Senator Predicted Bailouts Ten Years Ago

[jcd11235 0]

On yesterday's Weekend Edition Saturday on NPR, Scott Simon interviewed Senator Byron Dorgan, who foresaw the repercussions of repealing the Glass-Steagall Act with the Gramm-Leach-Bliley Act. Nearly a decade after GLB's passage, Dorgan's predictions seem to have turned out to be eerily accurate.
An excerpt from the interview:

SIMON: I wanted to give you the chance to say I told you so. We found a quote, 1999, from New York Times when you said, we will look back in 10 years' time and say we should not have done this - this was President Clinton's bank deregulation act - we should not have done this but we did because we forgot the lessons of the past, and that which is true in the 1930s is true in 2010. We have now decided in the name of modernization to forget the lessons of the past of safety and of soundness.

Sen. DORGAN: Well, I mean, it does precious little to say I told you so, but this was 10 years ago on the floor of the U.S. Senate. At the time, I said I thought it was a huge mistake and, you know, I was critical of the Clinton administration and critical of the Republicans in Congress who were pushing it.

But what I said is I think within a decade we're going to see massive taxpayer bailouts. I didn't necessarily know that for sure but it turns out my prognostication was a pretty expensive lesson. Because it made no sense that we should repeal Glass-Steagall and the protections that were put in place after the Great Depression.

And the result of that, in my judgment, was to steer this economy into the ditch and cause a significant economic wreck that's going to take us some time to get out of.

SIMON: The timing is something that intrigues me, 'cause you said this in 1999, whereas you note your party was in party.

Sen. DORGAN: Uh-huh. Well, but let me just say to you that the legislation that was passed by the Congress was called Gramm-Leach-Bliley - all three Republicans. Phil Gramm - those three Republicans led the approach. It was Republican legislation but warmly embraced by President Clinton, Secretary of Treasury Rubin and so on.

But I was one of eight U.S. senators that went to the floor of the Senate repeatedly in opposition to what they were doing. And, you know, as I said, I made some prognostications and say if we do this we're going to see massive taxpayer bailouts in the future.

And unfortunately, that has been the case.

Hopefully Congress will recognize their mistake and pass effective financial regulatory legislation to prevent future financial crises similar to the one we are experiencing and recovering from now.

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[Lucky... 0]

I don't see how the Act is sololy or even at all responsible for the mortgage mess. It's a Republican deregualtion Bill, drawn by a Republican Congress that Clinton signed, but show me how it led to the Mortgage mess. WHat the act did was to: The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate.

OK, and if interest rates weren't so low then people wouldn't qualify for loans for such high principle values, houses wouldn't have been day-traded and sub-prime borrowers wouldn't qualify. BTW, sub-primers qualified, IMO, because lenders felt the value was in the quickly appreciating house rather than the lender, so no down fine as the lender would be doing teh bank a favor by backing out / defaulting.

Whether the banks consolidated or not, the entire catylist for the mortgage mess were the low interest rates for too long.

Here's a great ref that I agree with:

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

The causes are numerous:

- mortgages resetting,
- borrowers overextending,
- predatory lending,
- speculation and overbuilding during the boom period,
- risky mortgage products,
- high personal and corporate debt levels,
- financial products that distributed and perhaps concealed the risk of mortgage default,
- monetary policy,
- international trade imbalances,
- government regulation (or the lack thereof). me - influx of moneys from the private sector
- banks entering into the mortgage bond market
- the predatory lending practices of mortgage brokers, specifically the adjustable rate mortgage,
- moral hazard lay at the core of many of the causes

And the real catylists were:

Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption.

So without the low interest rates, this whole environment wouldn't have been possible and even if attempted, the foreclosures would have come quickly, rather than being delayed and the bubble would have been so small no bailout would have been needed.

I look at this problem and the dignoses that it had to be the Gramm-Leach-Bliley Act as a physical dignoses of a human at the doctors office. A person smokes, drinks, uses drugs, eats poorly and does everything he can to be ill. He wants an answer as to why he has some serious illness, let's say cancer. The doctor might tell him it's the smoking (Gramm-Leach-Bliley Act) just to give him peace of mind, but in reality it's the template of an overall drug consumption environment that drove him there (interest rates).

I think that's a fair analogy, again, the whole mess would have never been attempted, but even if had it would have been stymied early on by quick foreclosures as the artificial house boom would have popped in a few months at most.

Was the Gramm-Leach-Bliley Act a bad idea? Yes, I'm for governemtn regulation, esp of major corporate industries, but di it have a major role here? Don't think so, if banks weren't allowed to consolidate this still could have happened.

[jcd11235 0]

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OK, and if interest rates weren't so low then people wouldn't qualify for loans for such high principle values, houses wouldn't have been day-traded and sub-prime borrowers wouldn't qualify. BTW, sub-primers qualified, IMO, because lenders felt the value was in the quickly appreciating house rather than the lender [borrower? -jcd11235], so no down fine as the lender [borrower? -jcd11235] would be doing teh bank a favor by backing out / defaulting.

The low interest rates of treasury bonds made mortgage backed securities more attractive investments than T-bonds, since they also had excellent bond ratings.

The increased demand for MBS's drove up the demand for mortgages. After all, you can't have a mortgage backed security without mortgages to back it. The increased demand for mortgages required banks and other lenders to find more borrowers. They offered teaser rates, stated income mortgages, and NINA mortgages to attract those borrowers, so they would have a supply of mortgages to bundle and resell to investors.

The lenders weren't interested in obtaining the real estate in foreclosure. Their goal was to make their profit obtaining and reselling the mortgages. Unfortunately, this resulted in many lenders not being particularly interested in practicing the careful underwriting necessary to ensure foreclosure rates didn't rise. Since they had no interest in keeping many of the mortgages in their own portfolios, foreclosures were not a major concern. They only needed borrowers to be able to make payments long enough to allow the lenders to resell the mortgage.

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Here's a great ref that I agree with:

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

I'm not sure I would call Wikipedia a "great ref." Nonetheless, from your linked source:

The Glass-Steagall Act was enacted after the Great Depression. It separated commercial banks and investment banks, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter. [Nobel Prize winning e]conomist Joseph Stiglitz criticized the repeal of the Act [(i.e. the GLB Act)]. He called its repeal the "culmination of a $300 million lobbying effort by the banking and financial services industries...spearheaded in Congress by Senator Phil Gramm." He believes it contributed to this crisis because the risk-taking culture of investment banking dominated the more conservative commercial banking culture, leading to increased levels of risk-taking and leverage during the boom period. The Federal government bailout of thrifts during the savings and loan crisis of the late 1980s may have encouraged other lenders to make risky loans, and thus given rise to moral hazard.

It appears Senator Dorgan knew what he was talking about.

Here are three informative episodes of This American Life that give a good general overview of the crisis and its causes: The Giant Pool of Money, Another Frightening Show About the Economy, and Bad Bank.

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[rushmc 23]

I gotta think you know why the reply's are so few.

You've nailed then at their own game

"America will never be destroyed from the outside,
if we falter and lose our freedoms,
it will be because we destroyed ourselves."
Abraham Lincoln

[lawrocket 3]

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I don't see how the Act is sololy or even at all responsible for the mortgage mess. It's a Republican deregualtion Bill, drawn by a Republican Congress that Clinton signed, but show me how it led to the Mortgage mess. WHat the act did was to: The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate.

.

It did more than that. It didn't allow them to consolidate so much as to diversify. Banks were banks, and they didn't do brokerage or insurance. Brokerages didn't do insurance or banking. Insurance/surety didn't do banking or brokerage.

Yet, all of these were interrelated. They all worked with each other. They all were also separately regulated - three different structures. Add to that each state having different regulations, and the regulations and compliance became labyrunthian and problematic.

Thus, GLB allowed these companies to diversify their services and unify the oversight.

So these companies all went into doing things they didn't know. And new ideas sprung up.

I personally thought at the time (I was fortunate to be taking a banking law class when GLB was passed) that GLB was the best idea to come along in a long time. I still think it was and is great.

It was responsible for the massive growth in wealth we saw. And for the massive drop we saw.

But now we know how these things work. We know that the old methods must be used.

Sureties shouldn't be bonding and rating instruments they are clueless about. Etc.

I think that we should let this thing work itself out.

My wife is hotter than your wife.

[Lucky... 0]

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It did more than that. It didn't allow them to consolidate so much as to diversify. Banks were banks, and they didn't do brokerage or insurance. Brokerages didn't do insurance or banking. Insurance/surety didn't do banking or brokerage.

True, consolidate and expand ventures / share ventures.

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I personally thought at the time (I was fortunate to be taking a banking law class when GLB was passed) that GLB was the best idea to come along in a long time. I still think it was and is great.

Which is fair, most conservatives want to pin this on Clinton and claim he was solely responsible. This, like NAFTA and so many others are systemic; they would have passed under any admin / congress.

Stand alone this is not a bad thing, maybe should have come with some gov oversight.

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It was responsible for the massive growth in wealth we saw. And for the massive drop we saw.

I dunno. How did consolidation and diversity lead to growth and shrinkage? Don't see it.

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I think that we should let this thing work itself out.

Yea me too, I mean, how many thousands of people died in teh Great Depression? Negligible.

Again, the basic environment that was required for the mess to kick off was for interest rates to drop so principle values could takeover that space, if you will. A house payment is PITI, the Principle and Interest are the biggies. They are also inverse of each other and when interest fell, buyers still qualified for X per month and sellers still want the same X for their house that they did before the int rate drop. This started a ponzi scheme.

So why did int rates drop? The fed chairman, Greenspan had to drop them due to the lagging economy, he wanted to entice spending. Why did the economy lag? In large part to the massive tax cuts which allows the rich to store away more of their money.

Of course you still think tax cuts are a good thing, so you will disagree. Ssow me a major federal tax cut that ended in success.

[lawrocket 3]

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I personally thought at the time (I was fortunate to be taking a banking law class when GLB was passed) that GLB was the best idea to come along in a long time. I still think it was and is great.

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Which is fair, most conservatives want to pin this on Clinton and claim he was solely responsible. This, like NAFTA and so many others are systemic; they would have passed under any admin / congress.

That's not me. What I DO think is that, like anythign new, there will be kinks to work out. We've found those kinks, and businesses that want to stay businesses better not repeat those mistakes.

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It was responsible for the massive growth in wealth we saw. And for the massive drop we saw.

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I dunno. How did consolidation and diversity lead to growth and shrinkage? Don't see it.

Because the growth we saw between 02 and 07 was freaking tremendous. It was also unsustainable. Dot-Bomb 2.0.

The economy built a bubble, and the bubble burst. Hence, the recession. The wealth gained was lost.

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how many thousands of people died in teh Great Depression? Negligible.

Thousands. While this is my personal opinion, I believe that the death toll would have been less had the economy been allowed to work itself back, versus the 10 year dragging out that we had.

the basic environment that was required for the mess to kick off was for interest rates to drop so principle values could takeover that space, if you will. A house payment is PITI, the Principle and Interest are the biggies. They are also inverse of each other and when interest fell, buyers still qualified for X per month and sellers still want the same X for their house that they did before the int rate drop. This started a ponzi scheme.


I think it played a role in it. But, like with so many things, the bandwagon took over. Interest rates had little to do with the perceived value of housing.

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So why did int rates drop? The fed chairman, Greenspan had to drop them due to the lagging economy, he wanted to entice spending.

Right. The economy was struggling in 2000-2002.

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Why did the economy lag? In large part to the massive tax cuts which allows the rich to store away more of their money.

I am having a hard time visualizing the rich socking their money away. They'd have their money in the bank or in some other non-liquid asset. Note - the rich are the ones who lost the most in the dotcom bubble.

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Why did the economy lag? In large part to the massive tax cuts which allows the rich to store away more of their money.

Like the Capital Gains Tax cuts of Clinton's Admin? The revenues came pouring in. Then it led to a bubble.

Or what about the Tax Reform Act of 1986? It was bipartisan and it worked. The problem was spending increased at a greater pace than revenues. The TRA also got rid of a large number of tax shelters, which increased taxes in some ways while decreasing them in others.

Tax cuts stimulate the economy. This results in more taxable acts. Revenues increase.

The issue is not that Laffer was wrong. The issue is that we never know which side of the tip of the curve that we are on. Will lowering bring more revenue? Or raising bring more revenue?

Either way - there is trouble if spending is not reined in.

My wife is hotter than your wife.

[jcd11235 0]

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Tax cuts stimulate the economy. This results in more taxable acts. Revenues increase.

This informative link was posted in a different thread by another poster:

Tax Cuts: Myths and Realities.

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[lawrocket 3]

I take it you read the part ewhere I mentioned the unknowns of where we are on the Laffeer curve.

And also note that the quwstion is about how to maximize revenues. "How can we take the most money?"

Isn't that a nice thought? Do you think the government should be doing what it can to maximize the gross dollars it can take from people?

My wife is hotter than your wife.

[justinb138 0]

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Do you think the government should be doing what it can to maximize the gross dollars it can take from people?

That's one of the things that pisses me off the most when I read the news.

If politicians put half as much effort into reducing spending as they did on dreaming up elaborate tax schemes, we'd be rolling in money right now.

[jcd11235 0]

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I take it you read the part ewhere I mentioned the unknowns of where we are on the Laffeer curve.

Yes. When cutting taxes significantly increases revenue, we'll know we're on the wrong side of the curve. Have you any examples of that occurring in recent decades?

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Isn't that a nice thought? Do you think the government should be doing what it can to maximize the gross dollars it can take from people?

I think it should be doing what it can to maximize the efficiency of resource utilization for the nation. In some cases, that means more government involvement, in some cases it means less government involvement.

When the government can provide a necessary service to citizens via taxation for lower cost than citizens could obtain that service for themselves, or for necessary services that individuals would be reluctant to pay for voluntarily, then yes, I believe group purchase via taxation is a good thing.

It is not accurate to assume that lower tax rates for individuals imply net increases in spendable income for those individuals.

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[justinb138 0]

Just out of curiosity, how do you feel about "sin taxes" ?

Should the government use the tax code to legislate morality or responsibility?

[jcd11235 0]

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Just out of curiosity, how do you feel about "sin taxes" ?

It depends on what the revenue is used for. For example, if tax revenue from cigarettes is used for research for and treatment of smoking related illnesses, smoking prevention/cessation programs, etc. that can be a good thing. If the revenue is instead thrown in the general revenue pot, I'm much less supportive of such taxes.

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Should the government use the tax code to legislate morality or responsibility?

Morality, no. Responsibility, yes.

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[lawrocket 3]

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I take it you read the part ewhere I mentioned the unknowns of where we are on the Laffeer curve.

Yes. When cutting taxes significantly increases revenue, we'll know we're on the wrong side of the curve. Have you any examples of that occurring in recent decades?

I already mentioned the 1986 Tax Reform Act. You missed that, too?


[Reply]

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Isn't that a nice thought? Do you think the government should be doing what it can to maximize the gross dollars it can take from people?

I think it should be doing what it can to maximize the efficiency of resource utilization for the nation. In some cases, that means more government involvement, in some cases it means less government involvement.

When the government can provide a necessary service to citizens via taxation for lower cost than citizens could obtain that service for themselves, or for necessary services that individuals would be reluctant to pay for voluntarily, then yes, I believe group purchase via taxation is a good thing.

It is not accurate to assume that lower tax rates for individuals imply net increases in spendable income for those individuals.

[jcd11235 0]

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Yes. When cutting taxes significantly increases revenue, we'll know we're on the wrong side of the curve. Have you any examples of that occurring in recent decades?

I already mentioned the 1986 Tax Reform Act. You missed that, too?

No, I didn't miss it. It just doesn't provide an example of what I asked for. The increases in revenue from the 1986 Tax Reform Act weren't significant. The annual growth in revenue in real dollars doesn't look unusual compared to previous years. It certainly isn't an indication that it was a move toward optimal position on the Laffer curve.

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That's a nice answer to a question I did not pose. Here's the question: "Do you think the government should be doing what it can to maximize the gross dollars it can take from people?"

No. That's the wrong metric to be using to determine optimal taxation, although it is a metric that must be considered.

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