Quoting ginger baker: gee will do you think you could get more of an ideological balance? every FreeWill episode has free-market libertarians.

Its a credibility crisis, know what i mean?

Hi Ginger, I thought Arnold was uniquely positioned to clarify a lot of things that confused me and I'm sure a lot of other people. What part of Arnold's explanation of the crisis do you suppose is ideologically freighted? Anyway, I think you'll find that most episodes of Free Will don't have libertarians as guests. (In fact, we had someone else -- a tech start-up guy [don't know his politics] -- scheduled for this week, but he dropped out, and Arnold was gracious enough to step in on short notice.) It is true, however, that every episode has me in it. Sorry for that.

Quoting ginger baker: gee will do you think you could get more of an ideological balance? every FreeWill episode has free-market libertarians.

Its a credibility crisis, know what i mean?

Arnold Kling gave a great explanation of how we got ourselves into this mess. I challenge you to find a single credible economist who would give a different explanation of the events leading up to the current crisis. Krugman and DeLong would have no major issues with what Kling said. Economists may differ as to what to do. Kling gave his opinion - and made it clear that few agreed with him. I have had requests from friends and family members to explain this mess. I am going to forward a link to this diavlog.

VERY HELPFUL! A fascinating history.
I'm planning to listen a second time to soak up what I didn't get the first time around.
Thanks to Will and Arnold Kling

This was a great dialog; I hope Will has Mr. Kling on for a Part 2. In my search for an 8th grade level of explanation about recent financial happenings, it was frustrating to discover how little most economists know about the capital markets. So being able to hear--at length-- from someone who once had a front row seat at Fannie Mae was great. I'm also planning to watch it again.

One of the most informative diavlogs I have watched. Great questions and answers on a really important issue.

Quoting Will Wilkinson: Hi Ginger,

I thought Arnold was uniquely positioned to clarify a lot of things that confused me and I'm sure a lot of other people.

I felt the same way -- lots of helpful background explanations, at least for someone at my level, and I didn't see how personal philosophy played much of a role. It's possible that it did in, say, reaction to Paulson's plan, or an argument against helping people take on mortgage debt as opposed to helping them with down payments, but other than bits like that, I thought Arnold offered expertise, not ideology. Good guest, Will. I'd like to hear another hour from him. And to Ginger -- I haven't looked at past threads to be sure, but is it you who complains about libertarians every time there's a libertarian on? (I know there's someone who does this.) If it is you, you might think about the relationship between effectiveness and repetition, especially concerning sweeping dismissals.

i really hope conn carroll watched this as arnold offered a very specific example of how dereg helped cause the meltdown.
also, here's this:
http://www.cbsnews.com/stories/2008/...n4483612.shtml
One of the e-mails said, “quote, 'It could be structured by cows and we would still rate it.' And this one, this is my personal favorite, one Wall Street analyst to another wrote, quote, 'Let's hope we are all wealthy and retired by the time this house of cards falters.' They were writing these e-mails nearly two years ago. Why are we bailing these people out?" Pelley asked.

I enjoyed the talk as well, but after reading and hearing a lot about the crisis, I'm left with a couple of painful questions: 1) How can Congress act intelligently? I am certain that most members of Congress are clueless about the complexity of the crisis and won't ever bother to educate themselves beyond soundbites. Thus, they'll continue to rely on the folk beliefs and ideologies of their constituencies, the interests of the lobbyists who influence them and the biases of the same "experts" who got us into the problem in the first place. But this is an enormous dilemma which leads to 2) How did the experts go so wrong? It seems that a lot of people who spend their entire lives studying finance and economics failed miserably to assess the risk properly. There's plenty of blame to spread around among all the actors ("greedy" Wall Street, over-compensated CEOs, bubbles, insanely complex secondary markets and derivatives, deregulation, domino effects, etc., etc.). But even factoring all that in, shouldn't the alarms have gone off sooner? I still don't have a clear answer to that.

It may interest Will and others that an entire secondary market exists for credit card receivable-backed securities. These are instruments similar to MBS but based off of everyone's credit card balances. Per capita credit card debt is now at an all time high. Imagine that the inevitable financial crisis discussed does come to pass, and that credit card default rates presumably skyrocket. Will Congress need to step in and in essence buy everyone's bad credit card debt? It my sound outlandish, but these are strange times indeed. Wonderment wonders why no one saw the mortgage bubble coming. But the same issues that created the housing bubble / MBS meltdown (teaser rates, relaxed credit standards, coupled with the offloading of risk via securitization) are evident in the credit card industry. I sincerely hope I don't have to say you heard it here first.

Hey Will, the link to your blog on the diavlog page is busted.

Will: Good catch. I've been pressing the booking department to get more heavy hitters on these topics as guests. Perhaps you can do better. There's a good pool of academics/bloggers/market participants who more-or-less saw it coming. Suggestions: Bob Shiller (good tie-in since bhtv is advertising his book), Richard Bookstaber, Nouriel Roubini, Chris Whalen (IRA), Barry Ritholtz (The Big Picture), Mish Shedlock (Globaleconomicanalysis), Paul Kedrosky (Infectious Greed), Jeff Matthews, just for starters. N.

Quoting syrupico: It may interest Will and others that an entire secondary market exists for credit card receivable-backed securities. These are instruments similar to MBS but based off of everyone's credit card balances. Per capita credit card debt is now at an all time high.

Likewise for student loans, auto loans, etc. A few key differences: securitization of credit card receivables is a more mature industry, the underlying delinquencies are both more predictable and partly offset by increased interest and penalties, and (most importantly) the industry is very small relative to the mortgage market. After mortgages, HELOCs are the biggest nightmare asset for many banks, and they've been trying to reel them in as fast as possible (even in some cases paying customers to terminate unused lines). There are plenty of anecdotes suggesting people have been treating these as shadow checking accounts ("their" money), and in terms of collateral, they're the worst of all worlds: unsecured and non-recourse.

Quoting Namazu: Will:

Good catch. I've been pressing the booking department to get more heavy hitters on these topics as guests. Perhaps you can do better. There's a good pool of academics/bloggers/market participants who more-or-less saw it coming. Suggestions: Bob Shiller (good tie-in since bhtv is advertising his book), Richard Bookstaber, Nouriel Roubini, Chris Whalen (IRA), Barry Ritholtz (The Big Picture), Mish Shedlock (Globaleconomicanalysis), Paul Kedrosky (Infectious Greed), Jeff Matthews, just for starters.

Your comment makes Sean Carroll's lament even more poignant:

... [the] amount of blogging by respectable physicists has taken a substantial leap forward. We still have a long way to go to catch up to the economists.

This was very good as far as it went, but I don't think it cuts it to confess to not having a complete understanding of credit default swaps. It seems that CDSs turbo-charged a big problem (crappy mortgage-backed securities) into an astronomical problem. I can't find any articles that explain exactly how these things permeated the worldwide financial system. Even the Sunday NY Times article on AIG's London desk explained only a small part of the CDS problem as it relates specifically to AIG. AIG at least had creditworthiness when it sold CDSs. As I understand it, hedge funds without credit ratings or public balance sheets sold trillions of dollars of these things, which freed up the buyers to remove loans off their balance sheets and free up lending capacity. How can a regulated lender manipulate its balance sheet with unregulated CDSs? Again, as I understand it (I'm using the phrase "I understand" frivolously), the real nightmare cascade occurs when any portion of +$60TT worth of CDSs default, which in turn causes the whole mess to default, requiring every damn financial institution in the world to restate its balance sheet, for the worse. I'd like to see

Attached see a WSJ article that gives a pretty good blow-by-blow of what happened in the financial system last week. Note that crappy mortgage securities aren't even mentioned; they seem now to be beside the point. This seems to offer credence to the Paul Krugman types who say the buying up crappy mortgage securities simply won't address the main problem. I hope attaching a pdf works. If it doesn't, the article is found here.

I was just listening to a guy from a company that made huge investments in subprime borrowers. no down, low interest, 30 year fixed loans. (it was on NPR a few minutes ago, sorry no link) his company is doing great. His point is that low/no down payment loans are NOT causing the problem (which Kling focuses on in the first 15 minutes). The problem is with the adjustable rate/ ARM loans where people suddenly face massive increases in their loan payments. So, it is the predatory loans, NOT the subprime borrowers who are causing the problem. Subprime borrowers in Prime loans are doing just fine. I would expect republicans (and libertarian leaning republicans) to focus on those "irresponsible poor people that never should have tried to own a home" rather than the predatory lenders because it fits their biases. Kling follows the expected path ( at about 16 minutes into the dvlog)

We’ve heard and read at length about how the lenders and insurance companies and high risk investors have helped cause the current financial mess. Time now to focus on Washington’s role in all of this. I believe that is where the blame ultimately lies.

The House just voted this rescue plan down by 228 to 205. I would imagine the Republicans had help from at least some of 44 Blue Dog Democrats. I think the added majority in the House come next election will have some more "fly over states" Blue Dogs. John

The Hero of the last week or so has been the Rep. Frank. In response to the utterly ludicrous excuse by House Republicans that Pelosi's speech earlier in the day made them unhappy and the killed bail out bills chances ... "Democratic Representative Barney Frank highlighted "one of the truly great coincidences in the history of numerology; the number of deeply offended Republicans who put feeling over country turned out to be exactly the number you would need to reverse the vote." http://www.huffingtonpost.com/2008/0..._n_130341.html I saw him slap Eric Cantor around on CNN Sunday. Fuuuuhneey

What was Pelosi's purpose in giving the speech when and where she did? What did she hope to accomplish by it? I watched the speech, and it so happens I agree with pretty much every word of it, but what kind of political judgment was it to choose that time and place not to promote and sell the bill, but instead to insult the living shit out of her partisan opponents?

Quoting thouartgob: The Hero of the last week or so has been the Rep. Frank.

Ya think? See here, from the WSJ:

Fannie Mae's Patron Saint

Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank. Asked about Treasury's modest bailout condition that the companies reduce the size of their high-risk mortgage-backed securities (MBS) portfolios starting in 2010, Mr. Frank was quoted on Monday as saying, "Good luck on that," and that it would never happen.

There you have the Fannie Mae problem in profile. Mr. Frank wants you to pick up the tab for its

Quoting thouartgob: The Hero of the last week or so has been the Rep. Frank. In response to the utterly ludicrous excuse by House Republicans that Pelosi's speech earlier in the day made them unhappy and the killed bail out bills chances ...

"Democratic Representative Barney Frank highlighted "one of the truly great coincidences in the history of numerology; the number of deeply offended Republicans who put feeling over country turned out to be exactly the number you would need to reverse the vote."

http://www.huffingtonpost.com/2008/0..._n_130341.html

I saw him slap Eric Cantor around on CNN Sunday. Fuuuuhneey

I like this one too:
http://www.huffingtonpost.com/2008/0..._n_130328.html

Again after listening to Arnold Kling I was made aware of how little I do know. This awareness increases with age. John

Quoting bkjazfan: Again after listening to Arnold Kling I was made aware of how little I do know. This awareness increases with age.

John

I believe they call that wisdom.

Quoting Anyuser: What was Pelosi's purpose in giving the speech when and where she did? What did she hope to accomplish by it? I watched the speech, and it so happens I agree with pretty much every word of it, but what kind of political judgment was it to choose that time and place not to promote and sell the bill, but instead to insult the living shit out of her partisan opponents?

Ya think? See here, from the WSJ:

What difference do you think Pelosi's speech actually had on the vote? Does anybody truly believe that House members of either party are going to en masse allow their vote on a vital issue be swayed because the opposition leader makes a partisan speech? The notion doesn't pass the laugh test. Boehner has been rightly ridiculed for floating the proposition at all, and it currently seems possible he could lose his leadership position, partly as a result of how stupid the suggestion has made him look. It's also not like the Republicans don't take jabs ("unpatriotic", e.g.) in the midst of important fights. Given that context, it seems even sillier to place any

Quoting AemJeff: What difference do you think Pelosi's speech actually had on the vote? Does anybody truly believe that House members of either party are going to en masse allow their vote on a vital issue be swayed because the opposition leader makes a partisan speech? The notion doesn't pass the laugh test.

Agreed, and now that the GOP has since backpedaled so furiously from that excuse, it's even funnier. If we apply paranoia to this, as though Democrats were capable of Rovian tactics, we might think Pelosi gave that speech on purpose, to draw the Republicans into whining about it, just so they could be seen as such pantywaists.

Quoting bjkeefe: Agreed, and now that the GOP has since backpedaled so furiously from that excuse, it's even funnier.

If we apply paranoia to this, as though Democrats were capable of Rovian tactics, we might think Pelosi gave that speech on purpose, to draw the Republicans into whining about it, just so they could be seen as such pantywaists.

We can only wish Pelosi was that good.

Quoting AemJeff: We can only wish Pelosi was that good.

Agreed, although sometimes I wonder -- you don't get to be Speaker of the House by being anything other than a really skilled politician, and I mean that in down-and-dirty ways as well.

Quoting bjkeefe: Agreed, although sometimes I wonder -- you don't get to be Speaker of the House by being anything other than a really skilled politician, and I mean that in down-and-dirty ways as well.

There's a valid distinction you can draw between raw political skill and the effectiveness a politician achieves as an officeholder. An easy example to illustrate this is W. I don't think Pelosi is Bush-level bad (bush-league?); but, I can imagine a less feckless couple of years than we've seen from Congress since '06.

Quoting AemJeff: There's a valid distinction you can draw between raw political skill and the effectiveness a politician achieves as an officeholder.

Completely agreed, but that doesn't obviate my thought that Pelosi could be capable of some clever tricks like consciously baiting the other side into looking bad. What does obviate it, though, is how unsuccessful she has been at getting much accomplished, although I suppose a case could be made that she was taking the long view, and starting in 2006, was always keeping her powder dry and playing to optimize the chances of winning back the White House. Pure speculation, to be sure. It's just as likely that your view is the correct one, that like Bush, her skills end with getting into office, and there's nothing left to do anything useful once in place. I think we'll be able to settle this within Obama's first hundred days.

Quoting AemJeff: There's a valid distinction you can draw between raw political skill and the effectiveness a politician achieves as an officeholder. An easy example to illustrate this is W. I don't think Pelosi is Bush-level bad (bush-league?); but, I can imagine a less feckless couple of years than we've seen from Congress since '06.

Yes, there's solid gold and there's golden paint. Well, there's also gold leaf...

Quoting bjkeefe: Completely agreed, but that doesn't obviate my thought that Pelosi could be capable of some clever tricks like consciously baiting the other side into looking bad.

Exactly. Especially considering Pelosi isn't acting in a vacuum. She has a massive staff and the entire Democratic caucus to help her plot strategy. And while we can't know for sure, I think it's distinctly possible that the Democrats deliberately baited the Republicans into shooting themselves in the foot by voting against the bailout. This sent an important message to the corporate community about which party is dependable and which is not. The Republican Party used to be corporate America's favored vehicle for advancing the corporate agenda, but increasingly in past years, the Republicans have shown themselves to be less than dependable, having been taken over by lunatics, and this is becoming obvious to everyone and a liability. As for Pelosi more generally, I think she deserves more respect. What people need to realize is that the Democratic party has ALWAYS been split between a liberal/labor coalition on one hand (that's what I think we all would identify with) and a conservative/corporate coalition on

Quoting AemJeff: What difference do you think Pelosi's speech actually had on the vote? Does anybody truly believe that House members of either party are going to en masse allow their vote on a vital issue be swayed because the opposition leader makes a partisan speech? The notion doesn't pass the laugh test. Boehner has been rightly ridiculed for floating the proposition at all, and it currently seems possible he could lose his leadership position, partly as a result of how stupid the suggestion has made him look. It's also not like the Republicans don't take jabs ("unpatriotic", e.g.) in the midst of important fights. Given that context, it seems even sillier to place any emphasis whatsoever on Pelosi's tack.

Politics are fun, kids! The purpose and substance of that bill were pretty hard and boring, weren't they? If you shift the topic to politics, you don't have to be very smart, and you can trade funny insults. Who wants either Pelosi or Boehner or BHTV commentators to show the slightest comprehension of what's at stake? Booooooring!

Quoting Anyuser: Politics are fun, kids! The purpose and substance of that bill were pretty hard and boring, weren't they? If you shift the topic to politics, you don't have to be very smart, and you can trade funny insults. Who wants either Pelosi or Boehner or BHTV commentators to show the slightest comprehension of what's at stake? Booooooring!

Hell, I'll say clearly: I have no clue whether passing this bill is a good idea or a bad one. I think Barnie Frank is a not-stupid, and as long as he's responsible for crafting the substance of the bill, I'll go along by default. But, Boehner's rejoinder and the chorus that picked it up and ran (nicely mixed metaphors there, sorry...) were exercises in distraction, attempts to massage the narrative regardless of the facts. For that matter, so was Pelosi's speech. None of ought to still be part of the discussion.

Quoting AemJeff: Hell, I'll say clearly: I have no clue whether passing this bill is a good idea or a bad one. I think Barnie Frank is a not-stupid, and as long as he's responsible for crafting the substance of the bill, I'll go along by default. But, Boehner's rejoinder and the chorus that picked it up and ran (nicely mixed metaphors there, sorry...) were exercises in distraction, attempts to massage the narrative regardless of the facts. For that matter, so was Pelosi's speech. None of ought to still be part of the discussion.

I agree with every word.

You have GOT to be joking. Barney Frank was an avid supporter of Fannie Mae until a late as LAST YEAR; urging them to be more aggressive in lending to the poor. His campaign received $40k in contributions from the institution, and he even had a fling with a Fannie Mae executive. And now, in helping to craft a $700 billion handout to his friends, you think he's uniquely qualified? You bet. I'm sure they'll come out of this swimming in a sea of your money. It's amazing how political affiliation makes one completely blind.

Quoting gamut: It's amazing how political affiliation makes one completely blind.

Quite.