Sunday, February 22, 2009

Phil Gramm's FooFooDust Machine

Ticker absolutely demolishes Phil Gramm.

I believe that a strong case can be made that the financial crisis stemmed from a confluence of two factors. The first was the unintended consequences of a monetary policy, developed to combat inventory cycle recessions in the last half of the 20th century, that was not well suited to the speculative bubble recession of 2001. The second was the politicization of mortgage lending--Phil Gramm, WSJournal

That's a statement so blatantly self-serving that it deserves the nuking awarded by Ticker:

You mean to tell me that the creation of 2/28, 3/27 and OptionARM loans was the result of politicization of mortgage lending?

Well, Gramm hopes you're stupid enough to believe that.


Because Gramm was a big part of the problem, that's why.

Step One:

Mr. Gramm, as someone who claims to understand finance, you of all people should know that the law of exponents does not permit the fanciful view you claim bankers had above to be the case.

Advancement in income is a known, published fact - the government puts out this number for personal income (annualized) every month.
It is not possible for home prices to continually advance at a rate that exceeds the growth in personal income, and to the extent that it does, compounding (that is, the mathematical law of exponents) guarantees that a collapse will eventually take place

We're not done yet.

Recall, Phil, the repeal of Glass-Steagall? Why yes, Phil does recall it--he was behind the move.

Moreover, GLB didn't deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies

...quoth Phil.

Yah, but:

That same Federal Reserve then proceeded to remove all reserve requirements through various machinations with sweeps and most recently lobbied for (and got, in the EESA) authority to set reserve levels to zero!

Oh, yes, there's more.

Every single one of the firms that has failed - Fannie, Freddie, AIG, Lehman and Bear Stearns - was operating with more than double the previously-lawful limit of 14:1 leverage at the time of their collapse.

All of them.

That limit was removed due to explicit lobbying by Henry Paulson (then in charge of Goldman Sachs) in front of Congress and the SEC in 2004 - after being rejected on the very same request in 2000.

The fact of the matter, Mr. Gramm, is that absent excessive leverage credit bubbles cannot grow to a dangerous size. Leverage limits prohibit that growth by constraining the ability to grow a balance sheet beyond what tangible capital will reasonably support. The housing bubble, LBO bubble, commercial real-estate bubble and consumer credit bubble had all reached their limit under the previous leverage ratio caps around the 2004 time frame, and so the banking industry went to Congress and the SEC and asked for it to be removed, claiming that they were "better able to manage risk."

And the SEC granted their wish, just like Fairy Godmother! Except the bad news is that there is no Fairy Godmother, and granting wishes in the real world created problems.

Oh, and Phil: that "mental recession" you talked about a quarter back or so? How's that working out for you?

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