaire on this: she passed legislation ("the right to buy") forcing municipalities to sell their rented social housing stock to sitting tenants at a deep discount (40-60%) on the market price - complete with a compulsion on the municipalities also to provide a mortgage on demand. It proved wildly popular for a time and transformed a lot of long-time Labour voters into Conservatives almost overnight.]

In the good old days the banks and S&L's (UK=building societies) kept the mortgage deeds in their head office vaults. An institution could borrow against the security of the deeds - but it was actually quite a complex process. If the sum to be borrowed was significant, the lender would want to actually do "due diligence" on the mortgage book - check what percentage were in arrears etc. Usually the borrowing institution would have a line of credit with a bigger institution and the lending institution would go into the head office of the borrower once or twice a year and do their checks and the line of credit would be adjusted accordingly.

The first US solution to the problem of increasing available funds was the "New Deal" creation of Fannie Mae as a government agency. This added a guarantee to mortgages meeting certain standards - and the availability of that guarantee increased the proportion of funds a lender could borrow against its mortgage book since the provision for defaults could be reduced. Nothing at all wrong with that.

To my way of thinking, the mistake came with the decision to privatise and/or create the anomalous GSE's : Federal Farm Credit Banks, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). That may have taken their obligations off the federal balance sheet, but it still left them covered by an implicit federal government guarantee. GSE's carry an implicit guarantee, because the federal government has acknowledged its interest in the issuing organisation and thus implies an interest in the securities it issues. While this differs from the explicit guarantee for U.S. Treasury securities it was unthinkable that the federal government should not stand behind GSE obligations.

Taking them out of explicit federal control was the worst of both worlds. The government lost control of their conduct, but was still stuck with the consequences of mismanagement.

Had these entities remained part of government there would have been far greater oversight, had the derivatives markets been properly regulated, then the problems with the derivatives based on mortgages would probably have been detected and remedied much sooner.

While, there can and should be a secondary market in mortgages, I do not believe that they are or ever have been suitable for securitisation in the manner which became common in the USA - both for Fannie Mae/Freddie Mac mortgages and for the far worse varieties on the market.

This has been known for 18 months or thereabouts and the Administration sought to just hang on in the hope of leaving the next administration with the 'poison pill'.
 

Perhaps a more moderate approach would be to require individual heads of department, the Cabinet Secretaries to resign if they lost the confidence of the Congress.

I rather like the idea of Congress going back to the old English practice of impeaching the chief ministers. While I've no doubt at all that W would let Strafford go to the block, one such example might have a salutary effect on the rest. At least that was the reasoning with Admiral Byng. :)
 

Unfortunately, Mark, the execution of Admiral Byng was a case of Pitt's ministers trying to cover up their incompetence.

See this epitaph pit up by Byng's family in the parish church:-

To the perpetual Disgrace
of PUBLICK JUSTICE
The Honble. JOHN BYNG Esqr
Admiral of the Blue
Fell a MARTYR to
POLITICAL PERSECUTION
March 14th in the year 1757 when
BRAVERY and LOYALTY
were Insufficient Securities
For the
Life and Honour
of a
NAVAL OFFICER
 

Clearly the family didn't appreciate the salutary example provided to the remaining British admirals. After all, the example was there regardless whether Byng was actually at fault.

Black humor, of course.