The Financial Crisis and Its Rhetoric

Guitar-picking virtuoso, Glen Campbell, was once asked, derisively I assume, if he could read music. He said he could read music, but not so much that it got in the way of his picking.  Not to suggest a comparison, but I'm pretty sure that if I'd ever taken a course in writing poetry, I'd never write another poem; so I hold onto my shield of  ignorance to protect my fun. I think it's probably the same with formal rhetoric and blogging. If I knew all the rules and pitfalls of rhetoric, I'd probably just freeze up.

President Obama is one of the best speakers (and probably one of the best rhetoricians) I've ever heard. He can put words together like few others can. However, he pulls a few tricks on his listeners that I find insulting to my intelligence. I worry that others might not even notice, so here I go again, stating the obvious.

It is true that the President inherited the financial crisis and resulting recession, and I think it's fair for him to remind us of that from time to time. So far, so good. But all too often, he slips in a little spin to the effect that "the present crisis is the result of eight years of the failed economic policy of the previous administration." At that point there is a brief allusion to tax-rate cuts or trickle-down economics, something that I've never heard anyone advocate.

Another variation goes something like this: "Why would we want to adopt the same policies to get us out of this mess [usually meaning tax-rate cuts] that got us into this mess in the first place."

You've heard other versions of the same theme: since this crisis developed when the previous administration was in office, it was their fault, and every policy they ever espoused was, ipso facto, responsible. That little hide the pea shell game must have a formal name in rhetoric, but I'm satisfied just to call it a lack of common sense and an insult to our intelligence. He knows better, but he thinks we won't.

To belabor the obvious for the record, the financial crisis began when the making of mortgage loans increasingly shifted out of reputable commercial banks and thrifts to mortgage brokers, many of whom made loans that they (and the borrower)  knew, or should have known, could not be repaid, especially after the interest-rate adjusted on the variable-rate mortgages. The brokers got their fees and sold the loans to other financial institutions which "securitized" them or included them in packages of mortgage-backed securities that were sold all over the world. This separation of the decision to make the loan from the bearer of the risk of the loan created a giant moral hazard that few recognized at the time, largely because the activity had moved outside the purview of the established regulators and into no-man's land.

Once the inevitable defaults started, we learned that our financial institutions were much more fragile than we had thought, loaded with too much debt relative to capital. The problem was aided and abetted by rating agencies that gave their stamp of approval to the securities containing toxic waste, and the problem was magnified by side-bets (credit-default swaps) on repayment of these instruments and many others without appropriate reserves put aside to cover possible payouts. It's easy to see how that could happen since those providing the insurance generally assumed they were insuring against a "black swan" event-too remote to worry about.

Regulators were also at fault-not so much because of failure to police institutions in their jurisdiction, but by not noticing and blowing the whistle on the movement of this activity outside any of their jurisdictions. It thrived between the regulatory cracks, and by definition no regulator is in charge of the cracks.

A big part of the policy problem was the government promotion of home ownership to the extent of giving mortgage giants Fannie Mae and Freddie Mac ever higher quotas to meet. Efforts were made to reign in Fannie and Freddie, but they were rebuffed by Congress, which made the problem much bigger by the time it was recognized. So there was some government policy responsibility involved. Unfortunately for the legitimacy of the President's argument, the "previous administration" was the one trying to fix the problem.

Comments (5)

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  1. Nemo says:

    that little hide the pea shell game must have a formal name in rhetoric

    As a logical fallacy, I would call it “post hoc ergo propter hoc” or maybe the “fallacy of the single cause”.

    I agree it is frustrating to see both parties trying to pin blame on the other when there is so much blame that both deserve.

  2. T-Bone says:

    I agree with the president here. I think that “trickle down” economics was a root cause of the recession, and more supply-side tax cuts aren’t the answer.

    I think the Bush tax cuts were largely ineffective for bringing us out of a relatively small recession. If anything, it was the brute force of multiple rounds of cuts that may have helped simply because there was some money going to people who would spend it readily, but it wasn’t anything well-targeted.

    And perhaps we depended on the low fed interest rates to make up for the lack of good fiscal policy. Then large institutional investors looking for safe investments weren’t happy with the resulting low rates on US debt, and that’s when they turned to safe-looking mortgages.

    I think because our fiscal policy wasn’t really effective, growth was sustained by people taking on debt, a low savings rate, rather than actually earning the money to spend in the economy. Incomes were stagnant. It was unsustainable.

    But it worked in the short term because it was similar to a ponzi scheme. Everyone takes out loans in houses which are constantly appreciating investments (or so it seemed) and we spend in the economy as if those gains were real.

    The mortgage mess just delayed the recession and made it more instantaneous and deeper. In the absence of the mortgage bubble, I think we would have just re-entered a recession shortly after the last had ended. Or we’d just have economic stagnation rather than the false, unsustainable growth.

    As for the mortgage problem, I’ve read many different accounts. None seem complete/comprehensive. I understand what happened, but I’m not sure what entities are truly at fault. For example, didn’t Bush push for the ownership society? I’ve also read that Fannie and Freddie largely avoided the “toxic” mortgages from the beginning, and only suffered from the larger fallout of the mortgage mess (as even good mortgages began to fail), and also were duped by the AAA rated tiers of mortgage securities. But I digress.

  3. Thayane says:

    Effects of the Global Financial Crisis on Developing Countries and Emerging MarketsThree pieces of moonriatifn provide interesting insights into current policy issues related to the global financial crisis.The first is a quote of Joseph Stiglitz’s, Whither Socialism, published in 1994 (1990 Wicksell lectures), warning of the problems facing American financial institutions:• Inadequate capital requirements, which resulted in insufficiently capitalized institutions having an incentive to take excessive risk• Inadequate incentives for banks not to engage in risk taking• Inadequate monitoring by regulatorsThe second is the crude observation in October 2008 that developed countries responded to the global financial crisis safeguarding their own banking systems to the tune of $2-4 trillion, as if only national tax payers mattered with no respect for international linkages (and no common EU position on banking or fiscal issues). Will the future hold improved global and regional economic co-operation?The final piece of news reminds us of how slow some developing countries are to react to the greatest global recession since the 1930, thinking that they might be unaffected. President Kgalema Motlanthe of South Africa moved only last week to mitigate the effects of the financial crisis when the government decided to set up a special task team to look at how best to cope with the knock-on effects of job losses. How will each developing country cope with and respond to the crisis?

  4. Imad says:

    Effects Of Global Financial Crisis Emerge In SenegalNot much has been heard from Africa about the impact of the gboall financial crisis that has sent markets tumbling, banks collapsing and homeowners fearing foreclosure. But there is concern on the world’s poorest continent that the financial fever and fallout will be contagious. In dusty downtown Dakar, the bustling capital of Senegal, many residents may not fully follow the complexities of the recent financial turmoil on Wall Street and beyond. But the Senegalese are no strangers to the word crisis. They face a crisis of survival daily. As night falls in Dakar, street vendors desperately try to offload a few more items before the close of business. Many are too busy to talk. But Moustapha Diouf was keen to share his views about the impact of the gboall financial crisis on Africa.