Reply With Quote
I'm skeptical that more aggressive propping up of the housing sector would have been a good idea, but Mr. Barofsky is surely right to point out that was part of the bargain and his points related to socialization/moral hazard are apt.
http://www.nytimes.com/2011/03/30/op...=1&ref=opinionWhere the Bailout Went Wrong
by Neil Barofsky
TWO and a half years ago, Congress passed the legislation that bailed out the country’s banks. The government has declared its mission accomplished, calling the program remarkably effective “by any objective measure.” On my last day as the special inspector general of the bailout program, I regret to say that I strongly disagree. The bank bailout, more formally called the Troubled Asset Relief Program, failed to meet some of its most important goals.
From the perspective of the largest financial ins utions, the glowing assessment is warranted: billions of dollars in taxpayer money allowed ins utions that were on the brink of collapse not only to survive but even to flourish. These banks now enjoy record profits and the seemingly permanent compe ive advantage that accompanies being deemed “too big to fail.”
Though there is no question that the country benefited by avoiding a meltdown of the financial system, this cannot be the only yardstick by which TARP’s legacy is measured. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals, including protecting home values and preserving homeownership.
These Main Street-oriented goals were not, as the Treasury Department is now suggesting, mere window dressing that needed only to be taken “into account.” Rather, they were a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide.
The act’s emphasis on preserving homeownership was particularly vital to passage. Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and, to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directs the department to do just that.
But it has done little to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial ins utions, a shift that came with the express promise that it would restore lending.
Treasury, however, provided the money to banks with no effective policy or effort to compel the extension of credit. There were no strings attached: no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request that banks report how they used TARP funds. It was only in April of last year, in response to recommendations from our office, that Treasury asked banks to provide that information, well after the largest banks had already repaid their loans. It was therefore no surprise that lending did not increase but rather continued to decline well into the recovery. (In my job as special inspector general I could not bring about the changes I thought were needed — I could only make recommendations to the Treasury Department.)
Meanwhile, the act’s goal of helping struggling homeowners was shelved until February 2009, when the Home Affordable Modification Program was announced with the promise to help up to four million families with mortgage modifications.
That program has been a colossal failure, with far fewer permanent modifications (540,000) than modifications that have failed and been canceled (over 800,000). This is the well-chronicled result of the rush to get the program started, major program design flaws like the failure to remedy mortgage servicers’ favoring of foreclosure over permanent modifications, and a refusal to hold those abysmally performing mortgage servicers accountable for their disregard of program guidelines. As the program flounders, foreclosures continue to mount, with 8 million to 13 million filings forecast over the program’s lifetime.
Treasury Secretary Timothy Geithner has acknowledged that the program “won’t come close” to fulfilling its original expectations, that its incentives are not “powerful enough” and that the mortgage servicers are “still doing a terribly inadequate job.” But Treasury officials refuse to address these shortfalls. Instead they continue to stubbornly maintain that the program is a success and needs no material change, effectively assuring that Treasury’s most specific Main Street promise will not be honored.
Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior. This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller ins utions, which continue to struggle.
Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial ins utions.
In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.
It wasn’t meant to be that. Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.
Neil M. Barofsky was the special inspector general for the Troubled Asset Relief Program from 2008 until today.
I'm skeptical that more aggressive propping up of the housing sector would have been a good idea, but Mr. Barofsky is surely right to point out that was part of the bargain and his points related to socialization/moral hazard are apt.
I think the main problem is that the middle class didn't want the party to end. Unfortunately middle class wealth is tied to the maintenance of the financial sector as is, so we're content to see socialism for Wall Street and about it because we don't want the alternate upheaval. However, at some point the can won't be able to be kicked down the road. But we'll take the pain in smaller amounts over a longer period rather than all at once.
Good read.
"I think the main problem is that the middle class didn't want the party to end."
You would continue to criminalize the citizens, wouldn't you?
The "party" was hosted by lenders, bank and critically non-regulated non-bank, that were getting a huge spread from low Fed rate, and financed with $800B freed up from dubya tax cuts, pocketing their fees, then selling the toxic to F&F and/or Wall St, all the while ignoring F&F regulations that would have prevented mortgages and home equity granted after "stated income", liar's loans, etc.
If the party-for-suckers had not been given and advertised so aggressively by the lenders, the citizens wouldn't have been suckered into losing $Ts.
btw, It was a LIE that CRA did forced regulated lenders to lend in high-risk areas. The lenders were predators without CRA. Regulated banks even created non-regulated affiliates to run their own suckers' parties.
Last edited by boutons_deux; 03-30-2011 at 03:12 PM.
No one was forced to live beyond their means. Were unsophisticated borrowers duped? Sure. But a lot of people got overleveraged and used their houses as ATMs of their own free volition. Putting all the blame on lenders is bull .
If something seems too good to be true....
Anyways, the middle class is not unaware that it's a house of cards which helps them live beyond their means and inflates their 401(k) accounts. The expectation is that the cards will fall after they cash out. We see the same assumption with regards to tax reductions, deficit spending, and the national debt. To pretend that this is some kind of secret conspiracy pulled on a credulous, honest populace lacks credibility. Of course, it makes people feel better about their participation in the arrangement.
Agreed. But I don't understand why MB seems to focus on the middle class, moreso than middle-class and above.
It's where the votes are, and both parties pander to that group.
Of course they are overtaxed, either due to the commies and their European ideas or due to the "Super Rich" not being taxed enough.
Maybe not all the blame on them since the regulators had a hand in this but as I debated with CG a week or two ago, the situation just calls for far more blame to be put on the lenders and the financial sector's creative bull than on the middle classes borrowing practices. In fact the biggest area the middle class is complicit in is their political apathy but not their borrowing practices.
And I mean far more blame. FAR FAR FAR more blame.
It doesn't lack credibility at all. Well except that it wasn't very secret. But our regulators didn't do to stop it.
When Goldman Sachs is buying massive amounts of CDS against the very CDO's and MDSs their selling as good products it doesn't take a genius to know they knew what strings they were pulling. And all of Wall Street did this. Its not just that they built up a house of cards, but that they BET on it falling.
I'm sorry, but the middle class is not complicit in this nearly as much as you make them out to be. The vast majority live within their means. The problem is that the financial sector built their house of cards on the backs of those that didn't. But because 10% (IF THAT) of the middle class made bad decisions in their loans the entire middle class is not responsible for the entire system coming down because of that. No way in ing .
If the bottom two tax bracket rates went up enough to cover the cost of federal governance without borrowing, then we'd see some actual pullback on federal expenditures, especially military spending. Until then, we'll have to deal with a public who regards a 10% effective federal income tax rate, or lower, as the advent of a socialist state, or proof positive that the "VRWC" is sticking it to them.
So the people were unaware that the Fed and the GSEs existed and serve to inflate the equity and housing markets, as well as impact consumer lending? I find that hard to believe. The same for the unsustainability of deficit financed spending and tax cuts.
The people aren't stupid. They know they are getting something for nothing. They just hope that when the music stops that they'll have a place to land or a bailout for themselves.
People can't name the Vice President and you expect them to tell you what the Fed is doing? Really?
Good luck with that.
The idea that a sizable portion of the middle class is getting something for nothing is just a crock of . The majority of the middle class is working their ass off to get by in life with the things that the American dream has told us we're supposed to have - namely a house and two cars and a comfortable lifestyle.
This country has told them that is what they're supposed to have and that you're supposed to keep up with the Joneses. The majority of them pay their bills on time and don't default on debt. They think that the programs they pay into will be there for them when they retire.
Your insinuation that they are living high on the hog on some ponzi scheme is just bull .
Sure, that sentiment plays well with the voters, along with other fairy tales.
If you declare it a fairy tale it must be true. However, if you'd like to quantify and explain how the middle class as a whole is "getting something for free" I'm all ears.
I have referred to this book before in these forums, but MB, if you read the book the Big Short it will absolutely convince you that the middle class had no hope of knowing/understanding what the financial crisis was or how it was developing. Not even the heads of Wall Street firms understood the extent of it.
This is not to say that there is not a kernel of truth in the "we all want to take the easy way out" position that some have taken.
It s absolutely to say that no politician of either party had an appreciation of just how bad things had gotten. In fact, precious few understood it, and some of them worked for the rating agencies.
This crisis was not the fault of the middle class or the poorer classes. The fact that people want more than they can reasonably pay for is true of every class of people and occupations.
Barofsky's points seem to me to reinforce the belief that even the 'regulators' at the Treasury Department failed to understand it fully.
Certainly that was true of Greenspan and Bernanke.
The disassociation between mortgage sellers and lending companies' balance sheets had much more to do with this than people's greed or politician's agendas.
They were married to the ideology of regulation being the wrong choice at every turn. Greenspan was presented with the issues on numerous occasions and how the power to act but never did.
And, all evidence to the contrary, they continue to espouse that position.
And the lack of political will showed itself when the finance company lobbyists
essentially wrote the finance 'reform' bill. But again, the legislators don't want to admit that they don't understand what they are legislating, nor do they want to take the time to learn it, if they could.
I refuse to place blame on lenders when I have personally seen common "middle-class" men work the lending game system to their advantage and come out on top. Discipline, knowledge, sacrifice, hard work. The majority of people do not hold these qualities. Let them perish.
Generalizing from anecdotal evidence is a common occurrence.
Understanding that lenders, mortgage sellers, financial product developers and market arbitragers combined with a frenzy of low-interest rates provided by the Fed to prop up the economy by enabling people to continue purchasing goods and services beyond the levels that fiscal prudence would support is far less enjoyable and does not lend itself to pithy quotes such as 'let them perish'.
It is, however, a more accurate rendering of the phenomenon.
Are we to ignore Humphrey-Hawkins? The worship of Greenspan not only by Wall Street but by Main Street as well? The expectation has always been that the Fed operate to create prosperity and low rates of inflation, and later on to make the financing of deficits easier, as well as to keep 401k balances growing.
Naturally when this blows up it's someone else's fault.
There are currently 1 users browsing this thread. (0 members and 1 guests)
Posting Permissions
