Mitt Romney: No Apology: Chapter Five: Part B: What Went Wrong and What To Do Now . Romneys Economic Wish List. The Devil Will Be In The Details.

November 7, 2010 by
Filed under: Uncategorized 

Chairman Grenspan Of The Federal Reserve Testifying To Congress That He Never Expected Bankers To Act Against Their Own And Share Holders Self Interest In Regard To The Real Estate Bubble.  

 

 

 THE CAUSE

Romney explains his take on what caused the subprime mortgage bubble. He notes that housing price growth had increased steadily for around fifty years. The U.S Average Housing Price Index had risen from 105 in 1950  to 120 By  2000.  Suddenly in 2006 it had jumped to 200 in just 6 years. The cause of this according to Romney was: first politician’s wanted to increase  home ownership so the Federal Loan guarantors Fannie Mae and Freddie Mac were pressured to loosen creditor requirements. Home loans were made to persons with doubtful ability to repay the loans. However, prices were going up so even if a doubtful risk could not repay the loan he could always sell and get out with a profit after repaying the loan.   Banks kept making ever bigger loans to ever more doubtful creditors. Wall Street was happy to securitize packages of loans and sell them to investors.

The bubble grew while interest rates were low, however when interest rates started to tick up in 2008 the rate of foreclosures increased, housing values stalled and started to decline. Then the bubble burst. The securities sold by Wall Street declined in value or could not be assigned a value at all and investment banks holding securities for themselves or in hedge funds they managed  went bankrupt while others required a government bailout, including the insurance companies that insured the securities.  This spread into the general economy when millions of people learned their homes were worth less and  their pension plans and 401k’s were worth about half of what they were worth as a result of the bond market losses spreading to the stock market.

Consumer confidence went down and demand fell. A recession set in and layoffs multiplied.

(Here’s what he doesn’t mention. After 9/11 the Federal Reserve led by Chairman Greenspan lowered interest rates to less than one per cent to stimulate the economy. This actually was a negative interest rate when inflation, which was low, was added in. Low interest rates made it easier to buy a house . The Federal Reserve had the regulatory power to set requirements for creditors to meet for a home loan. Greenspan and other members of the Federal Reserve did not exercise this power because the prevailing philosophy of the Bush Administration and the Federal Reserve was the less regulation of the economy the better  and  that a  free market will always regulate itself .

Later, Greenspan testified before Congress on this issue saying, I never thought bankers would act against their own self interest, [in making and securitizing bad loans.] However whatever  the Federal Reserve thought a free market did not exist and probably could never exist in an economy as complex as the U.S economy.  Private interests acting in their own, short sighted, self interest did things like issuing and later securitizing NINJA loans to home buyers (No Income, No Job, No Assets.)

None of this would have happened if interest rates were not so low in the first place. After 9/11 purchasers of high grade bonds like pension funds , insurance companies, endowment funds and conservative investors in general had nowhere to invest to receive a reasonable return to beat inflation.  

Wall Street met that demand by securitizing packages of home loans and by sleight of hand arranging for rating agencies like Moody’s to give them the highest rating for safety.  This satisfied trustees and others that they had met their fiduciary requirements when they bought the bonds from the Wall Street salesman who operated on the principal of caveat emptor or let the buyer beware.

Thus if 9/11 had not happened, if interest rates were not lowered to stimulate the economy, if the Federal Reserve had enforced the regulations on the standards for home loans, if  buyers of bonds had exercised more discretion, if Congress had acted, if banks had acted more discreetly in lending and most of all if Wall Street had not deceived their institutional clients that they were buying low risk bonds when they were actually buying high risk trash maybe the subprime bubble would not have occurred.  What would have happened if  9/11 never occurred is anybody’s guess.)

THE SOLUTION

Romney is in agreement with the two stimulus packages that have been passed to restore the economy. Although he thinks the second stimulus package came late and many parts  of the stimulus packages, especially the democratic package contained pet projects that did not stimulate the economy or create needed jobs.

Now the bad parts of the stimulus packages should be redirected to business development and taxes on business should be lowered. This would stimulate the economic engine and jobs would be created.

(This is an oversimplification as  American business has ample cash in their treasuries already. If every business hired a pro rata share of the unemployed this would end high unemployment put cash in the hands of consumers and create greater demand for the goods and services of American business. Then there would be no need for stimulus packages or further bailouts.)

ROMNEY’S ECONOMIC AGENDA

Romney thinks the following are also necessary to stimulate the economy and promote growth , low taxes, dynamic regulation, educational achievement, investment in research, robust competition, free trade, energy security, purposeful immigration, elimination of government waste,  elimination  of excessive litigation, control of unsustainable entitlement liabilities, control of runaway healthcare costs and energy independence. This he says is his economic agenda for America. (Sounds like Mitch McConnell, No.)

(These are all pie in the sky generalities of course. The devil will be in the details and deciding whose ox will be gored. There is nothing in here about climate change, or green technology or even the application of nuclear power which the index says will be discussed later.)   

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Comments

2 Comments on Mitt Romney: No Apology: Chapter Five: Part B: What Went Wrong and What To Do Now . Romneys Economic Wish List. The Devil Will Be In The Details.

  1. World Spinner on Thu, 11th Nov 2010 3:25 pm
  2. Mitt Romney: No Apology: Chapter Five: Part B: What Went Wrong and ……

    Here at World Spinner we are debating the same thing……

  3. Daniel on Fri, 17th Dec 2010 4:59 am
  4. great post, thanks for sharing

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