The Court Jester
So the buzz around the internet recently is the Jon Stewart/Jim Cramer showdown on The Daily Show. If you haven't seen it yet, watch it here, here, here, and here. Much of course has been made of the interview – some call Stewart a prophet for our times others question why Cramer had to become the scapegoat for the financial crisis. As for the scapegoating business, Cramer is a figurehead and in the convoluted world of hidden schemes, backroom deals, and outright greed, figureheads are the ones who must be addressed. It's the issue of Jon Stewart as prophet that intrigues me the most.
On one hand there is nothing new about the comedian being the one to speak truth to power. Historically, that was the role of the court jester, or as it's known in Shakespeare studies, the wise fool. Kings not only permitted, but employed, court jesters not just for entertainment but as the voice of reason. The court jester was immune from punishment and therefore was the only person who could speak with complete honestly. All others simply desired to curry favor with the King or to avoid his wrath – they could not question his decisions, point out his faults, or let on to how absurd his rulings truly were. The Fool held a special dispensation to speak his mind. His words could of course be laughed aside as that of a simpleton, but more often than not they were taken to heart. So what bothers me here is not the fact that Stewart has assumed the role of a modern court jester, but that in our day and age it still has to be the fool who speaks truth to power.
Why did it take Jon Stewart to stand up to the guys playing with our future and security and tell them "I know you want to make finance entertaining, but it's not a fucking game"? Were the rest of us so eager to be picked for the team that we just played along anyway? While I love what Stewart had to say and applaud him for saying it, I find it sad that Christians as a whole haven't been standing up the whole time saying similar things. We have a rich history of calling those who financially prey upon the weak and the powerless to task for their actions. Jesus simply had to have a meal with him for Zaccheous to stop taking advantage of others for his own profit and start give away money to those in need. All along Christians should have been taking a stand for Kingdom economics – finance free from manipulation or oppression, that doesn't hurt others for profit's sake, or that destroys lives as part of the game. Economics that serves the needy not merely the rich and powerful. Economics that doesn't force us to turn our backs on Jesus Christ himself.
But the prophet voice for the Kingdom has been too small. We have the opportunity and the right to be honest to those in power in our country. But too few bother to use that right and speak the truth. And those that are taking a stand have to spend their time trying to convince other Christians that Jesus actually meant the things he said. Too many of us simply want this to be a game that we can win.
And so as we try to win the favor of kings, we are left once again with only the court jester to speak the truth.
julieclawson(at)gmail(dot)com 
Just to clarify, I don't think Stewart was picking on Cramer as a scapegoat or figurehead for the financial crisis. I think he was using Cramer as the scapegoat or figurehead for the failure of the media (especially CNBC, which is devoted entirely to financial news) to live up to their responsibility as the watchdogs of society. It's not Cramer's or CNBC's fault that the Wall Street elite were playing ridiculously risky games with our money, but it is their fault for not calling them out on it a lot sooner when they obviously knew exactly what was going on. That's what I think Stewart was venting about on the show.
That's what I love about John Stewart – as much as he gets after politicians, he gets after the mainstream media even more. He has an understanding of the powerful potential for good that the media could exercise, and he's pissed off and genuinely heartbroken that it doesn't ever live up to that potential. I hope he keeps banging that drum until somebody listens.
The idea of Jon Stewart as the court Jester is pretty interesting. As much as I like him, one thing I find annoying is that when anyone tries to turn the focus on him, and say "What about how you covered X?," Jon Stewart just says "Oh, man, I just run a stupid comedy show, not a news program, why would you compare your news program to the Daily show?" Which always strikes me as pretty dishonest. But now that you mention it, also somewhat typical of a court jester.
Really AH? I don't find that too dishonest. The Daily Show is just a comedy show after all. It's not supposed to be an actual news program. The fact that it sometimes does a better job of covering the news than the actual news media is just part of the irony IMHO. I think that's what gets Stewart so worked up – he's just a comedian, and yet he ends up doing what the real news people are supposed to be doing and aren't.
In what sense is it not "supposed" to be a news program? They try to cover current news events, and they do. They try to provide insightful commentary about those events, and they do. Since their intent and product have all the characteristics of a news program, I don't see how the fact that they're funny stops it from being a news program. You say that they often do a better job of news reporting than other news media and I agree, but I'd say that that's by design, not by chance.
Because those features of the Daily Show are not their main purpose. They are only instrumental to their primary goal of making people laugh. That's why if they fail to cover current news events very well, it's not a problem, because that's not their ultimate goal anyway. And if their commentary isn't very insightful, it doesn't matter as long as they got a laugh out of us. Whereas if actual news programs fail on either on of these (as they usually do), that is a problem because that is their main purpose. Which is exactly why I think Stewart gets so upset with them, and why he doesn't let them point the finger back at him.
Okay, I have to say, first of all, that I have not seen the Jon Stewart clip. I may find time to watch it this weekend, but just know that some of my comments might be coming from a place of ignorance.
I don't know how much of a role the Wall Street elite have played in the creation of the current financial crisis. While I'm certain that they probably contributed to it or were willing to make money off of it, someone really close to me works in the finance industry (in bonds) and seems to think that it was, primarily, a failure on the part of the government (and individual homeowners who bought houses that cost too much or who used their houses as ATMs, continually refinancing and taking their "equity" out until the housing bubble burst and their homes stopped appreciating–and possibly even lost value) that got us into the housing crisis.
The Community Reinvestment Act (originally passed in 1977 and modified in 1995) said that lending institutions had to invest (make loans) in their community by lending to low-income residents. As I understand it, this forced banks to lend money to people who were not necessarily creditworthy (banks had to have a certain percentage of their assets in low-income housing loans)–and the banks didn't want to hold those loans on their balance sheets. So part of the act forced Freddie Mac and Fannie Mae to then buy and securitize these loans, which were then sold as bonds to other institutions.
However, because the people that these loans were made to didn't have the income level necessary or they did have too much debt, they weren't able to make their payments. This had a "trickle-up" effect of impacting all the people in that line described above. In addition, because homes couldn't keep appreciating at 20 percent a year (new homeowners weren't willing to pay that much more and might choose to rent), the bubble burst. People couldn't pull the "equity" out of their homes to spend it, which means that stores weren't generating as much revenue, which means that they have to lay people off, which means that even more people can't make their mortgage payments, etc., etc.
I guess I think that blame can fall on almost anybody and everybody for the current crisis, but the media often doesn't portray all sides of the issues (case-in-point: they've advised people that they'll be better off to walk away from their homes than take the bankruptcy credit hit).
Elaina, that's a good post. I work with a lot of people in the finance industry also, and have heard much the same thing. While there is plenty of blame to go around, the well-intentioned bit of social engineering that was the Community Reinvestment Act as modified in 1995 definitely played a significant part in creating the current economic crisis.
Elaina – great point. this is a systemic issue that we all in a way have contributed to. There are those who are treating it like a game and getting rich off of others, while others are just doing what they have been told to do. Homeowners have greedily or stupidly played the system (although I do have friends in Chicagoland who are involved in a lawsuit against their subdivision for being outright cheated and lied to…). Speaking truth to power isn't just to the CEOs, but to the government and to our neighbor. It's about being willing to question harmful systems instead of just putting up with them. Stuff like the Community Reinvestment Act makes sense as a good thing, but what other factors stood in the way of it actually helping (and not hurting) people?
Eliana, I think you make good points that the financial crisis is not just the result of Wall Street elites, but also the result of poor decisions on the part of the government, and individuals who took on mortgages that they shouldn't have. However, I disagree with your characterization that this is the result of lendiing institutions being forced to take on loans that they didn't want to. It's not the case that banks reluctantly took on some minimal number of loans to poor credit risks, due to government requirements. For a number of years, there were numerous organizations scouring the upper, middle, and lower class of the American public, trying to convince them to take on as many loans as they could convince them to. It's a little strange for them to now claim that the loans that they were previously so eager to hunt for, were burdens that they unwillingly took on. While I'm not a financial expert, it seems to me that the financial crisis occurred because the financial institutions tricked themselves into thinking that risky loans could be meaningfully repackaged and bundled to become unrisky; this is obviously true to some extent, but not to the extent that they thought. This is due to a market failure to properly evalute risks (or alternatively, a failure of regulators to force the market to properly expose risks), and not due to the government forcing businesses to make bad financial decisions.
In fact, we know from first principles that a sudden internal collapse such as this has to come from a failure of the market to evaluate things properly, rather than a bad law. Suppose that the government, for some bizarre reason, required that lending institutions had to invest a certain percentage of their assets in ham sandwiches, which would be left in swamps until they became moldy. The financial institutions would reluctantly invest the bare minimum in ham sandwiches, and those investments would properly be regarded as worthless by the market. No day would come when the market suddenly collapsed, as it suddenly realized that those ham sandwiches were becoming moldy, and thus were a poor investment. The sandwiches would be properly regarded as a poor asset from the start. Of course, the profits of financial institutions would be lower on a regular yearly basis due to their investment in these stupid ham sandwiches, but there would be no boom followed by a bust. The boom followed by a bust only occurs (absent factors external to the country) when the market convinces itself that something (ham sandwiches, high-risk home loans) are a great investment, and then one day realizes that they are in fact not.
If it was the situation you described, where banks were forced to reluctantly make loans that they knew to be bad, those costs would be baked into the understanding of the market from the start, just like an investment in ham sandwiches in swamps. Those loans would be marked as near-worthless by the banks, and continued to be viewed as such no matter how they were bundled, and when the new homeowners failed to make their mortgage payments, it wouldn't result in a sudden collapse, because those defaults would have been expected by the market from the start, and already factored into the expected gains and losses. The sudden collapse occured because the financial institutions for a long time thought that (1) the loans weren't quite that risky (2) to the extent that they were risky, they could be bundled with other risks in a way to make them less risky and (3) home prices would stay high, so even if the home owners failed to make their payments, foreclosing on houses would yield a valuable asset. And then realized that (1-3) were wrong.
Whew, I was going to say more, but this is plenty long already. Mike, I guess we'll have to agree to disagree—it looks to me like the Daily Show has multiple goals that are equally important to them.
Ahh, Autumnal Harvest, you're a smarter business person than I am! (Seriously, I edit other people's ideas for a living; I don't come up with my own!) Anyway, I'll run this by my resident financial expert and see if he's got an informed rebuttal.
Autumnal Harvest – let's say it was as you said and banks only made the minimal number of "risky" loans as required by the government and for example purposes that equates to 5% of the total loans made. Whether they are viewed at market value or at zero, the day came when those loans didn't pay. Banks were forced to foreclose and take ownership of these properties. Being that banks aren't in the business of property management they sold the homes for a price that minimized their loss while turning the property over as quickly as possible.
Now we have a situation where 5% of the homes are being sold at a cut rate price. Buyers, in hopes of finding homes for as little as 20% of market, neglected those properties at fair values. Now, non-bank sellers who for any number of reasons needed to sell were forced to reduce their asking prices in hopes of getting quicker turnover. In waves sellers, based on need, are forced to reduce asking prices bringing us where we're at today.
That all said, in no way do I think banker's are free and clear of all this but of the three major groups being discussed, I think culpability belongs first to the consumer, second to the government and third to lending institutions.
My next post will explain why I think consumers are the most responsible for our economic downturn.
Yes, but my point was that if those loans were regarded as likely to default, then the losses you describe would be expected losses, not the cause of an economic freak-out, any more than you freak-out when you try to resell the car that you bought ten years ago, and find that you can only recover a fraction of what you paid for it.
It's also worth mentioning that the minimum number of loans to low-income community residents wasn't 5%, it was 0%. The Community Reinvestment Act didn't force anyone to make such loans, and had no penalties for failure to make such loans. It said that the government was going to inspect banks to see if they were making such loans, and put smiley-face stickers next to their names if they were. The banks were told that the smiley-face stickers would be of benefit, in some vague, unspecific way, when they needed regulatory approval for certain actions, such as mergers. Given the lack of penalties, and the small, nebulous, promise of benefits, I'm skeptical that the act does much to encourages banks to make such loans at all. I certainly don't see how the financial institutions were eagerly pushing mortgages and refinance agreements on all economic classes in America, were in fact desperately seeking out loans that they knew were terrible, because they were in search of more smiley-face stickers in their records.
Thanks for doing the research on this AH. It's always good to know the actual facts before jumping on the "blame government first" bandwagon.
Being someone who works directly with banks, I can assure you the ramifications of not having these loans on the balance sheet were more than not getting "smiley-face stickers" from the regulators. In fact, banks couldn't pass examines without such loans.
The irony is, these loans only counted for CRA credit once. For each examine the bank needed to have new origination CRA loans added during the period under examine for the loans to meet regulatory requirements. That left banks in a position where they had to continuously add these lesser quality loans to the balance sheet on a regular basis. Since these loans didn't have much street value, banks didn't sell off the unusable loans in the market place because of the market value losses associated with them. Instead they hoped the loans would pay and they wouldn't experience losses via foreclosure.
Keep in mind, what the regulations state about implementation and how they are actually implemented are two different scenarios. The U.S. Senate, and the media, claim the largest banks who received TARP funds willingly signed on the dotted line. What the average person doesn't hear is how then Treasurer Paulson effectively forced these banks to take government money. This gave the impression that banks receiving TARP are in good standing to the public. Also, what isn't told in the media is how banks are being threatened with regulatory nightmares if they don't take TARP and use it to acquire failing institutions to present the image the banking system is healthy.
Oh, this TARP program was never created to increase the lending capacity of banks as some senators are currently claiming. TARP was originally created to help fund the acquisition of failing institutions by healthy institutions.
keepcapitalismalive, can you provide examples of fines or sanctions that banks faced for failing to make sufficient CRA loans? I know of no penalties under the law—if you know of some, I'd appreciate a citation to the relevant law and examples of its enforcement. Or, are you admitting that the law in fact provides no such penalties, but claiming that Paulson for some reason somehow coerced banks into making bad loans in some extra-legal way behind the scenes that no one knows about it?—I have to say that I find this claim dubious.
I don't really know what else to say, since I don't feel that you're addressing the basic points that I'm making, and I don't want to just keep repeating myself, especially as I tend to be so wordy.
You keep claiming that banks were forced, against their will, to make loans that they knew to be bad, but I don't see how that can possibly be squared with the actual behavior and statments from financial institutions over the last eight years. As I've said before, and I don't see that you've in any way dealt with, if these loans were considered to be bad from the start, that would have generally depressed the market, not caused a boom followed by a bust. Nor do I understand how, if these loans were considered poor investments by financial institutions, why the same institutions treated those investments as good assets, recorded them as such on their balance sheets, traded those repackaged investments as if they were AAA, and based their quant models on the assumption that housing prices were solid, and likely to keep rising. All their behavior, public statements, valuation, and modeling before the bust are inconsistent with the claim that they believed these loans to be bad investments. For them to now claim that they never wanted these loans just doesn't pass the smell test.
Whoops, just looked at your post again, and I see the part on Paulson was about TARP, not CRA, so ignore me here. My other objections still stand.
AH, in answering your specific question about penalties or state penalties, that's a major issue with banks. The penalties aren't stated but can include anything from special assessments, increased borrowing costs, etc.
This loan program only added to the demand for homes. An increase in demand w/o the increase in supply will drive the prices up. In my opinion, this is only one part of the issue.
Low rates in 2003 set off this housing bubble. The fed lowering borrowing costs to 1% helped make homes much more affordable on a monthly payment basis. This demand started a 5 year cycle where demand in one way or another drove prices up at unsustainable speeds. 2004-2007 saw many homeowners refinancing their homes in order to take cash out so they can buy that new car, boat or take that dream vacation.
Eventually new buyers wisened up and said they couldn't keep paying inflated prices for homes whether it be because homes shouldn't be appreciating at these rates or because the monthly payments were too much.
AH, you also mentioned the idea of these loans being considered AAA. Since banks didn't want to make these loans, the government stepped in and pushed Fannie & Freddie to guarantee timely payment of principle and interest for these loans. That protected banks from sustaining losses on the loans, not on the market value of these loans. This move by the government to lowering lending standards by Freddie & Fannie then put considerable pressure on their balance sheet that has been discussed at length in the media.
Now, where I really think banks added to their own problems is that from 2003-2007 they made loans to anyone with a good credit score and enough income to make their payments. Particularly, banks didn't slow the cash-out refinancing that was going on without realizing houses can't go up annually at 10+% simply because of the inflation aspect makes homes unaffordable in minimal time.
keepcapitalism alive, if your claim is that the CRA was used to coerce banks with penalties nowhere to be found in the law (apparently because the Bush administration was secretly siding with cronies in the powerful neighborhood community lobby over helpless, poorly-connected, big banks?), and you're not going to provide any evidence for that claim, then I have to say that that just doesn't seem very convincing.
We seem to be talking past each other. As I've said already, the claim that the banks didn't want these loans is horribly inconsistent with their actual statements, behavior, quant modeling, and the way the market behaved. You keep elaborating on the same story, but not explaning how it's consistent with how financial institutions actually treated and traded these mortgages, or why the market would react with surprise to the default of loans that they knew to be bad. If the financial institutions knew that they the entire subprime market was made up of mortages that were about to default, then their assumption that housing prices would continue to rise was not just stupid, but an incomprehensibly stupid inability do basic math. I don't really have much to say, other than to point you to the objections I've already raised. But thank you for an interesting conversation.
AH wrote: "keepcapitalism alive, if your claim is that the CRA was used to coerce banks with penalties nowhere to be found in the law . . ."
AH, I haven't researched the issue enough to speak on the specifics. I do know that my friends who follow or work in the financial world on a daily basis (attorneys, investment professionals) view the government policies and practices described in this thread as having played a significant role. Maybe they're just ideologically motivated in so believing.
But I also find the statement quoted above a little bit naive. State and federal governments often incentivize in the way described by keepcapitalismalive in this thread. When award of certain benefits by the government ("special assessments, increased borrowing costs") is discretionary, then you don't necessarily have to look for something written "in the law" saying that if banks do A then the government will do B. That "smiley face" you describe is enough if the government is motivated to use its presence or absence as the deciding factor in exercising its discretion, and becomes much more significant than you've made it out to be. Again I don't know enough to say whether that in fact happened in this case. But does it happen? Yes.
AH seems to be on the right track to me. Regardless of what the government might or might not have done way back when to encourage banks to lend to more lower income families, it couldn't possibly be significant enough to explain the enormous amount of sub-prime loans lenders were shoveling out their doors just a few years ago. I was living in the new-development suburbs of Chicago during the height of it, and you couldn't go ten feet out of your door without stumbling over five different ads for "no money down" mortgages.
This Harvard lecturer seems to suggest a "both-and" is involved.
(1) The government pressured banks to do more sub-prime lending. (2) The government implicitly promised Fannie Mae and Freddie Mac that the gov't would make good on bad debts. (3) With that gov't promise in their back pockets and real estate values escalating, lenders got really greedy with sub-prime loans and started doling them out all over the place. That included not just the needy who were buying modest housing they couldn't really afford but also materialistic suburbanites wanting to live in McMansions that THEY really couldn't afford:
"Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
"This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
"Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets."
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html
Generally speaking, I'm always a little wary when people want to go black-and-white, either-or on any particular issue. Either it's ALL the government's fault or it's ALL Wall Street's fault. I think the both-and model that Karl's Harvard lecturer suggests sounds about right.
Karl, Eliana, I don't think I said that everything was the fault of the financial industry. Crashes come from bubbles bursting—sudden collective changes in the understanding of what's actually going on in the market. In this case, everyone—financial institutions, the government, and individuals—got caught up in the belief that the housing bubble was justified, and sure to keep on going. Lots of people in all parts of American made corresponding bad decisions, so yeah, we're all a part of this. One of the things I find annoying about the Jon Stewart interview is the view that the American public got taken in by fast-talking financiers, rather than being caught up in the same collective delusion.
My problem was with the specific claim that I was responding to: that people in finance knew that subprime mortgages were terrible, and were only reluctantly pushed into a market that they knew to be terrible. Naturally, after a disaster, people have 20-20 hindsight, and want to claim that someone else is the one who screwed up. The trouble with all these people claiming 20-20 hindsight is really foresight, is that they didn't act on this supposed foresight. If they really knew that a large section of the housing market was based on subprime loans that were sure to default, why didn't they act on that knowledge? That is, why didn't they anticipate the resulting drop in housing prices? After all, if you know that subprime collapse is coming, predicting the effect on housing prices is uncontroversial supply and demand.
The claim reminds me of a friend I have who works in the mortgage industry, and says that she knew at the time that her company was putting out ridiculous mortgages, that the whole market was going nuts, and it was clear to her at the time that the whole thing was going to come apart. She knew what was going on, but the fatheads who ran her company kept telling them to push our more risky mortgages. To which I always say "But why do I remember you telling me several years ago that I should buy a house, and that this is a great time to invest in real estate? Did you hate me or something?" (OK, I don't actually say that, because she would get mad, but I always think it.)
The only one I know who's perfectly anticipated the entire financial crisis is, unsurprisingly, me! Because I'm a genius. That's why I took all my money out of the stock market a year ago. Oh wait, I didn't? Um, never mind.