Today CSPAN had the congressional hearings with Mozilo, who has a 40 year tenure with Countrywide as founder and CEO. He presided over Countrywide’s meteoric rise and much of the meteoric fall. I hope people hurry up and wake up to the significance of the events underway in housing right now. The mortgage meltdown is likely to become the greatest loss of wealth in human history. CEO pay is a mostly trivial aspect of this situation.I think we’ll see another 10-20% loss from current values and I think we are already down some
2+ trillion in housing value (need to check this, but the number is staggering). A discussion of the amount is HERE.
Housing is a major depository of American wealth and prosperity, and the recent boom in values has led to various forms of reckless spending by individuals as well as the usual wild, stupid, and reckless spending suspect: the Government. This is especially true of our unconscionable and totally indefensible levels of mililtary spending. Note that you *cannot* be a fiscal conservative and support the current military budget. $550,000,000,000 to the military and fiscal conservatism are mutually exclusive positions.The impact of the meltdown and the reckless spending will be felt forever because in addition to direct housing problems that we are only starting to feel, I think all this will to depress our economy for several years and thus accelerate the shift of business to China. This last notion is speculative, but I think it is now pretty clear that the Fed will keep rates low for many years in an effort to fend off an even more disastrous housing and credit situation. This means China will be buying less of our debt, but I think will switch to investing more*directly* in US companies, and thus owning more and more of the American empire. Russia’s leader and architect of communism Vladimir Lenin is famous for saying “The Capitalists will sell us the rope with which we will hang them.” But he was dead wrong. The “Communists”, to the extent that term has meaning anymore, have no intention of destroying the USA. In fact they want to keep us in good shape for as long as needed. Now it is China who is making the rope, buying the rope, and learning the capitalistic ropes so they can slowly and gradually replace us as the empire of choice on the global landscape. A few things I noted during the Countrywide questions and testimony:
* Probably Mozilo was just a high powered opportunistic guy and probably was pretty much within the law with his trades and pay, however he must have known things were poised to melt down to some degree.
* Our congressional system is failing to produce people who are worthy of ruling the amazing American empire. I don’t think there is much corruption but these guys sure are uninspired. The congress-as-corrupt view is a “naivety of the skeptic” idea that is not based on a study of the money flow, personalities, and history of public servants who for the most part are bright, helpful people. However they are mostly lacking in the key skill sets required for innovation and smart reform. In short: American politics selects for the wrong skill sets. To wit:
* Republicans can’t see past Ayn Rand’s ass. They understand the virtues of capitalism, but simply refuse to focus any attention on the key topic of how our brilliant capitalisic experiment has *failed* in many ways to deliver enough products to the neediest folks and how many capitalists are mostly focused on the creation of opportunistic business structures that are exploitable by the clever and the wealthy to the detriment of the greater society. .
* Democratic congresspeople are overwhelmed by math and economics. They concentrate on people, “good vs bad”, “rich vs poor”. * People want to find bad guys rather than find the obvious. In the case of mortgages the system as a whole incentified unwise practicies. Reminds one of the savings and loan debacle although I think government regulations (loan guarantees) were clearly at fault with S&Ls were the mortgage crisis cannot be blamed mostly on the government.
* Is there a simple legal remedy for all the CEO pay and stock manipulation issues? I propose a “Captains go down with the ship” law. If a company you founded fails you lose everything you made from that company except some modest monthly stipend. This would incentify stability over pump and dump strategies. I don’t think it would inhibit founding quality companies. What unintended consequences would this law bring to the business landscape?
Captain of the Ship doctrine?
Consider the past several decades:
It used to be that an investment banker was proud if a new-issue came out and stayed exactly at the offering price and investment bankers would have been ashamed to have a several hundred percent move in the initial days of trading.
Consider banking: Bankers used to own their own loans. The BANK suffered if a loan turned ‘non-performing’ and the BANK did everything it could to work with a borrower to avoid a default on a loan.
Consider appraisals: Appraisers went out and did their jobs properly so as to retain long term relationships and reputations. For years its been ‘windshield appraisals’ and C-notes from the homeowner.
Banks used to grant mortgages to people they though could repay them, not to people they knew would have to refinance them because they were marginally employed and had no money for even a downpayment.
Consider Bankruptcy: It used to be a shameful act, now homeowners see value plummeting and they mail the keys to their bank and buy the house across the street at auction once they dry off from their bankruptcy bath.
Mortgage meltdown? The only question has been the timing. You can go back and read warnings about it for years.
With all the creative accounting out there, bottom line performance is an illusion due to off-book liabilities. Montana Power’s assets were valuable to the officers and to the investment bankers and to the lawyers: but it was an end run around the shareholders who were faced with a fait accompli when the shares in a venerable company plummetted.
We have a long tradition of Businesses being free to make decisions. Ford invested gadzillions in the Edsel and it flopped. FedEx invested in proprietary fax machines for electronic document transmission and lost a bundle. Nobody went from the boardroom to the poorhouse because of business judgment mistakes.
Now you want to straightjacket the entrepreneurs by making them get as much money for shareholders as possible but not go under? Who wants to be a CEO if you can’t take risks. The name of the game is to take assets and get money for them while shifting the costs to someone else at some other time.
Municipalities who played fast and loose with derivatives shunt the losses onto the taxpayers. Mayors who used eminent domain to grab valuable properties bleed off the profits and leave the cities with the losses. Labor negotiators who gave away cushy pensions have already retired and left the government entities holding the bag of unfunded pension and healthcare obligations.
Yet suddenly you want the private sector to be saddled with accountability?
they mail the keys to their bank and buy the house across the street at auction once they dry off from their bankruptcy bath.
Ha FG – I hadn’t thought of this investment strategy!
HEY HONEY! We’re MOVING next door!
I’m not sure when you are saracastic or serious above:
Yet suddenly you want the private sector to be saddled with accountability?
Yes, of course and always. The cornerstone of capitalism is accountability. There are many examples where it has failed and the mortgage crisis will likely go down as *number one*.
The 60+ trillion dollar question is how to best optimize all the factors of a successful capitalistic equation. I agree you want to limit regulation, but even Adam Smith noted that you need government intervention sometimes to help level the playing field when monopolists are playing unfair games.
My thinking is that optimizing means pushing profits (and losses) deeper into the corporation and working much harder to make sure you don’t saddle taxpayers with bailouts.
Oh, rest assured. Despite my humor, I too wish to have accountability in the private sector. I’d love to have it in the public sector too, but have given up all hope.
Consider however that list of defects in my first comment (above). The IPOs that were coming out and getting several hundred percent bounces right away didn’t lead to any corporate shame. The end-run around shareholders of Montana power companies did not lead to anything more serious than a mosquito at a corporate officer’s palatial home. All those banks that changed from owning a loan to simply selling the loan for a quick profit didn’t suffer any criticism. Appraisals of dubious validity were rife and no one got their wrists slapped. So where is the accountability going to come for all those mortgages given to people with little income? Now that housing prices are often plummeting below the principal balance that has to be refinanced what bank suddenly will step forward to issue a new mortgage? And why should that bank sit back and wait for all those payments when all they really want to do is sell the mortgage for a quick profit.
Accountability in the private sector? Well, Crushey was indicted but he conducted a media campaign amongst black ministers during his trial and his largely black jury acquitted him. You going to have accountability?
One corporation banned a reporter from corporate meetings because he had dared to exercise the slightest independence from “the party line” on expected earnings per share. Where was accountability then?
Problems that are systemic are rarely solved by suddenly holding some individual responsible. Just look at some of the accounting scandals of late: High priced lawyers or heart attacks can insulate the primary actors but those who are less guilty face jail terms.
Its not unlike drug enforcement: sometimes the little fish are given immunity so as to catch the kingpin and sometimes the kingpin is given immunity so as to jail scores of the little fish. Either way, the prosecutor scores points, the drug eradication industry continues unabated and drug dealing continues unabated too. Accountability? Not too likely. Desirable perhaps, but not too likely.
Avoidance of bailouts? Lawyers make money on bailouts. And the new owners will soon want a bailout too.
I would agree that politicians on both sides of the aisle generally lack an understanding of modern econ., but then the same might be said for academic economists. Does Brad DeLong understand economics? Reading his site, you might not think so. I am no pro economist (and admit to opting for History instead of ye olde macro-micro track: macro-micro tends to be really a sort of sophisticated sociology with more stats, and perhaps even more guesswork), and my reading in econ. is not extensive, but I don’t think the liberal’s insistence on “eliminating the gap between rich and poor” should be dismissed as just some naive, vaguely marxist thinking: Marx hisself was not so naive either (i.e., read his analysis of Ricardo’s rentiers problem), though too many leftists view marxism in dogmatic terms, rather than as a model.
One can have markets in perfect equilibrium, with companies all making money, the execs spinning around in their Ferraris, and millions in poverty (and that is close to the situation, now). That leads to the Nancy Pelosi types, for better or worse, yet even ChairGal Nancy understands the basic, non-sexy problem of distribution.
In the old days, even republicans–say Teddy Roosevelt–took on the trusts, the industry titans, and the finance capitalists. Modern GOPers now seem more interested in, well, Countrywide sort of legalized money laundering.
An investigation into Countrywide’s lending practices (lots of Bush cronies with ties to the big CW as well) would show them to be aligned with the Frankie Costello school of loan sharking, rather than whatever “ethical” standard financiers might uphold.
Economists detest those who would introduce any ethical considerations with clean charts and analysis, yet I contend (as Galbraith did, in his remarks contra-oligarchies) at some point “entitlement” and fairness do, or should enter the picture, though one could put on the black hat, take a somewhat Darwinist (or Veblenist—economics as anthropology–) approach, acknowledge the greed and capitalist predation without resorting to the Pelosi-like sob sister act.
‘Scuzi the rant. Really, what one thinks of the American oligopoly–whether in regards to finance, IT, industry, schports-entertainment, etc.–sort of depends on a person’s chosen ontology, so to speak. Some humans might believe that a JP Morgan or Rockefeller abide in Perdition (though they might grant that proving that belief is another matter), and that a Billy Gates, or Lars Ellison, and many other Forbes 400 titans will join the industry Heroes, eventually, regardless of how much they give to charity.
Others don’t believe that, obviously, and econometricians would not likely allow a “usury index” along with their number-crunching. Now, if some political theorist or filosophe could quantify “usury”………