Our financial system is crumbling this week.

[heyzeus]

Someday I will post the "Our financial system's crumbles are reforming!" thread. But it's not quite yet.

btw, the economic definition of recession/depression is based on the number of consecutive quarters where GDP declines. So technically, yes, the recession is over. But in real terms, the effects are far from over.

[Michael]

btw, the economic definition of recession/depression is based on the number of consecutive quarters where GDP declines. So technically, yes, the recession is over. But in real terms, the effects are far from over.

There's no specific technical definition anymore. NBER defines it.

In the United States the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales."[8] Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end.

http://en.wikipedia.org/wiki/Recession#Identifying

[Hungary Jack]

Interesting NY Time story on the mortgage meltdown. Given the propensity here to rip markets and capitalism, it's worth checking out.

Management and regulatory failure fueled mortgage crisis

A few choice excerpts:

At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings — made as far back as 2002 — neither the bank’s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California.

No surprise that lenders were playing fast and loose with loans given the real estate boom and the fact that lenders could offload risk through securitization, which found a very willing set of buyers in Fannie and Freddie.

Many bank examiners acknowledge they were lulled into believing the good times for banks would last. They also concede that they were sometimes reluctant to act when troubles surfaced, for fear of unsettling the housing market and the economy.

In other words, the regulators failed.

Regulators have begun to act on some of the lessons learned. Federal officials are discussing whether to impose hard limits, not just soft guidelines, on the portion of bank balance sheets that can be made up of commercial real estate loans. That would automatically prevent the buildup of risky assets and take more discretion out of the examiners’ hands.

This sounds like a step in the right direction, although the banks will squawk about this. The bigger issue is regulatory processes that rely on the discretion of individuals rather than consistent standards applied broadly. All government regulation is subject to capture, but getting individual judgment out of the process is probably the lesser of two evils.

[Cheddar Tom]

http://online.wsj.com/article/SB125858925917154669.html

gov't can now break up firms that are too big to fail...depending on the HR and senate vote.

[cpebbles]

No surprise that lenders were playing fast and loose with loans given the real estate boom and the fact that lenders could offload risk through securitization, which found a very willing set of buyers in Fannie and Freddie.

Can we drop the notion that Fannie and Freddie were the culprits in all of this? They may have been first into the subprime market, but as soon as Gramm-Leach did away with Glass-Steagal, the private sector got deeper into the market than Fannie and Freddie ever were.

What gets lost in all of the scapegoating by conservatives is that the Republicans just wanted to push the GSEs out of the way to clear the path for private companies. Seeing as these companies effectively became GSEs as soon as they were in danger of insolvency, that makes any Republicans who supported the bailouts hypocritical corporate whores.

[Hungary Jack]

No surprise that lenders were playing fast and loose with loans given the real estate boom and the fact that lenders could offload risk through securitization, which found a very willing set of buyers in Fannie and Freddie.

Can we drop the notion that Fannie and Freddie were the culprits in all of this? They may have been first into the subprime market, but as soon as Gramm-Leach did away with Glass-Steagal, the private sector got deeper into the market than Fannie and Freddie ever were.

What gets lost in all of the scapegoating by conservatives is that the Republicans just wanted to push the GSEs out of the way to clear the path for private companies. Seeing as these companies effectively became GSEs as soon as they were in danger of insolvency, that makes any Republicans who supported the bailouts hypocritical corporate whores.

Fannie and Freddie own half the mortgages in the US. They did not originate these loans. They were a big part, but certainly not the only part, of the demand side of the market for mortgage securities.

I don't view this as a partisan issue. Both Democrats and Republicans are capable of spectacular governmental failure.

[TimeForGuinness]

http://online.wsj.com/article/SB125858925917154669.html

gov't can now break up firms that are too big to fail...depending on the HR and senate vote.

i'm guessing that power was reserved for companies that were considered monopolies and stifled competition.

[greenback44]

The article implies Haven was taken down by commercial real estate loans. That's not Fannie or Freddie's bailiwick.

The article is a fair description of examples of regulatory failure. Hard-and-fast standards don't necessarily solve that problem though, as that's pretty much setting a target for "creative" accountants and financial engineers.

[Arthur Dent]

No surprise that lenders were playing fast and loose with loans given the real estate boom and the fact that lenders could offload risk through securitization, which found a very willing set of buyers in Fannie and Freddie.

Can we drop this meme? The GSEs had been around long before this crisis and actually lost market share as the bubble inflated.

Interesting NY Time story on the mortgage meltdown. Given the propensity here to rip markets and capitalism, it's worth checking out.

I see absolutely nothing in that article to indicate that ripping financial markets is not entirely appropriate. It points out that regulators failed to stop a looming problem. Well, duh. That doesn't change the fact that market players massively misallocated capital driving themselves into bankruptcy and the rest of us out of work.

Regulators clearly did a horrible job due to a combination of incompetence, the finance industry's power in Washington, and an ideology that said that regulation was unnecessary or harmful because market participants' self-interest would protect us all. That's clearly nonsense. It's amusing to watch the contortions market apologists go through to avoid seeing the obvious. Reminds me of this:

http://en.wikipedia.org/wiki/Disconfirmed_expectancy

Disconfirmed expectancy was illustrated by Leon Festinger in the 1956 book When Prophecy Fails. This book gave an inside account of belief persistence in members of a UFO doomsday cult, and documented the increased proselytization they exhibited after the leader's "end of the world" prophecy failed to come true.
...

Although some members abandoned the group when the prophecy failed, most of the members lessened their dissonance by accepting a new belief: that the planet was spared because of the faith of the group.

[Hungary Jack]

Perhaps when the market naysayers can propose a reasonable alternative we can have a real discussion rather than bizarre references to cults.