Will you write about the Great Pandemic Money-Printing (GPMP) of 4+T USD that took place since Mar 2020 and is still ongoing to the tune of 120B/month as of Oct 2021?
Matthew - I assume you have read Peter Wallison’s “Hidden in Plain Sight.” I think Wallison has the fundamentals correct: government (with it’s “everyone should own their own home” mantra) skewed the market through legislation and administrative tinkering in the housing market. Lots of folks who have a good grasp on the 2007-08 meltdown place too much blame on the Fed (IMO). True, the Fed may have been one of the enablers. But I find your observation a bit more insightful: “What this means is that the trillions of dollars printed as part of the post-crash policy of quantitative easing were not actually printed from 2008 through 2014. In reality, those dollars were really printed in the form of implied insurance from 1995 through 2007.”
I read about this, editorial pages on the Wall Street Journal warning about the coming crisis with Freddie Mac and Fannie Mae, for years. When it tumbled, I was not surprised but was dismayed at the misrepresentation of the whole thing by the media, and by the lack of consequence to the responsible parties. History does rhyme, but as you are telling us, continues. I've been watching your interviews and thank you for staying on point regardless of the questions.
I began following you well after this was written so I just read it when you linked to it yesterday. Your perspective is interesting. I experienced the meltdown from a very unique perspective. My wife worked for the asset-backed group for one of the biggest players in the market at the time and I was in the leveraged finance space working primarily with middle-market PE firms. I watched CDOs commit millions to leveraged deals minutes after investor meetings simply based on the S&P rating of the issue. These were deals it took a good week to do a quality underwriting on for a leveraged finance shop. My wife told me a story about a rating on a CLO deal. S&P was going to give it an unfavorable rating. The team went back to them and told them that if they refused to grant the more favorable rating, her firm would just go with Moody and not pay S&P for their rating. S&P relented.
These experiences taught me that it took MANY co-conspirators to get to where we were. Naive investors, unscrupulous underwriters, and a regulatory environment that, as you aptly point out, not only turned a blind eye to the situation, but actively participated in its creation to the detriment of our entire economy.
This article misses the point. Greenspan and his successor Bernanke were complete failures as regulators because they were friends of Big Bankers: Greenspan ignored a 1998 petition by 30,000 home appraisers describing a a rampant practice by loan brokers (and bankers, since these loans became mortgage backed securities) to extort said appraisers into raising housing prices on loan applications by 30-60%, and so provide brokers with higher fees and fat yield spread premiums on short term, low interest loan rates that would reset in a few years. The bankers were in effect robbing their own banks, lending money against fictitiously high home prices to increase their fees. Brokers were trained to target minorities with predatory lending; add in the rampant altering of loan documents by brokerages who altered loan (and Home Equity Lines of Credit) applications by robo-signing and increasing stated income, and the system became rife with fraudulent loans that Investment Banks sold to investors. These actions constitute federal crimes in several ways, but the bankers bought off the incoming Obama administration and prevented criminal referrals to the Dept of Justice. Before Obama, Bush II did practically nothing to rein in criminogenic environment, after Clinton in the ‘90s had gutted staff in regulatory agencies such as the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Listen to the Bill Black interviews on the Real News Network to learn a ton more: the political and banking system was and is still rotten to the core.
Well, I will always continue to believe that deregulation of financial markets played a role, but what do I know. And yes, I did know the biggest players did know what was going on - I never did believe in the sanctity of Wall Street, but thought everyone else seemed to think it was all cool. (lived & worked in NYC in late 80s & heard or read lots of stories)
One point worth making explicitly here is that loan guarantee schemes pretty much only benefit banks and developers. They don't benefit the people who take out loans they can't afford who must also pay prices inflated by the spigot of free money and thus borrow even greater sums than the ones they already couldn't afford. Perhaps they benefit the existing owners of the goods for which loans are guaranteed, whose asset inflates at a greater rate than the price of other assets. Although any benefit those people gain is offset by the losses their children must endure. No the people who gain are the banks who make risk free profits and the developers who are assured a heightened (or at least pulled forward) demand for their goods.
The same argument can be made for student loans, and even to a great extent the student loan "writeoffs".
I’m a little confused by the dates of this paragraph:
“What this means is that the trillions of dollars printed as part of the post-crash policy of quantitative easing were not actually printed from 2008 through 2014.
In reality, those dollars were really printed in the form of implied insurance from 1995 through 2007!”
First, are your saying that the banks made the money by issuing the loans, and the Fed insured the new money by rating the securities AAA?
And then is the point of the graph that the later purchases of those assets that increased the Fed balance sheet in QE simply the activation of that implies insurance that kept the previously created dollars in circulation?
If so then my main point of confusion is the significance of 2007.
After reading I scanned again and I think you only mention 2007 that one time.
Where would those dollars created show up if they preceded the balance sheet? M2?
I just took a look at M1 and M2 over time and it does seem like M2 has an inflection point of increasing slope around 1998 that M1 doesn’t have.
I knew the mortgage bond scheme was basically a giant ponzi scheme in 2005 and called it out to many people. I have no dealings with Wall Street nor am I a financial guru. It certainly didn't take a rocket scientist or someone with insider knowledge to see the collapse coming.
If people on Wall Street couldn't see it, well, it's likely they didn't want to or maybe they're not the brightest of bulbs.
I have heard the repeal of the Glass-Steagall bill played a role as the investment and commercial side of banking were now able to mingle once again much like during the roaring 20's.
So basically, they—the inside of the inside of the inside—knew it would collapse and knew they would bail them out…?
Good times.
Will you write about the Great Pandemic Money-Printing (GPMP) of 4+T USD that took place since Mar 2020 and is still ongoing to the tune of 120B/month as of Oct 2021?
Matthew you’re terrific. Be blessed
Thank you for explaining what happened so eloquently!!
Matthew - I assume you have read Peter Wallison’s “Hidden in Plain Sight.” I think Wallison has the fundamentals correct: government (with it’s “everyone should own their own home” mantra) skewed the market through legislation and administrative tinkering in the housing market. Lots of folks who have a good grasp on the 2007-08 meltdown place too much blame on the Fed (IMO). True, the Fed may have been one of the enablers. But I find your observation a bit more insightful: “What this means is that the trillions of dollars printed as part of the post-crash policy of quantitative easing were not actually printed from 2008 through 2014. In reality, those dollars were really printed in the form of implied insurance from 1995 through 2007.”
I need to reread! thank you!
No mention of Austrian business cycle theory?
I read about this, editorial pages on the Wall Street Journal warning about the coming crisis with Freddie Mac and Fannie Mae, for years. When it tumbled, I was not surprised but was dismayed at the misrepresentation of the whole thing by the media, and by the lack of consequence to the responsible parties. History does rhyme, but as you are telling us, continues. I've been watching your interviews and thank you for staying on point regardless of the questions.
I began following you well after this was written so I just read it when you linked to it yesterday. Your perspective is interesting. I experienced the meltdown from a very unique perspective. My wife worked for the asset-backed group for one of the biggest players in the market at the time and I was in the leveraged finance space working primarily with middle-market PE firms. I watched CDOs commit millions to leveraged deals minutes after investor meetings simply based on the S&P rating of the issue. These were deals it took a good week to do a quality underwriting on for a leveraged finance shop. My wife told me a story about a rating on a CLO deal. S&P was going to give it an unfavorable rating. The team went back to them and told them that if they refused to grant the more favorable rating, her firm would just go with Moody and not pay S&P for their rating. S&P relented.
These experiences taught me that it took MANY co-conspirators to get to where we were. Naive investors, unscrupulous underwriters, and a regulatory environment that, as you aptly point out, not only turned a blind eye to the situation, but actively participated in its creation to the detriment of our entire economy.
One day there is a reckoning. The claw backs will be epic.
This article misses the point. Greenspan and his successor Bernanke were complete failures as regulators because they were friends of Big Bankers: Greenspan ignored a 1998 petition by 30,000 home appraisers describing a a rampant practice by loan brokers (and bankers, since these loans became mortgage backed securities) to extort said appraisers into raising housing prices on loan applications by 30-60%, and so provide brokers with higher fees and fat yield spread premiums on short term, low interest loan rates that would reset in a few years. The bankers were in effect robbing their own banks, lending money against fictitiously high home prices to increase their fees. Brokers were trained to target minorities with predatory lending; add in the rampant altering of loan documents by brokerages who altered loan (and Home Equity Lines of Credit) applications by robo-signing and increasing stated income, and the system became rife with fraudulent loans that Investment Banks sold to investors. These actions constitute federal crimes in several ways, but the bankers bought off the incoming Obama administration and prevented criminal referrals to the Dept of Justice. Before Obama, Bush II did practically nothing to rein in criminogenic environment, after Clinton in the ‘90s had gutted staff in regulatory agencies such as the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Listen to the Bill Black interviews on the Real News Network to learn a ton more: the political and banking system was and is still rotten to the core.
Well, I will always continue to believe that deregulation of financial markets played a role, but what do I know. And yes, I did know the biggest players did know what was going on - I never did believe in the sanctity of Wall Street, but thought everyone else seemed to think it was all cool. (lived & worked in NYC in late 80s & heard or read lots of stories)
One point worth making explicitly here is that loan guarantee schemes pretty much only benefit banks and developers. They don't benefit the people who take out loans they can't afford who must also pay prices inflated by the spigot of free money and thus borrow even greater sums than the ones they already couldn't afford. Perhaps they benefit the existing owners of the goods for which loans are guaranteed, whose asset inflates at a greater rate than the price of other assets. Although any benefit those people gain is offset by the losses their children must endure. No the people who gain are the banks who make risk free profits and the developers who are assured a heightened (or at least pulled forward) demand for their goods.
The same argument can be made for student loans, and even to a great extent the student loan "writeoffs".
I’m a little confused by the dates of this paragraph:
“What this means is that the trillions of dollars printed as part of the post-crash policy of quantitative easing were not actually printed from 2008 through 2014.
In reality, those dollars were really printed in the form of implied insurance from 1995 through 2007!”
First, are your saying that the banks made the money by issuing the loans, and the Fed insured the new money by rating the securities AAA?
And then is the point of the graph that the later purchases of those assets that increased the Fed balance sheet in QE simply the activation of that implies insurance that kept the previously created dollars in circulation?
If so then my main point of confusion is the significance of 2007.
After reading I scanned again and I think you only mention 2007 that one time.
Where would those dollars created show up if they preceded the balance sheet? M2?
I just took a look at M1 and M2 over time and it does seem like M2 has an inflection point of increasing slope around 1998 that M1 doesn’t have.
I knew the mortgage bond scheme was basically a giant ponzi scheme in 2005 and called it out to many people. I have no dealings with Wall Street nor am I a financial guru. It certainly didn't take a rocket scientist or someone with insider knowledge to see the collapse coming.
If people on Wall Street couldn't see it, well, it's likely they didn't want to or maybe they're not the brightest of bulbs.
I have heard the repeal of the Glass-Steagall bill played a role as the investment and commercial side of banking were now able to mingle once again much like during the roaring 20's.