Subprime Mortgage Market vs. Credit Default Swaps

To expand upon the exchange below, here is the size of the subprime mortgage market (from bloomberg.com) versus the credit default swap (CDS) market which expanded, thanks to chief McCain advisor Phil Gramm's 2001 legislation, from a 1 trillion dollar market ten years ago to more than 62 trillion dollars (from Yahoo):



Now look at that chart, and ask yourself: which of the two slices would have banks scared shitless that if they lend to other banks, those banks might lose everything? It's those kinds of numbers (and the reality that AIG almost folded because of CDSs) that are at the root of the credit crunch. And a further point: mortgage brokers have been talking about the huge demand for "paper" that came filtering down from on high, the pressure to generate mortgages. This pressure came from speculators (domestic and foreign) who wanted more fuel for Ponzi schemes like the CDS market. It's a situation where an instrument intended to mitigate mortgage risk far outstripped its object and magnified the risk -- not only did the cart get before the horse, it picked the horse up carried it off a cliff.

And in case you think part of the credit problem is all the plastic we've been burning (and which the "culture of responsibility" pablum keeps bringing up), chew on this: total consumer credit card debt was 2.55 trillion in 2007 (from creditcards.com). That's less than 5% of the CDS market. And this is why Matt Taibbi gets pissed at Byron York below -- blaming minorities and consumers*** is standard Republican bullshit.

The worst thing about this bullshit (as I suspect most of what comes from the G.O.P.) is that most of them believe it, because they don't understand what they're talking about. Byron York is only a lead contributor to The National Review -- perhaps the foremost conservative rag in the U.S. Why should he bother to do research that took me 20 minutes? Of course, the guy from fucking Rolling Stone had the time -- but I guess covering Kanye West and Tool leaves you with more free time to do market research than, say, professional policy commentary.

It has to be rare for an entire half of the political spectrum to be so completely, so unabashedly out of their fucking minds. But, you know, it takes a village...


*** And don't get me started on the plastic safety net that consumers turn to when their real wages decline over seven years of Republican (non)-domestic policy.

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Reaganomics

I've always wondered: if you assembled a hundred respected economists in a room, and asked them whether trickle-down economics worked, what would they say? Unsurprisingly, this turns out to be a silly question. Brad DeLong (who likes to do the economics at Berkeley) weighs in. Briefly, Bruce Bartlett recently wrote a piece on the subject for the NYTimes, and it's sparked a debate about how supply-side economics was taught in the 70's and 80's. The occasion for this discussion, I suspect, has less to do with the current political climate, than with a general re-evaluation following Milton Friedman's death last year. But the punch is that most economists, of any stripe, seem to agree that some supply side adjustments are valuable, like lowering high marginal tax rates. But apparently, this limited, if hard-fought discussion within economics has metastasized, so that conservatives now believe any reduction in tax rates of any kind will spur economic growth.

The other side of the coin is fiscal policy -- the belief that monetary adjustments (read the Fed's interest-rate jiggering) could affect factors from pricing to employment. As with the supply-side school of thought, this policy could be taken too far, and is often credited with the "stagflation" of the 1970's, when attempts to adjust production through fiscal policy resulted in an increase in inflation without an increase in economic growth. In reading DeLong's post, along with the comments posted by various economists, it seems that the consensus is both policies should be applied, in moderation. Supply-side adjustments are useful in spurring growth when inflation seems to be looming, but it takes a long time to kick in and should be targeted to specific taxes; monetary adjustments are faster-acting but cannot stem inflation on their own. Believe it or not, the solution seems to be careful adjustment of policy to the economic climate. Shocker.

I guess it's no surprise that these discussions don't appear on Meet the Press, but it sure is nice when the experts collect to hash something out.

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