Greenspan Tells Congress Bad Data Hurt Wall Street 496
CWmike writes "Former Reserve Bank chairman Alan Greenspan has long praised technology as a tool to limit risks in financial markets. In 2005, he said better risk scoring by high-performance computing made it possible for lenders to extend credit to subprime borrowers. But today Greenspan told Congress that the data fed into financial systems was often a case of garbage in, garbage out. Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them. Explaining in his testimony what failed, Cox noted a 2004 decision to rely on the computer models for assessing risks — a decision that essentially outsourced regulatory duties to Wall Street firms themselves."
bad code or bad summary? (Score:5, Informative)
The summary says bad 'code' led the credit rating agencies to give incorrect scores. The article doesn't say anything about code. It says bad data was responsible.
We seem to be passing the buck on Mortgage crisis. (Score:2, Informative)
Wikipedia has excellent articles on subprime and the housing bubble and their cause effect.
I still blame the banks and morgage brokers. Including the Sandlers who SNL made fun of.
-Leverage can be evil. The investment banks were highly leveraged. Caused the stock exchange to crash in 1929.http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
Re:Of course the code was bad. (Score:5, Informative)
The ratings were based on the idea that house prices only ever go up, and that they could always foreclose and get their money back. The model didn't take into consideration that in places like Detroit, you might find that you can't even sell the foreclosed houses in some of the worst areas for $1.
Re:Outsourcing Their Decisions (Score:5, Informative)
That comment proves your ignorance of this matter.
Libertarians did not 'want' a lowered interest rate or deregulation of the fundamentally corrupt banking system. Libertarians want NO socialized banking which means NO federal reserve which means NO federal control of interest rates.
This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas. The banking system in America is NOT free market and has not been free market since 1913 (The Federal Reserve Act).
But please continue to let ignorance be your guide...
Insurance (Score:4, Informative)
That and the fact that many mortgage-backed securities got their AAA ratings by being insured by the commercial insurance companies.
"This security is backed by a pool of actual mortgages AND it's insured by AIG. You CAN'T lose! In fact, they're so bullet-proof you should even leverage yourself to the max to buy as many of them as you can!"
Re:Outsourcing Their Decisions (Score:2, Informative)
Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate the Fed charged for money and kept their fingers out of market regulation.
I'm curious as to where you found these Libertarians who support the Federal Reserve.
In a true free market, capital is finite, so high investment leads to higher interest rates (by supply and demand) It is self-regulating, discouraging over-investment.
As you mentioned, the intervention of the Fed caused this boom/bust cycle by keeping interest rates artificially low and supplying endless credit. That's a key reason why most Libertarians and Constitutionalists want to end the Fed.
Re:Greenspan's hubris (Score:5, Informative)
Banks were pushed. Banks were even sued [mediacircus.com] to extend home ownership to those who, frankly, can't handle it.
According to the docket in your linked article, the banks were sued for the following reason:
Plaintiffs alleged that the Defendant-bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories.
Your position appears to be that plaintiffs lied -- that in fact loan applications were denied purely based on the financial and credit characteristics of the applicants. Is there any evidence to support and/or disprove this position? I've read your links but I have not been able to find statistics that provide any confirmation of the claim that "Obama Sued Citibank Under CRA to Force it to Make Bad Loans"
Without evidence that the banks were (or were not) denying loan applications based on ethnic origin, I don't see how I -- or anyone else -- can reasonably assess whether lawsuits like this one had a significant impact on the current banking crises.
I have found The Color of Money [powerreporting.com], a series of articles on lender's avoidance of middle-income black neighborhoods. The article series won the author, Bill Dedman, the Pulitzer Prize[1]. I'll be adding the articles to my reading queue -- my expectation is that the truth behind these loans is quite a bit more complex than has been presented here.
[1] Bill Dedman's MSNBC bio [msn.com]
Re:Outsourcing Their Decisions (Score:1, Informative)
Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate
Er, correct me if I'm wrong, but the libertarians don't believe government should hold a monopoly on currency in the first place, and therefore would have the federal reserve abolished. At least I've never heard of one arguing either way ("raise", "lower") for government control and arbitary manipulation of currency.
Libertarians say Federal Reserve is Theft. (Score:5, Informative)
Greenspan did exactly what all the [...] Libertarians wanted... lowered the interest rate the Fed charged for money
I call bullshit.
When the Federal Reserve prints (or equivalent) and loans out ANY money, the new money gets its value by diluting the value of ALL the money, thus stealing value from the money already out there.
Libertarians explicitly REJECT this sort of theft.
They believe that ALL money should consist of, or be 100% backed by, a valuable commodity. The value of the money would fluctuate ONLY according to the value of the commodity (and, in the case of "backed" tokens, by the perception of the reliability of the commodity warehousing operation). Thus it would be impossible for the government or its proxies to steal the value out of money already out there to give to its cronies.
So, no, libertarians did NOT want the Fed to lower interest rates.
Learn before you talk.
Impossible to tell good from bad. (Score:4, Informative)
So, tell me... (Score:1, Informative)
If what you're telling us is true, then how come...
While I don't mean to suggest that the CRA is perfect, the recent criticism of it is opportunistic, agenda-driven, and not based on actual facts. The reason we have a CRA and non-discrimination laws for mortgage lending is that: (a) for decades, mortgage lenders refused to lend to some people, irrespective of their credit history, based on criteria like their race or the neighborhood they were looking to purchase in (redlining [wikipedia.org]); (b) even today, minority borrowers have a harder time getting loans than white folks, even after you control for income and creditworthiness.
What policies like the CRA aim to achieve is to make lenders lend to minorities on the same terms. A black applicant looking to buy in certain neighborhoods has a lower chance of getting a loan compared to a white applicant with the same income and credit history, looking to buy in a different neighborhood. Policies like the CRA aren't aimed to forcing lenders to lend to that black guy. The point is that if a bank judges the black guy to be an unacceptable risk, then it should reach the same conclusion about the equivalent white guys that it gets applications from.
Not that this is terribly relevant, again, because the recent boom of subprime lending was due to institutions not subject to the CRA. The argument just fails to get off the ground because of this.
Finally, let me challenge this widespread assumption that your whole argument requires: subprime = poor folk = minorities. That just ain't so; being brown, black or poor doesn't automatically make you uncreditworthy (which is the whole damn point of programs like the CRA). To quote a really good blogger on this topic (Tanta from Calculated Risk):
The blog post [blogspot.com] in question is worth reading.
Not to mention Freddie Mac and Fannie Mae (Score:5, Informative)
The great irony is that you had an essentially government-forced-lending program created and protected by Democrats, while calls by Republicans to regulate it [freerepublic.com] were opposed and called "ideological" [wsj.com]. And now the free marketers are being blamed! That's like blaming Slashdotters if voting machines failed to work right.
Re:Bad data, no. Bad modeling assumptions, yes. (Score:1, Informative)
Myron Scholes was given a Nobel prize for his formula in 1997. In 1998 the hedge fund he (and Robert Merton) worked for as a partner, Long Term Capital Management, lost 4.6 billion in 4 months. It was bailed out by a group of private banks at the request of the Fed.
Re:Libertarians say Federal Reserve is Theft. (Score:4, Informative)
The price of a good has nothing to do with rationality, but how much people pay for them. Heroin is not cheap. Beer is cheap, but never as cheap as I'd like. Cigarettes, Jesus, I'm just happy I don't live in Europe. Those are not 'rationally useful' products, they are basically ways to die in slow gear, but they are much more expensive than air, which is essential to life, but so abundant as to be free. Wouldn't be so cheap on a space station. Its utility didn't change though, its scarcity did.
My point is merely that gold is no different from the rest of these. It's all just "how much people pay for them". There's nothing magical about gold, even though people talk constantly about its "intrinsic value". It has no such thing. Gold is worth exactly what people are willing to pay for it.
Anyway, if gold is as useless as you say it is, then lets just trade. I got 300 new 1 dollar bills. Just get me two gold bars for them and we'll leave it at that.
Let's do the reverse. If paper money is so worthless, why don't you give me enough $100 bills to fill a suitcase and I will give you an ounce of gold in return. I'm sure that the gold will be more than enough to pay for the cotton and ink.
What the hell are you talking about? (Score:5, Informative)
This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas. The banking system in America is NOT free market and has not been free market since 1913 (The Federal Reserve Act).
What the hell are you talking about?
Don't blame [slashdot.org] the CRA, it only prohibited red-lining (denying a loan based on geographic area rather than individual credit rating), and only applied to banks, not independent mortgage companies.
Don't blame [slashdot.org] Fannie Mae or Freddie Mac either. They weren't the ones making the loans.
The government didn't [slashdot.org] force these independent mortgage firms to push sub-prime loans, along with predatory rate structures, at high credit risks, nor did anybody force private investment firms to snatch up securitized mortgage bundles made from them.
Nobody forced the financial institutions to horribly over-leverage their assets on incomprehensibly complex securities [slashdot.org]
Ironically, it was the repeal [wikipedia.org] of the section of the Glass-Steagall Act (passed in response to the depression) which strictly separated banks from securities firms (to help assure the stability of banks) which exacerbated this mess and resulted in such massive failures.
TLDR version:
Deregulation under the notion the "free market" and "competition" would result produce stability allowed financial officers to engage in horrendous risks (pursuing increased revenue like any company should).
The federal reserve and FDIC are the unsung saving grace of this crisis. Without the guarantees on deposits, main street would have long ago run the banks, resulting in economic devastation which would have made the depression look like a quiet, happy picnic.
Re:What the hell are you talking about? (Score:5, Informative)
As I've said before, I'm not against people financing the operations of others for profit, but they shouldn't be allowed to inject fictional currency into the money supply to do so. Only with government interference in the market or criminal activity is this possible.
Re:Libertarians say Federal Reserve is Theft. (Score:3, Informative)
Agreed. There are several other reasons why we should avoid a gold standard, or any other similar arbitrary standard.
For one, a precious metals standard never stopped a country from playing loose with its own rules when it felt necessary. Major countries throughout history have bent or broke the rules in times of war to raise funds. Nixon didn't like the idea of raising taxes to pay for the Vietnam War, because he knew it would make the war even more unpopular. So, he printed money instead, despite the official policy of maintaining a gold standard. This caused a currency collapse, the downfall of the Bretton Woods system, and the eventual abandonment of the gold standard, known as the Nixon Shock. The astute reader will notice that this is very similar to what is happening today to pay for the Iraq War. In any case, a precious metals standard is no guarantee of fiscal responsibility. Governments and central banks can choose to be fiscally responsible or irresponsible regardless. A lack of a precious metals standard doesn't force us to print money. We're devaluing our own currency out of choice.
Another reason to avoid a gold standard is that it would encourage gold mining instead of "better" investments. Gold doesn't create jobs. It doesn't produce dividends. You can't eat it. A fiat currency, if properly managed, will encourage more valuable economic activity.
Gold mining is also rather bad for the environment, and tends to poison water supplies that people and crops depend upon for survival. This has been a problem in Romania and Peru.
Finally, returning to a gold standard would arbitrarily shift economic power to those countries with gold reserves and gold deposits, and away from those countries that might produce otherwise more valuable goods and services. If you thought that George Soros's currency manipulations or Sovereign Wealth Funds were scary, think about what happens when Russia or China can arbitrarily manipulate the value of the world's currencies by increasing or decreasing their gold mining activities.
Re:Libertarians say Federal Reserve is Theft. (Score:3, Informative)
The extremely thin oxide/sulfide layer has little effect on the overall effectiveness of the heat sink (and silver and copper are better at conducting heat than gold in the first place). The effect of dust collecting on the heat sink surface probably exceeds it by orders of magnitude, so if you don't clean the heat sink religiously, the effect of the oxide layer gets lost in the noise.
If it wasn't so expensive, it would be much more widely used.
It's not just expensive, it's also heavy - gold has more than twice the density of copper. And mass is a constraint in many applications.
Re:What the hell are you talking about? (Score:1, Informative)
No, They loan out a multiple of the deposits, this is the (alleged) problem with fractional reserve banking. If a bank has deposits of $10,000 they are allowed to loan out $100,000 if there is a 10% reserve requirement. They loan out money that they don't have.
No, the libertarian is correct, without any lending regulations it would be fraud to loan out something that you don't have. The ability to loan more than you own is created through regulations.
--
JimFive
The second great depression (Score:5, Informative)
If it was a truly free market we would be in the second great depression as people would have no guarantee that there money will still be there when their bank closes. After all there would be no FDIC insurance on their accounts in a truly free market right?
No government bailouts would mean your account would vanish if you used wamu or wachovia. Also no credit to businesses which will cycle to many more lost jobs which in turn means more bank failures and even tighter credit ... etc.
Massive withdrawls and runs on the bank would have happened by now and we would be in a situation much much worse economically than today.
The problem with market purist idealogies is that the assumption is the market is always perfect %100 of the time. It assumes people are rational and educated which includes investors and consumers. The market can not regulate itself unfortunate and this is the third time since 1929 that bad loans and banking failures caused economic recessions. H
Re:Not to mention Freddie Mac and Fannie Mae (Score:2, Informative)
I wish I had mod points.
Take a look at factcheck.org [factcheck.org]
They have the most comprehensive write-up I've seen on where the blame lies.
The republican reforms were probably to little to late but I can't see how the Dems opposed them when the crisis was so obvious. The main charge against McCain is that he got on board in 2006 after the bubble had burst, but while the Dems were still opposing the regulation.
Re:What the hell are you talking about? (Score:3, Informative)
No, They loan out a multiple of the deposits, this is the (alleged) problem with fractional reserve banking. If a bank has deposits of $10,000 they are allowed to loan out $100,000 if there is a 10% reserve requirement. They loan out money that they don't have.
I think you're conflating fractional reserve lending with the money multiplier effect. They can't lend capital they don't have. If the minimum reserve requirement is 10%, that means the other 90% of the deposit goes out.
In your example that would mean a deposit of $10,000 would result in $1,000 on hand and $9,000 in loans.
The money multiplier effect comes into play when this deposit->loan cycle happens many times.
That 9k loaned is deposited in the borrower's account, and 900 stays with that bank, while another 8100 is lent..
and so on and so forth along a log-linear curve until the sum becomes indivisible (1 penny)
Nobody lent more than they had, nobody committed fraud. Most of the assets in this chain are borrowed though. This is not unusual at all however. People take loans to buy cars, that's not fraud against the dealership (LOOK! I SNUCK IN A CAR ANALOGY )
From wikipedia [wikipedia.org]
Re:What the hell are you talking about? (Score:3, Informative)