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"The very traders who forced us into this mess" suggests some notion of knowledge about what "this" is and how "this" happened that I think is very incomplete. We don't entirely understand what happened, who caused it, or why it's unfolding the way it did. You could, just as easily, put the blame for a lot of our current crisis on consumers who really should never have signed onto mortgage loans that they didn't understand, which completely misstated the value of the properties in question, and which added to truckloads of unconscionable debt no one should have agreed to. We have, in part, a socialized problem... which is why we will have, in part, a socialized solution.

I think Duy's assessment of where we things stand just now makes sense... but whether this is really "endgame" or not, I think, is yet to be seen; as Duy points out, Congress really doesn't know enough to act intelligently, and the Bush Administration isn't going to be much help in offering a solution. The Fed is still being cautious, and the Bear Stearns to Fannie/Freddie to Lehman Brothers to AIG bailouts really don't make sense. Expecting a policy to come out of that... seems unlikely. I hope we are in some endgame. But if we were, I think we'd have a much clearer sense of what comes next. And so far, it seems to me, we don't. What we are waiting for, I think, is the next lurch of the unexpected.

Great piece on CEO "inequality" or as I like to phrase it - how some animals are more equal than other animals:

http://www.faireconomy.org/executiveexcess

What I'm sick of: bringing up these points to have the crowd chant "he hates the rich!" - which of course I don't - what I hate is the inequality.

How's about someone proposes a Bush Bailout tax?

The same guys who got rich when the market was flush should pay for these bailouts. A tax on the top 1% of earners for the full cost of the bailout seems fair to me.

That would REALLY get rid of moral hazard.

I hear you on some points there weboy - but this statement:

"You could, just as easily, put the blame for a lot of our current crisis on consumers who really should never have signed onto mortgage loans that they didn't understand, which completely misstated the value of the properties in question, and which added to truckloads of unconscionable debt no one should have agreed to"

is rather funny thinking. Let's think about this for a second. I'm borrowing money from a bank. The bank says "I require no documentation" so I don't provide it. It is the loaner's responsibility to make sure the loan is appropriate, not the borrower. The borrowers, in fact, was acting as a normal economic actor. You'll give me free money without any docs required? Excellent, I'll take it.

Now, I'm not saying the borrower has no legal or ethical responsibility, but if I'm a company, shouldn't it be in my best interest to find quality loans to give out rather than bad ones? So to me, the responsibility for making bad loans falls on the those that loaned the money.

As the saying goes, if I owe you $10,000, it's my problem, if I owe you $10,000,000 it's your problem.

The bad assets really do need to be eliminated, and it seems the only way to do so is by wiping out a lot of equity and bondholders, selling off the trashy assets held on the company's books, then using government assets to back up the policies or deposits to prevent the incredibly decentralized individual creditors from getting screwed. I'm actually surprised they didn't find some way to eliminate the AIG bondholders, and I think the credit default swap market still expects them to do it someday.

Just a quick note, Ezra: The rule regarding private investment partnerships and the ability to hide income as capital gains only applies to a certain legal structure used mostly by hedge funds and private equity funds. And those people don't get rescued when they're wiped out, though the managers certainly have made their bankroll already and even frequently manage to find new jobs after blowing up a fund. It's still unfair, but it's a different group of people so you shouldn't try to connect the two issues.

inthewoods - we're not just talking about "no document" Alt-A loans; we're taking about lines of credit, second and third mortgages, things with docs and signatures and a lot of paper to back them up. More to the point, though, I'm not necessarily endorsing the line of blaming mortgage holders anymore than I am Ezra's about blaming traders... just not any less. My point is that the mess we're in is a complicated one, complicated in part by the greed of bankers and traders... but also by an American culture that put too low of a premium on remaining debt free and not living beyond one's means. And I don't think any of us gets the luxury of just blaming "them" for what's happened. It's all of us. That's the point of social responsibility. We share it.

"My point is that the mess we're in is a complicated one, complicated in part by the greed of bankers and traders... but also by an American culture that put too low of a premium on remaining debt free and not living beyond one's means. And I don't think any of us gets the luxury of just blaming "them" for what's happened. It's all of us. That's the point of social responsibility. We share it."

I agree broadly with what you're saying, but to me there are three or four main culprits in this whole thing that need to be called out:

1. The Fed (under Greenie) for keeping interest rates at 1% for too long.

2. Complete failure of Congress and the Fed, over the last 8 years, to provide any meaningful regulation to the mortgage market.

3. Rating agencies which rated the junk CDOs as Triple-A when they were clearly not.

These guys cause a lot of other things. #3, for instance, creates the mortgages insurance business where they think they're insuring Trip-A, but are insuring junk - this is probably (I don't know for sure) what is taking down AIG.

So while I agree that all people that bear some responsibility, none of this attitude of "spend now, save later" can exist without these things being in place.

If they're going to rely on the tax system as an insurance plan, there's no reason they should be exempted from buying in.

Or we could avoid having the tax system be an insurance plan.

It is the loaner's responsibility to make sure the loan is appropriate, not the borrower. The borrowers, in fact, was acting as a normal economic actor. You'll give me free money without any docs required? Excellent, I'll take it.

While true, the borrower has at least an individual responsibility to consider his real ability to pay back money he or she borrows. And, any time offers you free money, buyer beware. That's pretty much always a suckers game.

At the same time, the banks doing this stuff had to know what they were doing and how risky it was. How can you expect someone who can't come up with much money down to be able to afford the balloon payments with the mortgage triples a year or two down the line?

Just nuts.

3. Rating agencies which rated the junk CDOs as Triple-A when they were clearly not.

And it's those folks job to know what they are rating. And professionals in the business could not have actually looked at those subprime mortgages and seriously, truthfully rate those things as AAA.

They are major players in this mess. If any part of the financial business is begging for fresh regulation and oversight, it's these rating companies.

I think we are now all realizing where we are headed. We are moving into the endgame, when Congress socializes the losses after privatizing the gains.

Ezra: Great post. And while I don't disagree much with the above sentiment, it has to be said that many of the "private" gains have been reaped by ordinary people and not just Wall Street fat cats -- in the form of more home equity, or lower mortgage payments, or lots of goodies purchased with home equity, than would be the case if the taxpayers hadn't gotten into the money lending business.

Moral hazard is moral hazard. You can't operate a system harnessing moral hazard just for little people and not for fat cats. If we're serious about reform, and if we're intent upon restoring the "risk" to the "risk-reward" calculus upon which free market capitalism is based, then everybody is going to have to learn to live without taxpayer-supplied free lunches. My worry is that the Congressional Democrats -- who I regard as usually having been a lot more sane than Republicans on economic issues these past several years -- if anything are worse than the GOP when it comes to the issue of moral hazard, and the destruction it has wreaked upon our economy. Are you listening, (usually smart and sane) Barney Frank?

Sorry weboy, not buying it.

Now, granted, I'm not a banker, a trader, or an economist. So I depend upon folks who know more about this stuff than I do to explain it to me. Perhaps you can listen to this episode of This American Life, "The Giant Pool of Money", in which journalists, with the help of bankers, traders, and economists, explain in perfect detail how this all went down, and tell me what parts I'm missing that would justify the moral equivalence you're suggesting.

And the next person who tells me that there's no such thing as a class war going on gets a link to this post. The tax loophole is salt for the wounds.

chiggins, you misread me - I'm not suggesting moral equivalence. I'm suggesting complexity. I'm looking at the transcript you sent us to, and I see one of the customers pointing out that the bank bears responsibility for his loan... and so does he. Complexity. Bad loans, desperate people, companies focused on profit... in one sense, yes, how we got here is obvious. In another, it will never be entirely clear.

Again, I think the problem is vague terms like "this all" - the crisis we're in has a great deal of parameters to it, and who bears responsibility for what's happened is something we'll be sorting out for years... and likely, never completely solve. The question it seems to me, is how to deal with the problem we have - an imminent economic disaster - in a way that mitigates the most suffering for the most people. And I don't think we have a clue about what that solution is, just yet. That's why I think "endgame" is premature; we're still figuring out just what game this is; an endgame to finish it seems quite a ways off. I'm sorry to leave the impression that I blame people who took out loans as bad people; that's not why I raised the point that there's a lot of reasons we're here, and a lot of responsibility we need to share. Getting to caught up in "these are the bad guys and it's their fault" misses that we've got a crisis to solve, it seems to me. And solving it is the first priority.

weboy, my mistake, apologies.

And, if I may respond to your last point: you're absolutely right, we've got a crisis to solve, and that should be priority one. But as one of the new purchasers of 79.9% of AIG, as well as a backer of 29 billion dollars of Bear Sterns debt (been a busy couple weeks for me I tell ya!), I'm interested in there being very strong disincentives for this sort of risk taking, and interested in seeing something like justice. What that something is...

Anyway, you're right. Crisis first. Guillotines soon after, then we liquidate AIG and every American taxpayer gets a shiny new Aeron chair.