Banks, Keynes, Subprime Mortgage Crisis and Great Recession

Posted by PITHOCRATES - September 17th, 2013

History 101

(Originally published June 11th, 2013)

Bringing Borrowers and Lenders Together is a very Important Function of our Banks

Borrowers like low interest rates.  Savers (i.e., lenders) like high interest rates.  People who put money into the bank want to earn a high interest rate.  People who want to buy a house want a low interest rate.  As the interest rate will determine the price of the house they can buy.  Borrowers and lenders meet at banks.  Bankers offer a high enough interest rate to attract lenders (i.e., depositors).  But not too high to discourage borrowers.

This is the essence of the banking system.  And capital formation.  Alexander Hamilton said that money in people’s pockets was just money.  But when the people came together and deposited their money into a bank that money became capital.  Large sums of money a business could borrow to build a factory.  Which creates economic activity.  And jobs.  The United States became the world’s number one economic power with the capital formation of its banking system.  For a sound banking system is required for any advanced economy.  As it allows the rise of a middle class.  By providing investment capital for entrepreneurs.  And middle class jobs in the businesses they build.

So bringing borrowers and lenders together is a very important function of our banks.  And bankers have the heavy burden of determining saving rates.  And lending rates.  As well as determining the credit risk of potential borrowers.  Savers deposit their money to earn one rate.  So the bank can loan it out at another rate.  A rate that will pay depositors interest.  As well as cover the few loans that borrowers can’t pay back.  Which is why bankers have to be very careful to who they loan money to.

Keynesians make Recessions worse by Keeping Interest Rates low, Preventing a Correction from Happening

John Maynard Keynes changed this system of banking that made the United States the world’s number one economic power.  We call his economic theories Keynesian economics.  One of the changes from the classical school of economics we used to make the United States the world’s number one economic power was the manipulation of interest rates.  Instead of leaving this to free market forces in the banking system Keynesians said government should have that power.  And they took it.  Printing money to make more available to lend.  Thus bringing down interest rates.

And why did they want to bring down interest rates?  To stimulate economic activity.  At least, that was their goal.  To stimulate economic activity to pull us out of a recession.  To even eliminate recessions all together.  To eliminate the normal expansion and contraction of the economy.  By manipulating interest rates to continually expand the economy.  To accept a small amount of permanent inflation.  In exchange for a constantly expanding economy.  And permanent job creation.  That was the Keynesian intention.  But did it work?

No.  Since the Keynesians took over the economy we’ve had the Great Depression, the stagflation and misery of the Seventies, the savings and loans crisis of the Eighties, the irrational exuberance and the dot-com bubble crash of the Nineties, the subprime mortgage crisis and the Great Recession.  All of these were caused by the Keynesian manipulation of interest rates.  And the resulting recessions were made worse by trying to keep interest rates low to pull the economy out of recession.  Preventing the correction from happening.  Allowing these artificially low interest rates to cause even more damage.

The Government’s manipulation of Interest Rates gave us the Subprime Mortgage Crisis and the Great Recession

My friend’s father complained about the low interest rates during the Clinton administration.  For the savings rate offered by banks was next to nothing.  With the Federal Reserve printing so much money the banks didn’t need to attract depositors with high savings rates.  Worse for these savers was the inflation caused by printing all of this money eroded the purchasing power of their savings.  So they couldn’t earn anything on their savings.  And what savings they had bought less and less over time.  But mortgages were cheap.  And people were rushing to the banks to get a mortgage before those rates started rising again.

This was an interruption of normal market forces.  It changed people’s behavior.  People who were not even planning to buy a house were moved by those low interest rates to enter the housing market.  Then President Clinton pushed other people into the housing market with his Policy Statement on Discrimination in Lending.  Getting people who were not even planning to buy a house AND who could not even afford to buy a house to enter the housing market.  Those artificially low interest rates pulled so many people into the housing market that this increased demand for houses started raising house prices.  A lot.  But it didn’t matter.  Not with those low interest rates.  Subprime lending.  Pressure by the Clinton administration to qualify the unqualified for mortgages.  And Fannie May and Freddie Mac buying those risky subprime mortgages from the banks, freeing them up to make more risky mortgages.  This scorching demand pushed housing prices into the stratosphere.

A correction was long overdue.  But the Federal Reserve kept pushing that correction off by keeping interest rates artificially low.  But eventually inflation started to appear from all that money creation.  And the Federal Reserve had no choice but to raise interest rates to tamp out that inflation.  But when they did it caused a big problem for those with subprime mortgages.  Those who had adjustable rate mortgages (ARMs).  For when interest rates went up so did their mortgage payments.  Beyond their ability to pay them.  So they defaulted on their mortgages.  A lot of them.  Which caused an even bigger problem.  All those mortgages Fannie Mae and Freddie Mac bought?  They sold them to Wall Street.  Who chopped them up into collateralized debt obligations.  Financial instruments backed by historically the safest of all investments.  The home mortgage.  Only these weren’t your father’s mortgage.  These were risky subprime mortgages.  But they sold them to unsuspecting investors as high yield and low-risk investments.  And when people started defaulting on their mortgages these investments became worthless.  Which spread the financial crisis around the world.  On top of all of this the housing bubble burst.  And those house prices fell back down from the stratosphere.  Leaving many homeowners with mortgages greater than the corrected value of their house.

It was the government’s manipulation of interest rates that gave us the subprime mortgage crisis.  The Great Recession.  And the worst recovery since that following the Great Depression.  All the result of Keynesian economics.  And the foolhardy belief that you can make recessions a thing of the past.

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Banks, Keynes, Subprime Mortgage Crisis and Great Recession

Posted by PITHOCRATES - June 11th, 2013

History 101

Bringing Borrowers and Lenders Together is a very Important Function of our Banks

Borrowers like low interest rates.  Savers (i.e., lenders) like high interest rates.  People who put money into the bank want to earn a high interest rate.  People who want to buy a house want a low interest rate.  As the interest rate will determine the price of the house they can buy.  Borrowers and lenders meet at banks.  Bankers offer a high enough interest rate to attract lenders (i.e., depositors).  But not too high to discourage borrowers.

This is the essence of the banking system.  And capital formation.  Alexander Hamilton said that money in people’s pockets was just money.  But when the people came together and deposited their money into a bank that money became capital.  Large sums of money a business could borrow to build a factory.  Which creates economic activity.  And jobs.  The United States became the world’s number one economic power with the capital formation of its banking system.  For a sound banking system is required for any advanced economy.  As it allows the rise of a middle class.  By providing investment capital for entrepreneurs.  And middle class jobs in the businesses they build.

So bringing borrowers and lenders together is a very important function of our banks.  And bankers have the heavy burden of determining saving rates.  And lending rates.  As well as determining the credit risk of potential borrowers.  Savers deposit their money to earn one rate.  So the bank can loan it out at another rate.  A rate that will pay depositors interest.  As well as cover the few loans that borrowers can’t pay back.  Which is why bankers have to be very careful to who they loan money to.

Keynesians make Recessions worse by Keeping Interest Rates low, Preventing a Correction from Happening

John Maynard Keynes changed this system of banking that made the United States the world’s number one economic power.  We call his economic theories Keynesian economics.  One of the changes from the classical school of economics we used to make the United States the world’s number one economic power was the manipulation of interest rates.  Instead of leaving this to free market forces in the banking system Keynesians said government should have that power.  And they took it.  Printing money to make more available to lend.  Thus bringing down interest rates.

And why did they want to bring down interest rates?  To stimulate economic activity.  At least, that was their goal.  To stimulate economic activity to pull us out of a recession.  To even eliminate recessions all together.  To eliminate the normal expansion and contraction of the economy.  By manipulating interest rates to continually expand the economy.  To accept a small amount of permanent inflation.  In exchange for a constantly expanding economy.  And permanent job creation.  That was the Keynesian intention.  But did it work?

No.  Since the Keynesians took over the economy we’ve had the Great Depression, the stagflation and misery of the Seventies, the savings and loans crisis of the Eighties, the irrational exuberance and the dot-com bubble crash of the Nineties, the subprime mortgage crisis and the Great Recession.  All of these were caused by the Keynesian manipulation of interest rates.  And the resulting recessions were made worse by trying to keep interest rates low to pull the economy out of recession.  Preventing the correction from happening.  Allowing these artificially low interest rates to cause even more damage.

The Government’s manipulation of Interest Rates gave us the Subprime Mortgage Crisis and the Great Recession

My friend’s father complained about the low interest rates during the Clinton administration.  For the savings rate offered by banks was next to nothing.  With the Federal Reserve printing so much money the banks didn’t need to attract depositors with high savings rates.  Worse for these savers was the inflation caused by printing all of this money eroded the purchasing power of their savings.  So they couldn’t earn anything on their savings.  And what savings they had bought less and less over time.  But mortgages were cheap.  And people were rushing to the banks to get a mortgage before those rates started rising again.

This was an interruption of normal market forces.  It changed people’s behavior.  People who were not even planning to buy a house were moved by those low interest rates to enter the housing market.  Then President Clinton pushed other people into the housing market with his Policy Statement on Discrimination in Lending.  Getting people who were not even planning to buy a house AND who could not even afford to buy a house to enter the housing market.  Those artificially low interest rates pulled so many people into the housing market that this increased demand for houses started raising house prices.  A lot.  But it didn’t matter.  Not with those low interest rates.  Subprime lending.  Pressure by the Clinton administration to qualify the unqualified for mortgages.  And Fannie May and Freddie Mac buying those risky subprime mortgages from the banks, freeing them up to make more risky mortgages.  This scorching demand pushed housing prices into the stratosphere.

A correction was long overdue.  But the Federal Reserve kept pushing that correction off by keeping interest rates artificially low.  But eventually inflation started to appear from all that money creation.  And the Federal Reserve had no choice but to raise interest rates to tamp out that inflation.  But when they did it caused a big problem for those with subprime mortgages.  Those who had adjustable rate mortgages (ARMs).  For when interest rates went up so did their mortgage payments.  Beyond their ability to pay them.  So they defaulted on their mortgages.  A lot of them.  Which caused an even bigger problem.  All those mortgages Fannie Mae and Freddie Mac bought?  They sold them to Wall Street.  Who chopped them up into collateralized debt obligations.  Financial instruments backed by historically the safest of all investments.  The home mortgage.  Only these weren’t your father’s mortgage.  These were risky subprime mortgages.  But they sold them to unsuspecting investors as high yield and low-risk investments.  And when people started defaulting on their mortgages these investments became worthless.  Which spread the financial crisis around the world.  On top of all of this the housing bubble burst.  And those house prices fell back down from the stratosphere.  Leaving many homeowners with mortgages greater than the corrected value of their house.

It was the government’s manipulation of interest rates that gave us the subprime mortgage crisis.  The Great Recession.  And the worst recovery since that following the Great Depression.  All the result of Keynesian economics.  And the foolhardy belief that you can make recessions a thing of the past.

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The Problem with the Occupy Wall Street People is that they don’t Know the Difference between Capitalism and Crony Capitalism

Posted by PITHOCRATES - October 15th, 2011

Bank Tellers have a Job because they didn’t go to College to get a Philosophy or an English Degree

Another proud day for American public education and American colleges (see Protesters arrested in bank march, party in Times Square by Georgett Roberts, Jennifer Bain and Kevin Fasick posted 10/15/2011 on the New York Post).

The “Crossroads of the World” were jammed when thousands of anti-greed protesters brought their party to Times Square, capping a day of marches marred by the arrest of more than 20 who stormed a Citibank branch.

And what do they want?  A lot of free stuff.  The greedy little bastards.

Brought their ‘party’?  Yeah, that about sums up these beatniks on Wall Street.  For them life is nothing but a party.  And a protest is an even better party.  I mean, look at them.  They’re having the time of their lives.

Earlier, 24 protesters were arrested when a mob stormed a LaGuardia Place Citibank and shouted slogans as two demonstrators closed their bank accounts in protest just after 2 p.m.

I hope they find a safe place for that money.  There are a lot of desperate people out there who need money.  And it would have been a lot harder for them to get at that money if they had left it locked in a bank.

They were screaming and chanting while they were going in. Security told them to leave, but they didn’t. They stood in a group chanting things to the tellers. There were locked in, and then they were taken away.”

If I’m not mistaken bank tellers aren’t part of that superrich 1%.  No.  They’re probably a part of that 99%.  Like the protesters.  Only they have a job.  Unlike the protestors.  Because they didn’t go to college to get a philosophy or English degree.

“We went into the bank to peacefully protest,” she said. “People were standing in the bank giving testimonials, speaking about their student debt, some of which is held by Citibank and a few undercover police officers came into the bank”

These people partied for 4 years (or more) while going to college getting their worthless degrees.  And learning how to hate America.  And the man.  And now they’re bitching to complete strangers about their own bad decisions?  Taking on debt for some BS degree?  Mom and Dad probably warned them not to do that.  To get a degree in something useful instead.  Like business.  Accounting.  Chemistry.  Something that has value in the economy.  But did they listen?  Apparently not.

He said he paid $559 annually in fees to the bank, including late charges.

“I’ve been wanting to move my money for awhile. But this opened my eyes,” he said of his experiences. “I’m going to use a community-based bank for my funds.”

This is just like someone living in East Berlin at the height of the Cold War waiting for their chance to escape to West Berlin.  To scale the Berlin Wall.  Before the East Germans shot him.  Or her.  Of course, there are some subtle differences.  East Germany was an oppressive police state that killed people trying to escape.  While America is a free county.  With a free market.  Where you can move your money to any bank you wish.  Without the threat of being gunned down by the state.

We call this free market capitalism.  Businesses compete for you business by pleasing you more than their competition.  You don’t need a law to make banks please you.  If you don’t like how a bank is treating you, leave.  All you have to do is open a new account.  Withdraw your money from the old account.  And deposit it into the new account.  It’s that easy.  It sure is a hell of a lot easier than trying to
climb a barbwire wall under withering machine gun fire.

If Government Favoritism Bothers you Perhaps you should Direct your Angst at Washington D.C. at the Next Election

These protestors may hate capitalism.  Because they were taught that on our college campuses.  But they sure love some of its billionaires.  Even though they belong to that 1% (see Protesters should not target entrepreneurs like Steve Jobs by Antony Davies posted 10/12/2011 on The Morning Call).

Steve Jobs, the co-founder of Apple who died last week at age 56, left the world a better place than he found it — and not just because of the treasure trove of gadgets he shepherded into creation.

Mr. Jobs’ life is a testament to what economists have long been telling us — that wealth and plunder are not the same thing. Plunder is what you get when you take from others. Wealth is what you get when you give to others.

Due to his commercial success, Mr. Jobs accumulated $8 billion of wealth over his life. But you won’t see Occupy Wall Street protesters coming after Jobs or Apple because it is so obvious that we freely gave our money to him in exchange for his products. We don’t view Jobs’ wealth as plunder, but as one-half of a transaction. We gave him $8 billion and he gave us the world that science fiction authors promised.

We voluntarily gave our money to billionaire like Steve Jobs.  The Occupy Wall Street mob is trying to take money from others.  The Steve Jobs of the world create wealth because they please us.  People like those on Wall Street threaten us for plunder or else.  Steve Jobs good.  Plunderers bad.

The young protesters currently occupying Wall Street should be careful where they direct their ire. People like Steve Jobs who gained their wealth by providing value to others — including the protesters using iPhones to call their friends — shouldn’t be the subject of protest. The protesters should focus their ire on those who use the political process to gain plunder by forcing the rest of us to subsidize their losing business models.

Some of these pirates can be found on Wall Street. They benefited when the government forced taxpayers to underwrite Fannie Mae and Freddie Mac’s largesse, and they benefited when the government forced taxpayers to bail out the companies that bet on that largesse.

But they’re not just in New York City.

Let us not forget that Fannie Mae and Freddie Mac are Government Sponsored Enterprises.  With close ties to the government.  Executing government policy.  And being under the official oversight of the government.  In particular, at the time of the subprime mortgage crisis, Barney Frank and Chris Dodd.  Who kept saying there’s nothing wrong with Freddie or Fannie.  That they were both as sound as a pound.  All the way up to the Great Recession.  Which they caused.

Pirates can be found on Main Street, where businessmen ask the government to create an unfair licensing system that will hamstring their competitors. They can be found in the public sector, where public unions ask the government to maintain a system that forces us to use the U.S. Postal Service to send first-class mail. Some can even be found on the farm, when they fight to maintain government requirements to put ethanol in our gas tanks and pay huge tariffs on imported sugar.

Here’s my point. Pirates can be found in all cities, and in all sectors, but their power to plunder has its source in one city: Washington, D.C. The federal government and the businesses that use political ties to force their products on consumers aren’t creating value — they’re enriching themselves at our expense. If protesters want to stop the plunder, then they are protesting in the wrong place.

That’s right, it takes two to tango.  And to plunder.  Lobbyists can’t lobby politicians unless they’re for sale.  Corporations can’t plunder unless they have cronies in Washington letting them.  By restricting competition.  And this is the key difference between capitalism (such as Steve Jobs used) and crony capitalism (such as what everyone is pissed off about).  It’s is crony capitalism that gets special favors from government.  In exchange for campaign contributions.

So if this kind of government favoritism bothers you, perhaps you should direct your angst to those who make the rules.  Washington D.C.  And by that I mean at the voting booth at the next election.  The way real democracy works.

The Occupy Wall Street Protestors have no Idea about Capital, Labor, Regulatory, Distribution, Insurance or Piracy Costs

And speaking of piracy, let’s talk about that a little.  And I’m not talking about bootlegging music or movies.  I’m not about literal pirates on the high seas (see Prepare to repel boarders posted 10/13/2011 on The Economist).

SOMALI pirates can be persistent. They have attacked the Maersk Alabama, a container ship owned by an American subsidiary of Denmark’s Maersk Line, no fewer than five times, most recently in May. In the first attack, in 2009, the captain was held hostage until the US Navy rescued him. Then Maersk put private armed guards on the ship. Since then, it has successfully repelled all boarders.

Maersk says it is only arming a few ships plying the pirate-infested waters off East Africa. But the practice is spreading rapidly among shipping firms despite the cost, which can run to $100,000 per voyage for a four-man team. That is because the number of attacks, off Somalia and elsewhere, has kept growing despite the strengthening of naval patrols (see chart). The European Union’s NAVFOR task-force, NATO warships and other navies patrol the waters off Somalia, but this has only pushed the pirates out into the open ocean, extending their attack zone towards India’s coast and as far south as Mozambique’s. This has forced the shipping industry, its insurers, and the national and international authorities that oversee them to accept that private armed guards are a necessity.

American ships plying these waters are bringing American-made goods to overseas markets.  Which everyone agrees is vital to our economy.  A positive balance of trade.  More exports.  Less imports.  And here we are trying to deliver our exports.  And having our ships hijacked by pirates.

Protestors hate corporations.  Because that’s where rich people sit back with their feet up on their desk puffing away on their fat cigars.  While counting their money.  At least, that’s what the protestors think.  They have no idea about the capital costs for plant and equipment.  Labor costs.  Regulatory costs.  Distribution (container ships ain’t cheap).  Insurance.  And, of course, piracy on the high seas and ransom demands.

Protestors are no fans of military spending, either.  They think the military is used just to invade other countries so we can steal their oil.  Well, they can’t blame this Somali piracy on America.  For the Somalis are stealing from anyone.  And nations everywhere have banded together to try and protect their trade routes.  But can’t.  Which is pretty sad.  Because during World War II we eventually defeated the U-Boat menace in the North Atlantic.  Of course, back then, we spent what was necessary on the military to win.  Unlike today.  Where the military budget is just a source of funds the Wall Street protestors want to plunder.

The Occupy Wall Street protestors are Acting like Spoiled Children, Like a Bunch of Eric Cartmans

The Occupy Wall Street protestors hate banks.  Capital formation.  Corporations.  That is, capitalism.  How do we know this?  Because they have told us.  Via Twitter.  Blogs.  YouTube.  Which they wrote and/or recorded on their Apple products.  And uploaded it to the Internet.  That we then downloaded on our Apple products.  Or other devices.  All of which made possible by banks, capital formation and corporations.  That is, capitalism.

These kids love capitalism.  They love the toys capitalism offers.  They just hate not being born into privilege.  Where they can afford to satisfy every want and urge as soon as they have it.  Without having to work hard or wait until they can afford to pay for these things.  They’re acting like spoiled children.  Like a bunch of Eric Cartmans.  Except for that part about being a bunch of filthy, stinking hippies.  For everyone knows that hippies are the bane of Cartman’s existence.  But apart from that one difference, these protestors are Eric Cartman.

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