Episode 1 - Cause Of A Crisis
Published November 9, 2011
Perhaps the biggest financial disaster since the Great Depression, what has been called the Great Recession is currently the subject of a lot of speculation and analysis. In this episode, we tackle some of the causes and contributing factors. Recorded on 11/07/2011.
You can download the episode here.
Mike & Matt's Recommended Reading:
Bloomberg to OWS: Congress caused the mortgage crisis, not the banks, by Ed Morrissey (HotAir, 11/01/2011)
Savings and Loan Crisis, Wikipedia
How Does the Financial Crisis Compare to the S&L Crisis and other Bank Crises?, by Kimberly Amadeo (About.com)
Similarities Between SL and the Housing Crisis, by Michael Shedlock (Daily Reckoning, 01/09/2008)
Mike Johnston: So welcome to episode 1 of our new podcast, Robot Overlordz. I'm Mike Johnston and joining me is Matt Bolton.
Matt Bolton: Hello.
MJ: Tonight we're going to talk about an article that Matt selected. So Matt, I'll turn it over to you.
MB: Alright. I selected a, it's an article from the website. It's called Hot Air. The article called Bloomberg.... it's Bloomberg addressing the Occupy Wall Street people. It's called "Congress Caused the Mortgage Crisis, Not the Banks." The article goes over why he think that the government started this whole crisis and not the banks and then it gives some facts and some reasons why he thinks that. So I just, I'll start talking about that. Mike can jump in here, refute, and rebut anything I have to say.
MJ: Sure. That sounds like a plan, man.
MB: Alright. Mortgage crisis was started by Congress under President Clinton and these are facts that are really not in dispute as Clinton's White House basically went to the banks and said look, based on this study that was Boston, Blacks and Hispanics are not getting home mortgage loans. They're getting them in a much lower percentage than white people are. The problem with the study was they didn't take into account anything other than race. They didn't take into account whether or not the people had jobs, whether or not they could afford the houses they were applying for, whether or not they had bad credit. So all these things, so when you look at it like that...And then the White House kind of came through and said look if you don't start lending to people of ethnic minorities then we're going to out you as basically being racist banks and things. So the banks started lending money to these people that there was no way they could pay these loans back. And then Wall Street gets involved and they start jumping on the bandwagon. So, to me, it started with the government basically getting involved in the private sector. And once they opened up the floodgates there was no stopping Wall Street from making bad decisions through the entire thing and it's kind of how where we are now.
MJ: I definitely kind of like the... well I guess I should start with this one is a big, messy just tangle of issues. So it's incredibly complex and anything that we kind of say about it, I think, to make sense of that mess, how you frame the issue and how you look at some of these things can kind of color some of this. So I thought it was interesting, the article's take on the unintended consequences of that kind of social engineering goal. I guess for my own take I would say that the context is important about the kind of racial background because if you, not to say racism per se, but at the same time just the context of race relations in the US. The history of them. I think you're going to find that more minorities are in the, without jobs and in the kind of the bad credit area so that I'm not really surprised by that. I think there's arguments around it being demographical and around it being racial that depending on how you approach it could color things. I don't think it's purely one thing or the other I guess.
MJ: I think the article could maybe be accused a little bit of apologizing for the fact that there's at least some elements that are racial in there even if it's just the fact that minorities are more likely to be in those demographic groups. It kind of whitewashes over the fact that that might be a concern to some people. But I think it does correctly identify the fact that there were these huge unintended consequences of that social engineering goal whether you agree with the goal or not. So from my standpoint I would say that that was a poorly-executed goal. It definitely had unintended consequences and this is definitely a factor that should be in kind of how we look at the financial crisis. I would kind of disagree with the author and with Mayor Bloomberg as far as that being kind of the smoking gun. I mean, metaphorically speaking, if there was a gun sitting like on a table in front of us and you picked it up and shot me, that's a direct cause of me dying, for example. But if I'd brought that gun in myself and put it on the table, it might color how people would react to you picking that gun up and shooting me especially if I just handed you a suicide note that I was dying of cancer. I mean that all changes the picture. And so I think to kind of color this picture of what the banks then did with those, that kind of unintended consequences of risky loans...
MJ: I would say that is a little bit more the actual pulling the trigger of what caused the explosion of the financial world to such an extent, but at the same time definitely this article makes a valid point about Congress bringing the gun into the room in the first place.
MB: You know, I, obviously had Congress never done this then Wall Street and the banks and all these few... wouldn't have had the opportunity.
MJ: They wouldn't have had bad mortgages, but they might have had something else. And I would trace back some of the banks' misbehavior to things that happened even earlier than, the article mentions in 1994, Clinton's stuff. Personally, I kind of trace some of the problems that led to the financial crisis back into the '80s and some of the things that where the banks began to be de-regulated and right around that time is when you had the savings and loan crisis. Which is almost similar in a lot of ways, but then that was, you know they still had things like Glass-Stegal and things that they've since repealed. So I think there's also an argument to be made that stuff happened well after the stuff that the article is trying to a little bit pin the blame on.
MJ: I guess I'm personally not really that interested in where the blame is per se, just that how do we stop this from happening again. So in that sense I think the article kind of makes some recommendations of getting rid of this kind of subsidizing either minority or demographic or just subsidizing bad loans. That policy should definitely be retired.
MB: Well, I mean, when you go into a bank to get a loan whether it be a car loan or a home loan or whatever it is, to me the bank should look at you only from a number standpoint. Do you have good...
MJ: I agree with that definitely. I would say a lot of our problems are definitely a result from the social engineering around the bank, but also then I would say a lot of it also revolves around the fact that we've let banks do pretty much anything and kind of operate as if they're a casino. It's when you put those two things together that you have a meltdown. So rather than argue about which one contributes more or less. I mean, personally, I would probably reverse the contributions from how this author probably would and maybe you would agree with this author. But, that kind of wastes some time on he said she said. Let's just do both things. Let's kind of lock down the banks to operating the structures of a solid financial situation where they can't go and make risky loans and then if you want to do other social engineering stuff, let's do that somewhere separate.
MJ: And definitely, I mean, I think there's an admirable goal behind maybe some of the things that were pushed around the '92 study or '94 legislation or whatever happened, but that's just a recipe in unintended consequences.
MJ: And they correctly should be called out. But at the same time I think just a little bit could be taken as apologizing, or not really apologizing, but whitewashing the banks' role in this. Because it's oh no look over here at what Congress did. I think both things are bad.
MB: Well, they are, but I think it's also important to get all of the information out so that we can learn from it. It's easy to blame one...There's never going to be, it's not like you can just go "oh it's Bernie Madoff". There's not one guy or one entity or one, there's not one bank or one congressman or whatever you can point to.
MJ: No, it's definitely the entire ecology of it.
MJ: All of it interconnecting.
MB: And I think it's important to get the media and a lot of these blogs and internet media and whatever. They all seem to, they want to place blame on one thing. It's important to get all the information out and then look at it and then take a step back and go alright here's where it started, this is why it got worse, and this is how it ended up, and this is what we can do to fix it.
MJ: I could even see this contributing to later things of the banks trying to, "okay you've given us this shit well now we're going to try to change the regulations so we can just dump it on everyone".
MJ: Not realizing that people's with, people's pension funds and everybody wouldn't be chasing this as if it's the next thing. But I think the problem with the financial system, though, that the article a little bit is, I think, letting off the hook is the way things have grown up that happened with no human intervention, with no human knowledge, no human control. I mean, when you have things like the high-frequency trading going on, those kind of unintended consequences can surface before anyone can even know that they're there. They're like earthquakes - all of a sudden they're just there.
MJ: And the fact that we ever allowed that in, I think, a little bit raising up the blame game. Whether you think it's Congress or the banks or whatever, I think there's plenty of blame to go around, but when we get into the blame game rather than purely information about aspects of this, you kind of hide that as the overall problem. It almost doesn't help getting things moving beyond it. Instead we get hung up on messing with the problem itself but not actually fixing it.
MB: Right. Now, well I say one or the other we went and bailed all these banks out and there's obviously an ongoing argument of whether or not we should have done that or whether we shouldn't. But I think it gives banks a little bit of a, "well they bailed us out the last time. There's no consequence to us, so..."
MJ: Well it, that might be something else about the article. Not that it necessarily is blatantly apologizing, but just the subtext just seems to me to be apologetic because it is a little bit, "oh the poor banks are getting beat on and they're not the ones that caused this".
MB: No, well I think the...
MJ: At the same time...well because they are, they did get bailed out. You're kind of defending the people who got bailed out rather then, Congress had gotten bailed out, the banks have gotten bailed out. When is everybody else going to get bailed out?
MB: Right. Well, I think the article just, well at least from my perspective, the article is more trying to say, 'cause right now it's, with Occupy Wall Street and everything else it's basically hate on banks. And this is kind of, "hey wait a minute, it wasn't all the banks' fault". There's a lot of blame to go around.
MJ: Yeah. I guess I just think they took those loan that were, that attempted social engineering. They took that, which no matter what you think of whether it was a good idea or not, I mean I definitely think it had unintended consequences, but they took something that at least had good intentions behind it and they did turn it into shit and distribute it as if it was gold.
MJ: So, if nothing else, the one had good intentions behind it. I don't think you can argue the other one did, particularly. I mean, and maybe that's me bashing on the profit motive, Matt.
MB: Right. Well, yeah. It's kind of one of those, because Congress opened up this flood gate and they ended the risk for lending, somebody was going to make money off of this. You've got these predatory lenders and everything. I mean somebody was going to make money and it was because of all of this.
MJ: Yeah, but a lot of that predatory lending wasn't legal really by most of the laws except the ones that got repealed.
MJ: They went through and repealed a lot those laws between when this thing, when the legislation was introduced to kind of create more bad loans, I guess. When that stuff was out there they couldn't turn around and package this to poison the entire economy with it.
MJ: The banks might have failed and then you could've said, "oh well look what happened when you did that program. No bank could make a profit so they all crashed". But instead the banks turned around and said, "okay if we're going to fail at this we're just going to make shitloads of money and pretend that it's gold". They made it so much exponentially worse, I guess is what it seems like to me.
MB: They did. Well. Like we both said it's kind of, if I were going to place blame I would say it's probably 50-50. Just because without, there wouldn't be one without the other.
MJ: Right. I guess I would probably say 60-40, myself. But it's still a close split. In that sense you and I are a lot closer together than we are far apart.
MB: You're right.
MJ: It just, a little bit to me the article was saying, "oh it's 100% Congress" and maybe that's over-reading the fact that it did come from Hot Air. It is a more Right leaning blog.
MB: Oh it definitely is. Like I said, I think it was more or less just, instead of saying "hey wait a minute, you're all hating on banks right now but they aren't 100% to blame". So...
MJ: Yeah. Well I guess I just think banks do deserve the hate, although certainly Congress also deserves hate.
MB: Yeah. Well.
MJ: But as far as the criticism of Occupy Wall Street, I think if you look at how generally Congress is not approved of by anyone in this country pretty much other than Congress itself.
MB: Yeah, well they're in single digits approval rating right now.
MJ: Yeah. I wouldn't say that the Occupy Wall Streeters are necessarily letting the Congress off the hook per se, it's just they definitely have a much, much more intense dislike of Wall Street at this point.
MB: Right. I don't know, that's all I have unless you have more to add.
MJ: No, not really. I think I was just kind of looking at my notes. I think we pretty well covered things. Okay, we'll be back next episode. Thanks for listening.
MB: Thank you.