The Chamber of Commerce Has It Backwards

The US Chamber of Commerce is opposing the administration’s proposed Consumer Financial Protection Agency, on the grounds that it would hurt small business.  Their argument is that this agency will extend the dead hand of government into every small business.

For the Chamber of Commerce, government is the enemy of small business and should always and everywhere be fought to a standstill.  Chamber Senior Vice President (and former Fred Thompson campaign manager) Tom Collamore sees this as “advocacy on behalf of small businesses, job creators, and entrepreneurs” (quoted in the WSJ link above), and the Chamber has launched the “American Free Enterprise” campaign.

Somewhere, the Chamber’s senior leadership missed the plot.  What brought on the greatest financial crisis since the 1930s?  What has hurt, directly and indirectly, small business of all kinds to an unprecedented degree over the past 12 months?  What is killing small and medium-sized banks at a rate not seen in nearly 80 years?

It’s the behavior of the financial sector, particularly big banks and their close allies – by consistently mistreating consumers.  And the letter and spirit of the regulatory regime let them get away with it.

Some members of Congress honestly believe that consumers should have a free choice, unfettered by any kind of restriction, regarding the financial products they buy.

But spend time talking to any marketing professional or call them to testify before your committee – or just ask Mr. Collamore, who was previously at Altria.  The state of knowledge regarding how to persuade people to buy stuff is impressive, the degree of potential manipulation for consumer preferences is simply stunning, and the “innovations” in this area are not slowing down.

The scope for taking advantage of consumers in subtle ways, or outright duping them, is probably higher for finance than for any other sector.  For fairly obvious reasons, people are more likely to misunderstand credit than, say, furniture.  Ambitious executives have therefore hammered hard on borrowers.  And the implications – as you have seen and are still seeing – of systemic financial misbehavior are awful in terms of human impact and essentially without limit in terms of ultimate macroeconomic downside.

Unscrupulous Finance has brought us down and will do it again.  Those most damaged now and in the future include small and medium-sized business owners who are trying to treat customers fairly.

The Chamber of Commerce is fighting the last war (or the one before that).  Their small business membership should wake up to the current reality and press the Chamber hard to change its position before it is too late.

President Obama needs to go over the heads of the Chamber’s leadership, reaching out to and running ads directly targeted at its small business membership.  The White House has to tackle this head on, framing the issue clearly for people with the help of very clear TV and radio ads.  The Chamber of Commerce is arguing that unfettered finance is good for small business.  They are wrong.

By Simon Johnson

90 responses to “The Chamber of Commerce Has It Backwards

  1. awesome post and I definitely agree.. I do believe the US can learn quite a bit from the system in Europe..

  2. Actually, what brought on the worst financial crisis since 1930 was the government regulating and forcing financial institutions into situations they probably would have never otherwise entered into.

    Does this mean financial institutions are free of blame? Certainly not. But lets not give the government a free pass here. They shoulder the bulk of the blame for this mess and they continue to make it worse.

    When you claims that financial institutions are predatory and we’re victims, you remove any sense of personal responsbility or accountability. Entering into a bad financial agreement takes TWO parties, not one.

    ~Trish

  3. The Chamber of Commerce is just a tool of big business to try and block any legislation that it deems dangerous to corporate profits. Reportedly, the chamber is the biggest spending lobby group in the country and is actively fighting health care reform, the climate change bill as well as the consumer protection agency. In fact, their stance on climate change (denial) has resulted in a couple of high profile defections in their ranks, from utility companies. Small business does need to wake up and smell the roses and see who the Chambers really respresents.

  4. We have a similar organization in Utah called Utah Taxpayers Association. Those in the know say, protecting the little guy, and then laugh cynically. That’s the US Chamber of Commerce

  5. Trish,
    Could you give us specific examples of which government regulations supposedly (so you say) caused the current crisis??

  6. Terrific post Professor Johnson. Please keep them coming and as the old Chinese proverb says “Don’t let the big turtle eggs off the hook”. I’m paraphrasing of course.

  7. Realistically, will the CFPA go after the “too big to fail” institutions that own our government?

    Or will it concentrate its efforts on less-well-connected small fry?

  8. Trish, the power dynamic is asymetrical when you have an individual and a large corporation (eg, TBFT). People on Main Street need consumer protection.

  9. Agoraphobic Kleptomaniac

    “When you claims that financial institutions are predatory and we’re victims, you remove any sense of personal responsbility or accountability. Entering into a bad financial agreement takes TWO parties, not one.”

    Claiming that the financial institutions were not predatory is more foolish. These financial institutions were in the position of power, either misleading the customer intentionally (criminally) or pushing for highly dangerous financial products to close more deals, which they wouldn’t have any responsibility for once they were sold off (negligence/risk-free transactions).

    Here’s a different situation: If an Architect builds a house, signs off on the plans, tells you the house is safe and built to code, are you really going to rip up the carpet to find out if your supports are spaced appropriately? Would you even know what code was violated when you did rip up the carpet and found the supports spaced 40″ apart?

    Because of the architect’s position of power and liability, you take their word that the house was built properly. Same goes for these financial products. Most people were assured that these products were built correctly. To rip up the carpet of the loans is above and beyond what the customer is expected to. Do some people do it and find bad construction? Yes, but that’s not the norm.

    NINA loans, look them up. The fact that they even existed shows how irresponsible this bubble really got.

  10. You can’t con an honest man.

  11. I can’t believe you guys take people like Trish seriously. Government regulation of finance? Since when?

  12. Most people work for small and medium sized businesses, and the small and medium sized businesses account for most of our economic output. You are right that they need to wake up …before the big business interests drive them out of business.

  13. That is a key point. Compliance burden shouldn’t fall harder on small business, otherwise it’s just another way for big business to drive out competitors.

  14. which system in which part or parts of Europe and under which regulations, please?

  15. Nemo
    I hope you are being ironic!!!
    - I have met over the decades lots of decent non-greedy people who were conned – if you were serious it would mean that you can’t lie successfully to an honest man …

  16. Unlimited caveat emptor for you, unlimited protections for me.
    Heads I win, tails you lose.
    Laws for you, while I remain above the law.
    …it’s only a matter of time before society self-destructs.
    Conserve that, you conservatives!

  17. @Trish: I think you’re closer than the article, but still not there. The problem was largely non-enforcement of existing laws, coupled with repeal (or modification into irrelevance) of a few key pieces of legislation — Glass-Steagall being the poster child for this.

    @Agoraphobic: what Nemo said. Anyone making $30k/year that thought they could somehow afford a $300,000 house is just as responsible for their situation as the lender that did whatever necessary to close their loan. That they can’t do math isn’t an excuse: “Gee officer, I didn’t know the speed limit was so low.”

    What now needs to happen is straight Austrian economics: default the bad debts and clear the malinvestment out of the system. Markets will find the correct price equilibrium. Some massive banks would (and should) go out of business were this allowed to happen, and a whole lot of former homeowners will revert to their more-economically-tenable position as renters.

    Of course, we live in a country and culture that apparently only wants the “up” of the business cycle and refuses to take its lumps on the inevitable “downs”, so I won’t hold my breath that the economically right thing will be done — namely, non-intervention by the statist would-be masters of the universe inside the Beltway.

  18. The guy who runs the Chamber of Commerce is also president of the Center for International Private Enterprise:

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

    “Although administered as a private organization, its funding comes almost entirely from a governmental appropriation by Congress and it was created by an act of Congress.”

  19. but that’s just one of the circles to be squared

    - compliance regulations must either be terribly complicated to be just or they will be just with the small ones leaving the big ones off easily or they will be tough on the big ones damaging the small ones with all kinds of variations in the middle. The easy solution often proposed is set one or more size limit. But once you do that you have created walls to be jumped i.e. a hindrance to one step after the other with no big one at certain stages

    the above is one of the reasons why I always bemoan that regulations, rules, laws seem to get written in awsome haste nowadays i.e. getting knitted with hot needles

  20. Yes, these statist wannabe masters of the universe always sticking their dead arm of government (or is it dead hand?) into the well-oiled machinery of efficient business, clogging commerce with their onerous regulations, destroying good businesses at the whim of a government beaurocrat. Let’s have anarachy in the business world. Oh wait…

  21. Fair enough, although in this case, let’s be real… The vast majority of borrowers knew exactly what they were getting into. They just did not care because they thought house prices could only go up. Just like the lenders, the borrowers were trying to get something for doing nothing.

    All of the parties were complicit, and in my view, they should all receive precisely what they signed up for. Greedy borrowers should lose their overpriced houses (and everything else); greedy banks should collapse; etc.

    But in our modern world, there is no such thing as taking responsibility for your actions. There is only political power. If you belong to one of the powerful interest groups — e.g., mega-size financial firms or “poor deluded borrowers in danger of losing their homes” — then government will make everybody else pay for your greed-motivated poor decisions.

  22. “When you claims that financial institutions are predatory and we’re victims, you remove any sense of personal responsbility or accountability.”

    Ditto when you broker a loan, collect your dough, and move on. Ditto when you securitize mortgages. Ditto, in spades, when you create a derivatives based on a pool of mortgages and sell them with no transparency. Ditto when, in effect, you take out fire insurance on a stranger’s house. Now we are at the casino.

    Yes, there was massive fraud, and a lot of it needs to be prosecuted. But it was the massive superstructure built on top of the housing bubble and dicey mortgages that amplified the problem to global, systemic proportions.

  23. George B., Lawrence, Kansas

    It’s hard not to want to put up barriers to future heads-I-win-tails-you-lose speculators and operators. However, as much as I have learned from Simon Johnson, I think he’s dealing with symptoms and not causes, and neglecting the collateral damage. Finance scamming is a symptom that the financial service provider does not have a long-term stake in the outcome. We have local banks who, for example, get high marks from credit counselors for dealing ethically with their customers and high marks from analysts for having done sound lending. Those banks are concerned that this legislation will increase costs and hurt them and their customers. Perhaps this damage is worth it, but it needs to be mentioned.

  24. Just making sure everyone saw this…quite amazing actually:

    http://www.cbsnews.com/blogs/2009/10/02/business/econwatch/entry5358730.shtml

  25. to put the lenders and the borrowers in the same pot and judge them with equal measure goes against my European grain. I am not sure about practice but in theory at least we think that the mightier bears greater responsibility
    and my gut says that the frauder deserves greater punishment than the defrauded
    or would you blame a woman for having gotten herself into a situation where she could be raped?

  26. Your attempt to mock ironically pretty much restates what I believe is the right answer: beyond enforcing contract law and prosecuting outright fraud, the best thing for the government to do with regards to the operation of the economy is …nothing.

    If your child bites another child, does it seem practical to attempt to prevent your child from EVER being in a situation in which they might bite again? Or do take the more personally painful route (in the short term) and punish the child’s behavior to establish a negative reinforcement correlation, ultimately teaching the child that the consequences of biting are undesirable (which produces the desired result in the long term)?

    When government (at any level) interferes with the basic pricing signals of the market, it distorts the ability of market participants to accurately read the underlying economic reality, which leads to malinvestment. When government interferes with what should be the natural consequences of malinvestment — default, bankruptcy, and/or failure — then malinvestment is not discouraged.

  27. Small business is in as much danger from government regulations as they are from big business. I think the historical landscape has shown that it can be quite good for small business when government regulations enforce an even playing field, preventing big business from playing in ways that are not societally advantageous. The current state of health care is terribly difficult difficult on small business and the loss of local, small financing opportunities is also devastating. Since a huge proportion of innovation and job growth comes from small business not large, this should worry everyone.

  28. They believed it could only go up because they were told that over an over again. There was a TON of money to be made in the telling and the exploiting once you got people to believe you.

  29. Why do you believe the CoC is fighting the last war? Doesn’t the idea of “cognitive regulatory capture” apply to NGOs as well?

  30. Oh I agree completely that there should be free markets and business failures and so forth. It’s just that this mythical state of affairs has never existed and will never exist.
    People who blame the victim ignore the causes. It takes a kind of radical ignorance not to see the deregulation that has happened over the last 30 years.

  31. Morris
    really glad somebody has finally introduced and successfully defined what is NATURAL
    whatever is natural can of course never be bad
    - which should make all vipers very happy or is there a rule that it is unnatural for viper to bite a human?
    btw how do you propose to do the punishing of that child? hopefully in a natural way? I am sure you know one for that problem also.

  32. Greenspan should be taxed every time he opens his big fat mumble mouth.

  33. Greenspan in typical fashion wants a VAT, not a progressive income tax to pay for the costs of TBTF. Here’s an Idea: claw the money back from the TBTF banks.

  34. Since Greenspan was a major enabler, I think we should take his personal savings as a tax to pay for what he wrought.

  35. Borrower’s and lenders are in the same pot. They are both cooked. They share responsibility. But, you cannot regulate an entire population to safeguard them from their own lack of knowledge. Many people who borrow do not and should not be business experts. They have other gifts to give society and if they spent all their time being their own risk managers they could not give their gifts. So what if some of them got a little greedy? I remember when home equity borrowing was pushed as a “right” of the consumer. States that required more conservative lending, such as 80% LTV caps or even stronger limits were lobbied by the financial industry and influenced by federal courts and eventually succumbed. Many have been hurt by the removal of consumer protections. So whatever the right regulation is, some regulation is right.

  36. Seems as though the Chamber can’t get anything right, not even it’s own membership figures: http://www.motherjones.com/mojo/2009/10/us-chamber-caves-membership-numbers

  37. Agoraphobic Kleptomaniac

    @Nemo: I know this study is famous, and often referenced, but it applies here.

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

    You have these people in power, with their “expertise” telling these people that they CAN afford it, that everything will work out if they just listen to them. How many people are going to explicitly say “I’m sorry, but you’re running a system that is going to cause the financial collapse of most of the world and I’m not going to join you.”

    I mean, there’s a lot of us out here who just had to sit back and watch these people do this stupid stuff, but you can’t tell me that a Borrower could have walked into a bank and said, “Give me a loan for $500,000 on my $10,000/yr salary!” and any RESPONSIBLE bank would comply with that. In a world where banks are the responsible party, every single bank would have told someone like that to go jump in the lake.

  38. Mr. Johnson is wrong.

    First, he is wrong that consumers were duped. People who took advantage of exotic loans acted according to their incentives: people who had no business owning homes were suddenly given a free call option through cheap, low down payment loans and took advantage. With banks 12 months+ behind on executing foreclosures, who looks like the sucker, the consumers or the bankers?

    Second, I oppose all new agencies because there is never a reason to establish an extension of the government bureaucracy when so many agencies already exist to handle the task. Johnson fails to think ahead to what the agency will look like 10 years from now, and remember than it is nearly impossible to kill an agency once it is established.

  39. They tell me that the most successful con-artists are the ones that appeal to “that little bit of larceny in all of our hearts.”

  40. Yes, the poor wittle innocent banks. I feel so sowwy for them. Let’s give them another bailout.

  41. I believe that’s what the con-artists tell themselves so they feel morally justified in being con-artists.

  42. I agree that certain people have no business owning a home. My neighbors for example. There should be a law that says people who have no business owning a home are prohibited from ever owning one.

  43. I admit I must agree with your second point Aslam. The FBI should be put in charge of bankers. Each CEO should get his own U.S. attorney to prosecute him.

  44. “First, he is wrong that consumers were duped. ”

    WOW, I am impressed as I am always impressed by people who seem to be sure that it could never happen to them.

    what was it with “whoever amongst you is without stupidity and gullibility throw the first stone”

  45. I am sorry, but the rape analogy is ridiculous on its face. Nobody forced anybody to do anything here.

    Borrowers consciously and deliberately took out loans they knew they could not afford to buy houses they knew they could not afford. They did so not because they were deceived, but because they saw everyone around them making hundreds of thousands of dollars a year for doing nothing.

    When the party finally ended, the last ones to arrive were left holding the bag. Boo hoo, cry me a river… But don’t you dare take a penny of my tax dollars to bail them out. Whoops, too late.

    I realize that it is the European tradition to believe that “the peasants” are incompetent to think for themselves, and thus they require “the elite” to make all of their decisions for them. Consequently, “the peasants” are never, ever responsible for their own actions. Suffice to say that this peasant was raised in a somewhat different tradition.

    Do not get me wrong; I want the lenders to suffer as badly or more. And unlike the first commenter above, I do not believe government policies “pushed the poor lenders into making bad loans” or any such garbage.

    The bottom line is that the housing bubble — like all bubbles — was caused by greed, on everyone’s part and all the way down. Watching it unfold, my only source of optimism was the belief that everyone would get what they signed up for… But now I see even that is denied me. And with the “first time homebuyer credit” etc., none of which will ever expire, starter homes like I might want to buy will be forever overpriced.

    Maybe I should change my alias to “Pissed-off Peasant”.

  46. Agoraphobic Kleptomaniac

    @Nemo
    “I realize that it is the European tradition to believe that ‘the peasants’ are incompetent to think for themselves, and thus they require ‘the elite’ to make all of their decisions for them.”

    No, it’s a question of division of labor. Architects, CPA’s, Engineers, Doctors, etc, are ALL responsible for their work and any repocussions of their work, because they should have the training and knowledge to know better, which is why we have things like Licensing and Degrees, to say “this person is knowledgeable in this subject”. You’re claiming that it’s the banks “power” that gives them the authority over the peasants… that’s not it at all, it’s their supposed knowledge of the area that SHOULD be more than a common person’s knowledge.

    “The bottom line is that the housing bubble — like all bubbles — was caused by greed, on everyone’s part and all the way down. Watching it unfold, my only source of optimism was the belief that everyone would get what they signed up for”

    Agreed. But I still hold that holding the consumer’s responsible for jumping on the bridge that was poorly designed is misplaced outrage.

  47. One things that confuses the debate a lot is that there were a lot of things happening at once. There were investors flipping houses. Poor people who bought a tiny house that was a bit of reach. Middle income people trading up to houses with home theaters and granite counter tops. Wealthy people acquiring 9th and 10th homes. People engaging in fraud on both sides. People buying expensive homes they couldn’t afford. People buying homes they hoped they could afford. People buying because if they didn’t buy, they’d never be able to live in a house. People who thought their job was secure or that they would never get sick (and therefore go into bankruptcy from their medical bills). People who’s church (I can’t make this up) told them to get into real estate as an investment. The typology of buyers was very complex.

  48. never mind the motives/yearnings/longings of the buyers, Yakkis
    those might be mitigating factors in a court case dealing with a simple burglary but when succumbing to the lure of owning a house that can’t be taken into consideration

    @Nemo
    have you ever been to a sales training course?
    and besides rape-rape-rape there is at the other end of the spectrum what we called in the old days petty rape …

  49. Just to state the crux of Nemo’s complaint Silke, the problem was not with home ownership per se, but that it was structured in a way that benefitted people who gamed the system on both sides, from the builders who built the crap houses in hastily approved subdivisions in the exurbs, to the professional and family house flippers, to the liars of the so-called liar loans, to the originators who charged huge mysterious fees to the buyers, to the real estate agents (there were in fact millions of new ones in California alone), and the list goes on.
    Honest working stiffs who just wanted a decent place to work had to sit it out, and either pay way too much or sit it out until the market corrected itself. They are justifiably angry now that their effort is being rewarded by bailing out the fraudsters who caused the mess in the first place.

  50. What I meant to say is that it created a society with blatantly unjust rewards for dishonesty, and penalties for honesty…with no hope for correction in sight.

  51. thank you Yakkis, I needed that reminder
    I should have known better from lots of office inrigues especially after the “synergy lifting time” had started

    my only excuse is that I tend to get besides myself with fury when I see that little ones get at eachothers throats instead of banding together to go for the ones at the top or at least resist them

    the analogy in those office feuds is that the mishandled/duped get more excited about a favoured clerk’s perks than about the misdeeds of the real perpetrator in charge

  52. I agree completely. One of the most disturbing trends that is being monitored on Naked Capitalism is the increasing homelessness of school aged children (and their parents), no doubt through predatory lending and refusal to negotiate workouts in good faith.

  53. The predatorclass, (and I lay this evil at the feet of the republican party and the lockstep partisans in wingnuts in redneck Amerika has succeeded in an information domination perception management campaign demonizing government as evil and deleterious to the all perfect, supreme, and numinous workings of the allmighty markets, (when government is tasked with safteynets, regulatory poweres, social interests). Curiously, these same hyporcrits, reprobates, greedmongers, hatemongers, thieves, swindlers, pathological liars, profiteers, and racists view biggiantmassive government in the form of police state or military state, or intelligence apparatus state as godzword, and necessary to contain, and control the unwashed masses.

    The people need government to police and regulate industry or the most vile and evil practices will be adopted for profit and the manipulation of profit, and systemized to most abuse the people. The oligarchs and the predatorclas will resist like screeching banshee’s any attempt at regulation and consumer protection and fare wages, and executive compensation review, – because these actions would cut slightly into the monsterous profits of the predator, and constrain them as individuals politically and legally from standing on high, obdurate and olympian and controlling markets, funnelling trillons of taxpayer dollars into offshore accounts, manipulating peoples lives, incomes, cost of living, and intentionally and ruthlessly exiting millions of people to long lives of hardship and poverty, – while the predatorclass alone basks in oppulent luxury ensconced in the exhorbidant palaces, untouchable, superman, mastersoftheuniverse.

    This illusion will be shattered someday, and the predatorclass will know the peoples pain, and feel the sharp and lasting sting of that pain, and perhaps after the harsh uprizing and tumult, kindler, gentler, wiser minds will prevail. Now we are ruled by predators. Ruthless criminals, insatiable psychopaths, drunk and delirious with illgotten wealth and power. The lawless go unpunished. The innocent are deprived and slaughtered for predatorclass greed. We must counter these evil winds, and toxic tides of suffer the horrible consequences.

  54. Mortgages are nonrecourse loans. The risk is all on the lender as the boorower can give up the property and walk away at any time. It is perfectly rational for borrowers in a positive market to push for loans as large as possible. Banks had the responsibility to protect themselves. Instead, the securitized and created default swaps. They amplified their risk. If all we had were some houses foreclosing, we would have a run of the mill recession.

    BTW, there is a lot of documentation on how lenders and appraisers lied to borrowers. There was a lot of outright fraud.

    Steve

  55. Here’s one: The Community Reinvestment Act of 1977 as it has been perverted since the late 1990′s. The goal was honorable—to provide affordable mortgages to low and moderate income families. We all know the result. Banks were coerced into making loans and were rated with regard to CRA loan production. If they didn’t meet certain benchmarks, banks were prohibited from opening new branches, etc.

  56. Actually, mortgages are only non-recourse in a minority of states.

  57. All the empirical evidence points to the reverse conclusion. Don’t take my word for it; The Fed and FDIC have published numerous reports.

  58. Are PONZI schemes not illegal??? If so, then can any of the many erudite commentarians here please explain to this lowly unwashed pedestrian how the entire 500Trillion$ derivatives market is NOT a PONZI scheme? No doubt an exceedingly complex and woefully underregulated PONZI scheme, – but a PONZI scheme no less. How are these socalled “innovative instruments”, or “products”, socalled “derivatives” legal?

  59. Nothing’s illegal when you own the sheriff in town.

  60. Interestingly enough, the Change To Win coalition today released a new report entitled “Preaching Principle, Enabling Excess: How Tom Donohue Compromised the Credibility of the U.S. Chamber of Commerce.” Should make for interesting reading.

    First two paragraphs: Preaching free enterprise, U.S. Chamber of Commerce President and CEO Thomas J. Donohue leads the Chamber’s attack on the financial reforms essential to restore employment and the economy. He cloaks the Chamber’s staunch opposition in the most expensive rhetoric money can buy. But Donohue’s pro-business, pro-economy and pro-jobs rhetoric notwithstanding, the Chamber’s record under his leadership is none of those things. It is pro-CEO.

    Specifically, Tom Donohue has hijacked the Chamber’s agenda away from serving the interests of the business community to serving corporate CEOs. Under his direction, the Chamber now rewards corporations that write large checks with specific lobbying on their behalf. Donohue’s Chamber also expends significant resources defending CEOs whose conduct harms their own corporations as well as the business community.

  61. Forgot to include the link to the report mentioned in the previous comment. Here it isL http://www.changetowin.org/features/tom-donohue-preaching-principle-enabling-excess.html

  62. With all due respect steve2, I rebuke the assertion that: “It is perfectly rational for borrowers in a positive market to push for loans as large as possible. Imagining positive signs where there is only optimism bruted by the predatorclass, and where many of the structures and the glue that binds the system together are flawed and some even toxic is IRRATIONAL, not rational behavior. You are confusing and I hope not condone avarice greed and insatiable lust for wealth, – with affluent living and all the joys and benefit of comfort, and a comfort that can not be found or contemplated while your fellow citizens suffer. There’s also that thing we like to call the “law” or the socalled “ruleoflaw”. Either there are laws, and laws are aplicable to everyone evenly and equitably, or – in fact – there are no laws. In a world where there are no laws, – there are no laws for anyone predators.

  63. Ponzi-ing – there’s a question I have not got an answer to yet
    i.e. when they short stock the first step is that they borrow stock for a fee and then sell that borrowed stock at a high price betting that they can rebuy it at a lower price later when their loan becomes due so they can pocket the profit. Now between the selling point and the rebuying point they must be flash with cash because where else should the money from the sale be. What do they do with it? Go to a bank show the cash as down payment and take out a loan on it thus doubling tripling multiplying their original down payment i.e. the fee on the original stock loan endlessly ???? Let’s assume the fee for borrowing the stock was 10.– and the borrowed stock is 100.– once they have sold it they have cash amounting to 100.– so that they can go out and borrow new stock for 1000.–???

    I hope I do not sound too garbled but ever since I understood what shorting means I have been wondering what they do with the money between sale and re-bye – I just can’t imagine them keeping it in their strong-box (as any prudent person would) – and it would be a different kind of Ponzi because it would be one man and his pyramid all by himself – does it happen that way or do I get it wrong somewhere?

  64. Somewhere in this discussion of responsibility for the crash of the mortgage securities market we should acknowledge that the middle class has suffered diminished real income for the last 3 decades. When health insurance costs spiral at 15%+ a year and goods and services increase without offsetting increases in income, sooner or later the incentive to gamble to survive becomes truly perverse. We can decry the culpability of the borrowers/refinacers, but in some perhaps many cases they felt the need to risk everything to preserve their families and homes.
    I am certain that there were some who gambled not from need, but from greed, just as there were investment managers who overlooked risk to pursue return. The people who had the capital to risk for greed should be allowed to fail, but those who risked from need should not be lumped together in the same category or necessarily suffer the same fate!

  65. A lengthy discourse by Fed Governor Richard Kroszner as to why blaming the CRA for this crisis is simply wrong. There are other studies published that prove the same points Kroszner makes.

    http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm

    But I am sure we will get more bizarro world talk claiming that is was regulation and not the lack thereof that caused this crisis.

  66. Correction: Kroszner’s first name is Randall not Richard

  67. Nemo opines:
    “Borrowers consciously and deliberately took out loans they knew they could not afford to buy houses they knew they could not afford. They did so not because they were deceived, but because they saw everyone around them making hundreds of thousands of dollars a year for doing nothing.”

    “Borrowers” is a pretty broad term. The description you provide is only a portion of borrowers in this latest financial meltdown.

    I think, placing relative blame aside for our current malaise, it is instructive to consider which parties received the largest pot of taxpayer largesse. The honest answer would be our financial intermediaries: Banks and non banks in the so-termed “shadow banking” system.

    The foundational problem is leverage and risk taking. People who thought they could “flip” property were gambling. People who needed to sell their home and use the equity to pay for their new home (upsize or downsize) were not gambling, they were simply in the market at the wrong time. To characterize them otherwise is sleezy.

    So Nemo (just so you get my point) you are sleezy.

  68. Chiaman thankyou so much for a lucid response.

    Laws were broke, those who broke them should be held accountable PERIOD. Why are people not in the streets demanding, screaming, for retribution.

    This winter people will freeze to death in northern cities such as Chicago, Detroit, Buffalo, the homeless numbers have tripled since last winter. Wake up people its just the beginning. To sit on a message board and type out the nonsense I have been reading only implies that you all have not directly felt the pain. Get off your collective rear ends & DEMAND CHANGE.
    If you do not you are no less guilty than all those miscreants that have taken this country to it’s knees.

  69. Note to Silke:

    Short selling, by definition, reduces liquidity in a market.

    Markets gain liquidity the higher they go. Markets that plummet drain liquidity. Short sellers gain from withdrawing liquidity.

    That successful short sellers come into the market at a lower price to “cover” their positions (and thus book a profit) doesn’t change the fundamental calculus.

    The only real economic purpose of shorting a market, or an industry, or an individual stock, is to hedge an existing position. Otherwise you are dealing with a “bucket shop” process which is exactly the same as betting on a horse race, or pulling the lever on a slot machine. It’s a zero sum (less the house take) game. Recently the “house take” in our economy from financial activity reached (some estimate) as much as 40% of national product. Conclusion: We’re running a huge global casino in a zero sum game.

    We got $150 petroleum prices a year ago almost entirely due to “bucket shop” gambling. The negative effect on our real economy was substantial. We now have the same process in play in a number of arenas, including forex and basic materials. Unless you are in a position to play in this arena, stay completely away. Otherwise you are “lunch” for the professionals.

    There’s big business in gambling (ask your local bookie), but it’s no way to run an economy.

  70. I think you mean “sleazy”. Well, I can’t argue with that.

    I have sympathy for people with fixed-rate mortgages who are in foreclosure due to circumstances outside their control (e.g. job loss or medical bills).

    But that is not the bulk of the problem. The bulk of the problem is people with a 2/28 ARM or whatever who are unable to make their new payments, and they knew from the start they would never be able to make their new payments. That is not being “in the market at the wrong time”; that is gambling, plain and simple, regardless of other circumstances.

    I doubt I am convincing anyone of anything, but then I guess that makes us even.

    On the bright side, I will stand with anyone who wants to see the large banks smashed into tiny little pieces, even if we disagree on the just desserts for greedy borrowers.

  71. For what it’s worth Mr. Johnson, thanks.

    As a former small business owner, I can personally attest to the fact that government policies (state and federal) regarding health insurance, have been a major anti-business force.

    We need to remove the tether connecting health insurance from employment. And we need to evolve a system where the providers of health insurance (physicians, nurses and administrators) take back control of their business.

  72. Actually, studies have shown that the majority of sub-prime loans were made by institutions that were not covered by the CRA. Banks were not coerced into making loans that they should not have made. some banks gave into pressure just to avoid legal fights in their efforts to expand and/or merge.

    The truth is that as middle class incomes fell behind economic growth and inflation, financial institutions made credit easier to come by and Americans lapped it up in order to keep to a higher standard of living. The financial/credit card industry exploded into a huge money making machine as consumer debt rose greatly over the past 25 years or so. In the process, we saw the rise of credit default swaps and so called trick mortgages (variable rate and interest only loans,) the vast majority of which were willingly entered into by an increasingly debt ridden middle class.

    Of course, the growth of the American economy was built on the borrowing of the middle class which is one important reason that the government did everything in it’s power to facilitate.

    Speaking of which, where was the Chamber of Commerce when the government was interfering in the largest economic growth sector of the past decade, the housing market? The actions of the Fed in artificially keeping the housing bubble growing by keeping the prime rate at such low levels was governmental interference at it’s very worst and led to the crisis we are in now. Did the chamber call for the government to stay out of the way then?

  73. Good analysis Ray. This “blame it on subprime borrowers” meme is still in play obviously. By now we know it’s completely false, but it still has a certain amount of emotional appeal to people who want to blame it on poor slobs.

  74. The U. S. Chamber of Commerce used to be a great organization, it’s so sad to see it become just another plutocratic, oligarchic shill. We need to check where its money comes from. I bet that the big banks have made substantial contributions, otherwise how would they end up with a President who doesn’t have the time of day for small business. Someone(s) have bought them, and a great small business lobby is now gone. We need to expose them to their small members (most) as being anti-business at the Main Street level. Obviously they are.

  75. What empirical evidence? All the empirical evidence points to the fact that the banks were coerced. Trish and Jessica are absolutely right.

    Dragged into the CRA coercion, certain banks once in bed with the guvmint, found a funny way to profit from the situation. Gee, who did that nice Robert Rubin fellow once work for? None other than Goldman, the archvillain of the Wall Street Banks.

  76. Nemo,
    let me apologize first – I think I exaggerated more than a bit yesterday

    the conundrum you find yourself in is in my view that if you do not create class solidarity you have no chance whatsoever to get at the big ones. In my experience it is an either or, either you bite into the sour apple or forget about getting at the real perpetrators

    another thought is if there are too many “eligible” for eviction in a neighbourhood those who bought within their means and have not lost their jobs will see their houses losing value disproportionately because nobody who has a choice wants to buy/move into a neighbourhood where too many houses look deserted. One saying I learnt about property buying was that the three most important things to judge a property by are
    first the location
    second the location
    third the location
    and since watching what happens to the market where I live I have seen nothing suggesting that that isn’t sound advice. So I gather how and how much to help buyers who can’t make it is a program that has to be well balanced so not too much of the burden will have to be born by the responsible ones in any given neighbourhood

  77. thanks Beezer

    but with sentences like this

    Short selling, by definition, reduces liquidity in a market.

    you are way above my abilities to understand anything

    my question related to one individual actor and his action i.e. what the one individual actor does with the cash that he gets from selling the borrowed stock while he waits for the stock to go down

  78. Sorry Ray, the overwhelming amount of abuse by the banks, loan brokers and appraisers, was in the subprime market. There was a census tract analysis where if your property fell into a low income census tract you could get a 25% discount on your rate. That program was pushed by our government and the Fed, not the banks. Properties in low income areas could qualify for special deals, where better properties in high income areas could not. These programs led to a cottage industry of abuse.

    BTW, a similar thing is still happening. The vast majority of the mortgages being written right now are FHA in the lower end of the market, where a borrower need only put up 3 1/2% of the purchase price including closing costs and need only have a 500 FICO score. But if you want a jumbo loan, particularly in you are self employed, a down payment far in excess of 20% and your first born are the rule. The two sets of lending standards; one for the poor, and one for everyone else, combined with government guarantees on the trillions in loans in the lower end of the market are what brought us to this horrible situation we are now facing. .

    One of the reasons the economy is failing right now, and it is failing rapidly, is that the self employed have been cut out of the lending market. Their collateral has been deemed by our government controlled financiers nearly worthless. Lending to business over the last three months is down 28% on an annual basis. Small business is evaporating as we speak ( actually as we write our little diatribes here at the Baseline). Just what Soros and Obama wanted; no more of those pesky capitalists. No amount of phony stimulus and pump priming will prevent the collapse if small business goes away. And it is going away.

  79. Paul said:
    “Sorry Ray, the overwhelming amount of abuse by the banks, loan brokers and appraisers, was in the subprime market.”

    Sorry Paul but this is irrelevant. Re-read Paul’s sentence: “Actually, studies have shown that the majority of sub-prime loans were made by institutions that were not covered by the CRA.”

    To put it simply

    Ssubprime =/= CRA.

    So even if the subprime market was the cause of the crisis (it was not, this was the initial assessment of the financial “experts” who assured everyone that the crisis was contained a couple of years ago) you still wouldn’t be able to blame it on the CRA (unless you worked for CATO of course and your paycheck depended on it.)

    This has been shown by several studies but Yakkis is right (as usual): you can’t kill the meme now, it’s already grown roots.

  80. Simon, maybe here’s why the Chamber of Commerce is against your fabled Consumer Financial Protection Act:

    “Now comes Rep. Eddie Bernice Johnson, D-Texas, and 50 other co-sponsors (all Democrats) of H.R. 1479 the “Community Reinvestment Modernization Act of 2009,” who want to expand the CRA to include not just banks but also credit unions, insurance companies and mortgage lenders. Congressman Barney Frank, chairman of the House Financial Services Committee, has supported the idea in the past. The SEIU and ACORN, along with a host of other activist groups, are also behind the effort.

    President Obama has been a staunch supporter of the CRA throughout his public life. And his recently announced financial reforms would make the law even more onerous and guarantee an explosion in irresponsible lending. Obama wants to take enforcement of the CRA away from the Federal Reserve, the FDIC and other financial regulators who at least try to weigh bank safety and soundness when enforcing the law, and turn it over to a newly created Consumer Financial Protection Agency (CFPA). This agency’s core concerns would not be safety and soundness but, in the words of the Obama administration, “promoting access to financial services,” which is really code for forcing banks to lend to those who would not ordinarily qualify. Compliance would no longer be done by bank examiners but by what the administration calls “a group of examiners specially trained and certified in community development” (otherwise called community activists). The administration says, in its literature about the reforms, that “rigorous application of the Community Reinvestment should be a core function of the CFPA.”

    http://arroyosecohomes.org/2009/10/06/the-hits-just-keep-on-coming/

    So the CFPA has finally been exposed. Real Reform. Not!
    Absolutely Not! More Marxist thuggery and unwise lending practices is all this is.

  81. The bulk of the problem is people with a 2/28 ARM or whatever who are unable to make their new payments, and they knew from the start they would never be able to make their new payments.

    Wrong. The bulk of the problem is people who are unable to make their new payments, and DIDN’T know from the start they would never be able to make the new payments, because the information that the payments were going to triple after 2 years was buried on page 1,073 of their pile of mortgage paperwork which the friendly mortgage salesman told them not to worry about, it’s just a formality, sign here and here and then let’s pick out the pattern for your countertops.

    You’re blaming the person who stepped on the land mine rather than the person who built and buried it.

  82. In response to Ky,

    Once the market was dominated by the subprime lenders and their mortgage backed securities as it was just a few years ago, competition for profits forced many other banks to participate in the subprime market. Remember the subprime con was very lucrative while the con held, and supposedly as many thought it was all guaranteed by the government. The market naturally followed to where these big and guaranteed profits were. Before 1998 and before the CRA coercion, subprime was a tiny fraction of the market and it grew to be this monster that ate our financial net worth, devouring everything in it’s path.

  83. If you are talking about organized market shorts, the broker holds the sale proceeds as collateral, so the wicked shorts don’t get to pyramid it. In the OTC derivatives market, everything is a negotiation between the dealer and the customer. Powerful customers get better deals. The problem isn’t shorting; the problem is leverage in the derivatives market. Nobody knows what the total system exposure to OTC derivatives trading is. Estimates go as high as $100 trillion.

    As for the CFPA (or whatever you call it), I am surprised the financial industry opposes it because it will not make any difference. The US consumer no longer has any borrowing power or equity in his home either. The game these days is lending to hedge funds speculating in currencies, commodities, interest rates.

    The real end game comes with the collapse of the dollar as a reserve currency. One more exploded bubble ought to do it. When it happens the US government will no longer get to borrow at 4% for thirty years. The only question is whether the world will then return to 1946 or 1932.

  84. @ Jake – thank you!

  85. The Chamber has seldom advocated on behalf of small business despite its claims to the contrary. It is bought and paid for by big business and functions as a big business advocate. It often postures by claiming (often falsely) that the position it advocates will protect small business–and to the extent to which those claims are true, small business is a byproduct beneficiary–it is big business that is calling the shots.

    The Chamber’s opposition to FCPA is big bank driven and underscores why we need such an agency. The existing financial regulatory did’t and won’t regulate to protect consumers because often the interests of consumers could adversely affect the profitability (read “safety and soundness”) of the banks. That is why we need a separate consumer advocate in Washington.

    Consumers need to be protected from far more than predatory mortgage practices, so let’s get beyond the arguments of whether the mortgage mess was the result of borrower or lender misconduct. We all know that both contributed and we can agree to disagree about the which was the worst. Beyond mortgages, banks abuse us with fees that they can (and do) unilaterally impose and increase at will. The fees extend from ATMs (remember when they were free and banks were telling us that they were firing tellers to save us money?) to checking accounts (they get to use our money for free so why should we pay them additional fees?) to overcharge fees (paid in connection with automatic overdraft protection or insufficient funds rejection) to cash advance fees, etc. We don’t have the right or power to negotiate these fees and given their universality, we have little practical ability to avoid them. I hope a FCPA can help consumers with respect to these practices by insisting that monthly bank statements fully and clearly disclose all the fees paid by the account holder each month. That should result in some pressure on regulators. Similarly, to the extent that fees represent pure income to banks with little or no off-setting costs, the FCPA should, at a minimum, seek to limit or prohibit them. In the mortgage area, it should require full, easy to understand disclosure of costs and risks associated with various mortgage products so we can avoid a future debate about whether the borrow or the lender overreached.

    As Simon notes, small business will benefit as much or more as individual consumers from such regulatory efforts. Small business has little reason to oppose a FCPA. Small business has many reasons to oppose the activities U.S. Chamber of Commerce. Democrats should ensure that the voices of progressive small business owners are heard and that the lies of big business, posing as small business advocates, are exposed.

  86. Of course, of course! Now I see! CRA really stands for Communists Raping Avarice and the CFPA stands for Communists F****** Punishing Avarice.

  87. CRA exists since 1977. I guess the brave lads at the banks managed to resist the coercion for 20 years. If the business was lucrative, as you say in your post, why did the banks have to be coerced into it? They did it exactly because it was lucrative not because of some regulation. And subprime lending was what burst the bubble not what caused it.

  88. In the old days Joe Marginal Risk would have been rejected for a loan, end of problem. That is the job of the lending institution. I assume every day there will be unqualified people applying for loans and jobs and so forth. It’s the responsibility of institutions to weed these people out. Of course, in this case it didn’t matter what the responsible banks did if there were plenty of Fly By Night Mortgage companies, who never saw any pain from the bad mortgages once they were WAMUed and sliced and diced into mortgage toxic waste.

  89. Is the entire derivatives market not a complex many tentacled PONZI scheme. One thousand thanks Silke for attempting to answer the query, and it would seem to me from your response, that in fact there are flows missing from the derivatives markets, and later jake chase diminishes my number ($500Trillion) on the size of the derivatives market to estimates of $100Trillion. Demurring to jake chase’s number, and the fact that the exact size of the market is cloaked because no one can account for “the system exposure to OTC derivatives trading”. How is that possible? Are numbers missing? Why? I realize that modern accounting is a complex mechanics, but deliberate fraud, or intentionally deceptive or fabricated accounting practices are CRIMES!!! Laws must be honored, abided, and enforced. Those convicted of crimes must be punished. When criminals walk away from crimes, or worse – are majikally awarded trillions of taxpayer dollars by grifters in the socalled government, and remain untouched and unaccountable for grievous crimes, – there is in fact NO LAW. In a world where there are no laws, – there are no laws for anyone predators.

    Is the entire derivatives market a PONZI scheme? If not, then please explain how. If not, then why are these thieves not being prosecuted for crimes, and the most epic theft in the history of the world.