Beware the Unintended

It seems these days one cannot open a newspaper (online or otherwise) without reading something about Title IX abuse.  Title IX, originally instituted to prevent gender bias and discrimination in education (a noble goal) has become a hammer for schools to police and prosecute sexual activity among students (something schools are greatly unprepared to do).  Students are routinely denied legal council and due process, all because of Title IX.  What was originally intended to be a guide for diversity and equal rights has become a tool for extra-legal prosecution of consensual behavior and an arbitrator of free speech.

Title IX is hardly the only piece of legislation that has developed disastrous unintended consequences: The Community Reinvestment Act, passed to help ensure everyone can have a place to live and thriving communities (a noble goal), lead to The Great Recession.  Civil Asset Forfeiture, designed to help the US Navy combat piracy, has become a greater source of legal robbery than robbery itself (often without conviction of a crime).  Other examples are legion.

This is why, as a classical liberal and free market supporter, I often oppose government attempts to fix issues.  Their actions, while nominally noble, can lead to highly repressive and disastrous consequences.  I believe a good maxim when evaluating legislation is to consider how can such legislation be abused or lead to unintended consequences.  In other words, its not what is written or intended, but what can be read and applied.

122 thoughts on “Beware the Unintended

  1. Jon,

    Please do some more research before repeating this tired trope that CRA led to the Great Recession. I know a lot more about CRA than I ever wanted to know. I have been an outside director at a small community bank for the last 16 years. I am not here to defend CRA. It has long since outlived its usefulness and goes on as zombie legislation that is a great example of why more laws should sunset. I would be delighted if CRA was repealed tomorrow.

    None of that means it was a primary cause of the housing bubble. In my entire 16 years our bank never made a bad loan due to CRA and we never failed a CRA exam. The real reason banks and shadow banks ( they are a big part of the story and not regulated by CRA) made so may sub-prime loans is that – for many years – those were the most profitable loans by far. When the buyer paid, you got a lot more interest (and of course, fees). If he couldn’t pay, you usually refinanced based on the rapidly increasing equity from the bubble. Homeowners were almost always eager to sell if they couldn’t pay because they could often take away a little equity from doing so.

    The faulty assumption in the model was NOT an assumption that sub-prime borrowers are good credit risks. The faulty assumption was that real estate prices would continue to rise (and certainly not crash).

    ALL the banks that got in trouble took on vastly more exposure to sub-prime than they were required to by CRA. As I like to say: When you get a ticket for going 100mph on the freeway, it won’t work to cite the minimum speed of 45 and claim you were afraid of dropping below it.

    The key perverse incentive in this story was that top executives were paid based on booking short term profits on long term loans. They could make enough in very few years of that to be set for life. Then they got to keep the money whether or not their companies blew up AND whether or not their companies were bailed out. Or they could try telling their stockholders it would be more prudent to take fewer risks and make half the profit the competition was making. It’s not only governments that can create perverse incentives. It can happen in markets as in the example I just described.

    And by the way, sub-prime wasn’t even the biggest part of the housing bubble. Losses were much greater in prime loans.

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    • Greg, thank you for your comment. Please note that I linked to a paper showing the CRA did encourage the kinds of risky lending that lead to the recession.

      Of course, that is not to say that everything you listed didn’t also factor in

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      • Jon,

        I looked at your link. Like everyone else who publishes an economic study, they were able to find a data set that supported their theories. I probably put a lot less stock in that than you do. CRA is a much smaller part of the story than people think.

        As the housing boom peaked, private, non-CRA regulated institutions were securitizing the overwhelming majority of sub-prime loans and rapidly taking market share from the GSE’s. The GSE’s weren’t happy about it because it meant they were losing profits and market share. NONE of the major players ever had real trouble passing CRA or ever suffered significant sanctions for failing to meet CRA standards. They all wrote a lot more sub-prime than they were required to.

        Bear, Lehman, Morgan Stanley, Goldman, AIG, Countrywide etc. were NOT covered by CRA requirements. There was a similar, and in some cases worse, housing bubble in Europe all without CRA or even comparable GSE’s.

        CRA was a very tiny part of the overall structure of the financial incentives at play.

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          • Ron,

            First of all their data was a mix of large and small CRA regulated banks. Obviously, there are a lot more small banks than large banks out there. The effect (a slight increase in bad loans allegedly due to CRA) was found primarily in the large banks. No surprise there. Everyone knows that’s where the main problem was, not in the small community banks.

            They defined the time period influenced by a CRA exam as the 6 quarters around that exam. Big banks are examined every two years. That doesn’t leave much out. It’s a very blunt instrument for establishing motives in a complex system.

            The effect they found was most pronounced at the peak of the boom 2004-2006. During that period there was an insatiable demand from ALL securitizers of sub-prime for more loans to securitize. Why? Because those were by far the most profitable loans and had been for many years. The people making the biggest profits were the people securitizing the most sub-prime loans. No matter how bad the loans were the securitizers and rating agencies found a way to package them that allowed them to sell most of them as AAA.

            It really comes down to your view of human nature. Do you think big time financial executives were more motivated by a fear of regulatory penalties that none of them ever suffered – or more motivated by the unprecedented fortunes that were being made by securitizing every sub-prime loan they could get their hands on?

            Now consider the fact that losses on prime mortgages were far greater in the end than losses on sub-prime. Consider the fact that private securitizers produced more of this stuff than the GSE’s and CRA regulated institutions. Consider the fact that this housing bubble happened in much of Europe too where the regulatory regimes were different but the financial incentives similar.

            To conclude from all that, that it was CRA that “led to the Great Recession” is a bit like concluding the the highway system leads to your door.

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        • “Bear, Lehman, Morgan Stanley, Goldman, AIG, Countrywide etc. were NOT covered by CRA requirements. ”

          Yep. But, they were selling securitized mortgages to banks with the additional selling point that the securities were a factor considered in evaluating the banks Community Reinvestment Act performance.

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          • Also, the Community Reinvestment Act is different for community banks than for regional and multinational banks. The standards for community banks are easy to meet, and the regulators tend to be much more sympathetic to community banks because they do not have the resources the much larger regional and multinational banks have. Community groups, however, used the Community Reinvestment Act, to pressure the larger regional and multinational banks to lower their lending standards for those with less ability to repay. And, they are effective in achieving their goals because the regional and multinational bankers do not want the adverse publicity (often gross misrepresentations).

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          • True that they were “a factor” but CRA exams focused more on originations than bond purchases. And those securities were also marketed to many other buyers.

            Subprime mortgages originated by CRA covered banks and securitized by Fannie and Freddie actually performed significantly BETTER than those originated and securitized privately – not that there was much to be proud about in either case.

            The financial institutions that failed all voluntarily took on far more exposure to sub-prime than CRA required them to.

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          • “CRA exams focused more on originations than bond purchases.”

            False. Read the regulations implementing the CRA (12 CFR Part 345)>

            “not that there was much to be proud about in either case.”

            False. They were crappy loans whether created by CRA covered banks or not. And, Fannie and Freddie were the ones buying up all the crap to create a market where, if traditional lending standards had been applied), no crappy loan market would have existed.

            The financial institutions that failed all voluntarily took on far more exposure to sub-prime than CRA required them to.”

            False. A lot of financial institutions failed. Some due to sub-prime issues, while others failed that shied aways from sub-prime. When you have that much mall-nvestment in residential real estate caused by misguided government policies, it takes out any financial institution caught up in the boom. Some of the boom areas included Miami, Atlanta, Phoenix, Sacramento, etc.

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    • “Please do some more research before repeating this tired trope that CRA led to the Great Recession.”

      — Reads 241 words on unintended consequences

      — Goes on a tangential tirade over 9 of them.

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      • Seanleal,

        It is true that my only beef with Jon’s post is with the part about CRA.

        It’s easy to agree that we should be concerned about unintended consequences. It is much harder to agree on counterfactuals and cause and effect in complex systems.

        The argument blaming CRA for leading to the housing bubble is itself an argument about “tangential” effects. The original purpose of CRA was to combat real discrimination, not undermine credit standards.

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        • “The original purpose of CRA was to combat real discrimination, not undermine credit standards.”

          And, as Jon postulated, the original purpose is well intentioned. However, the unforeseen effect was that community groups would use to it negotiate concessions from larger financial institutions to avoid or settle a lawsuit and adverse publicity. Those concessions often included lower lending standards on a certain dollar amount of new loans to low income people.

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  2. So then, blaming the housing bubble and financial crash largely on CRA has become a rather lazy, but entirely conventional, way to signal a more general right wing disdain for government regulation.

    There is a comparable trope on the left. This is the idea that deregulation in the form of the repeal of Glass-Steagall was one of the main causes of the financial mess. This analysis is equally wrong and lazy. Glass-Steagall worked reasonably well for a long time but, by the time it was repealed, it was largely irrelevant to the later financial crisis. Decades of financial innovation had provided many routes around it.

    A better, but less often cited example of ill-fated and consequential deregulation was the so called Commodities Futures Modernization Act of 2000. This legalized many new financial derivatives that did later contribute to the bubble and panic in a very significant way.

    Most famous among those derivatives was the Credit Default Swap popularized most enthusiastically by AIG. They were basically allowed to sell insurance (against credit risk) without putting away anything like the reserves necessary to actually pay in the event of a loss.

    For a while this was believed in good faith by many to be a good idea. They thought it was a good way for the market to transfer risk to those best able to handle it. Turns out if was a way for the market to transfer risk from those best able to understand it to those less able to understand it. Turns out that those who understand risk best mostly want to get rid of it as much as possible even if that creates a catastrophic systemic risk int he larger economy.

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    • Mark,

      Yes, that Kling article you linked to is excellent. Kling is very knowledgable about housing policy and its history having worked for both Freddie Mac and the Fed early in his career.

      Of course the 83 page length may be too much for some – especially seanleal who was shocked at at the length of a several paragraph long blog comment on the topic.

      Kling assigns very little blame to CRA. He says “Many mortgage loans that met the standards for CRA were of much higher quality than the worst of the mortgage loans that were made from 2004-2007. Thus one must be careful about assigning too much blame to CRA for the decline of underwriting standards.”

      He also confirms that the GSE’s market share of sub-prime declined from 2003-2005 and that recovering market share was a much bigger factor than CRA in them going back into sub-prime more heavily after that.

      Kling puts most of the blame for the bubble on regulatory arbitrage. More specifically, regulatory arbitrage seeking to avoid capital requirements by moving business into less regulated or unregulated sectors of the shadow banking system. Securitization, off balance sheet financing, repo and derivatives were the main tools.

      It’s fine to blame government regulation for permitting and in some cases encouraging these trends. Either way, they give you a vision of what a more unregulated marketplace for finance would look like since the purpose was to be free of the constraints of the regulation.

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      • Either way, they give you a vision of what a more unregulated [by government] marketplace for finance would look like since the purpose was to be free of the constraints of the regulation.

        Emphasis mine.

        As a board member of a community bank (did I get that right?) I’m surprised you see the relationship between large financial institutions and their regulators as confrontational. It seems clear that there are few more incestuous relationships in the world.

        In the absence of government regulation of financial institutions, we would expect the market to regulate the financial sector and determine acceptable levels of risk. If an institution measures risk incorrectly it will suffer losses or go out of business. What could be better than that? Please don’t use terms like “too big to fail” or “domino effect” in your response.

        How did banks and financial markets ever function before there was government regulation?

        As much as anything else, uncertainty about government reaction to the crisis may have caused more panic than was called for. Bear-Stearns was bailed out, but much larger Lehman bros. was not. Monster AIG was bailed out despite “a profound failure in corporate governance”. Apparently it depended on who one’s friends were in Washington. Well, either that, or the Overlords had no idea what they were doing, which is equally disturbing.

        And of course our current President intervened in behalf of auto workers to bailout GM and Chrysler with unprecedented and illegal interference in bankruptcy proceedings.

        It’s little wonder that trust in government is at such an all time low.

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        • Ron,

          >—-“How did banks and financial markets ever function before there was government regulation?”

          In general, banks and governments have tended to grow larger together in a relationship more symbiotic than confrontational but which has some aspects of both. Big financial institutions tend to want to employ much more leverage than governments want them to have.

          There are no modern economies with anything like any prospect of totally free market banking with no government regulation. You think that’s a bad thing. I think that’s a good thing. Either way, I have little interest in arguing about how it would turn out in some fantasy world counterfactual.

          It makes a little more sense to argue about whether or not we should have relatively more or relatively less banking regulation. It makes much more sense to talk specifics and recognize there are some areas where there is way too much regulation (CRA for example) and others where there is way too little (the parts off the Shadow Banking System that collapsed).

          Bank regulation always was and always will be an arms race between regulators and financial innovation.

          When there was a lot less regulation of banking there were a lot more financial panics and devastating economic depressions. That’s how financial markets functioned when there was a lot less government regulation. A lot of innocent people got hurt.

          The bailouts in 2008 worked far better than even their biggest supporters expected at the time. They averted what would have been a major economic depression. They actually turned a very substantial net profit for the taxpayers. The result was far less government debt than we would have today had there been no bailouts and far fewer innocent people hurt.

          The owners of the bailed out companies were NOT bailed out. Their shares lost most or all of their value. It was bondholders who got bailed out. The decision not to give bondholders haircuts was one I disagreed with at the time.

          The way things played out later convinced me that giving them haircuts would have been more costly in the end because it would have failed to stop the runs on the financial system.

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          • Either way, I have little interest in arguing about how it would turn out in some fantasy world counterfactual.

            That’s because you have little faith in markets to regulate and control the behavior of business owners and operators. You seem to believe instead that the same fallible and short sighted human beings we agree need to be regulated can be regulated by other fallible and short sighted human beings with whom they share a symbiotic relationship. You clearly understand that a regulatory regime creates an arms race with innovation, which means that there will always be ways to beat the system, and yet that’s your preference. It doesn’t make sense.

            When there was a lot less regulation of banking there were a lot more financial panics and devastating economic depressions. That’s how financial markets functioned when there was a lot less government regulation.

            I’m sure you learned that in government schools, but it’s just not true. Please provide some substantial support for that claim. It’s a common claim, true enough, but the explanation usually lacks some important elements. Looking forward to yours.

            <blockquoteA lot of innocent people got hurt.

            You have a low opinion of people’s ability to manage their own lives. Even if it were true, will you really claim it’s the job of our masters in government to protect people from making bad business decisions?

            The owners of the bailed out companies were NOT bailed out.

            Nor should they be.

            The decision not to give bondholders haircuts was one I disagreed with at the time.

            Finally, we agree on something. Bondholders are not innocent people. Of course Obama screwed them in the GM deal, so from a macro view it all evens out, I guess.

            Claiming taxpayers made a substantial profit on government bailouts is a disingenuous claim. Ignoring the lack of authority to spend tax money on such illegal ventures, TARP closed out a $426 billion “investment” with $!5 billion in “profit” after 6 years. What kind of return is that? I haven’t figured it out, but it’sw tiny.More importantly, one must ask what that money in the hands of private actors could have accomplished in 6 years.

            The way things played out later convinced me that giving them haircuts would have been more costly in the end because it would have failed to stop the runs on the financial system.

            That’s funny. Now you’re asking me to consider some fantasy world counterfactual. There’s no evidence for that, only speculation by folks who want to defend government intervention.

            BTW I’ve read about half of that Kling piece,and I agree it IS excellent. So far I have found nothing with which I disagree. Unless he changes course before the end I see him blaming government incompetence and perverse incentives for most of the financial crisis.

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          • Ron,

            Here is a list of years (that I did NOT get from “government schools”) when there were economic downturns lasting years, which were far worse than what we saw in 2008-9. 1837, 1857, 1873, 1893.

            Like it or not there was formal legislation authorizing TARP spending. Since you think all existing government laws are illegitimate, it’s hard to know the significance of your singling one out as illegitimate.

            Fannie and Freddie continue to pour enormous profits into the Treasury on an ongoing basis. The returns to taxpayers from the bailouts have not nearly ended. No legislators want to stick their necks out going for some reform that might fail and will certainly be compared to continuing to allow GSE profits to partially fund government.

            >—“More importantly, one must ask what that money in the hands of private actors could have accomplished in 6 years.”

            Now that’s funny. There has long been a huge amount of essentially uninvested capital invested in safe assets with slightly negative real interest rates after inflation. The money could have added to that pile of uninvested capital.

            Yes, it’s clever of you to point out that all counterfactuals are fantasies. Point taken. I would remind you that all fantasies are NOT equally likely to become future realities.

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          • “The bailouts in 2008 worked far better than even their biggest supporters expected at the time.”

            False. This is what politicians, their cronies, and their useful idiots like to say to justify the use of taxpayer funds by politicians to bail out political cronies who fail at banking.

            “They averted what would have been a major economic depression.”

            False. Politicians helped their cronies by bailing them out from their mistakes. Competitors would have bought the assets of the failing institutions and everything would have continued after a short recession to revalue assets caught up in the residential real estate boom caused by misguided government policies.

            “They actually turned a very substantial net profit for the taxpayers.”

            False. Matthew Yglesias of Vox wrote, “Treasury now says ‘taxpayers have recovered $441.7 billion on TARP investments including the sale of Treasury’s AIG shares, compared to $426.4 billion disbursed’ for a profit of a bit over $15 billion.” Now, while a profit of $15 billion sounds enormous, it only amounts to a nominal annualized return of 0.6 percent. Even Treasury Bills (maturing after three years or longer) would have been a better investment, so this is hardly “very substantial.”

            Mark Gongloff at the Huffington Post pointed out that the problem here is that nearly half of those loans were repaid with funds that come from loans from other government programs. So, one debt was swapped for another. While it may have appeared to show a profit for the Capital Purchase Program, we can’t exactly know what the status of the other loans will be. Thus, the “net profit” is questionable at best.

            “The result was far less government debt than we would have today had there been no bailouts and far fewer innocent people hurt.”

            False. Typical false statements of the left: “if government had not intervened, then CATASTROPHE! Yet, they can never tell you, in detail, how bailing out political cronies helped anyone.

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          • Greg W,

            First of all, that was a great Dwight Shrute impersonation.

            Secondly, you either don’t know – or don’t want others to know – that Fannie and Freddie continue to pour huge profits into Treasury on an ongoing basis to the benefit of taxpayers as a result of the “bailouts” which did not bail out the owners of Fannie and Freddie who saw their investments devastated as they should have been.

            This is a great example of why I like to say: If you hate government enough, you will hate its successes even more than its failures.

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          • “. . . Dwight Shute . . .”

            Who?

            “. . . you either don’t know – or don’t want others to know – that Fannie and Freddie continue to pour huge profits into Treasury. . . ”

            I guess you did not know . . .

            http://www.marketwatch.com/story/freddie-mac-may-need-another-taxpayer-bailout-next-week-2016-04-29#:hN0vZpMiqPuxEA

            “This is a great example of why I like to say:”

            That the left either lies or does not know what they are talking about. But, thanks for the impersonation of Lenin’s “Useful Idiot.” However, that just seems like the real you.

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          • Greg W,

            More deliberately misleading half truths of course.

            First of all, it has already been announced that Freddie will NOT need any kind of draw from Treasury this quarter despite some losses on interest rate swaps. Even if they HAD needed it, it would in no way have threatened the overall net profitability of the bailout to the taxpayers. Careful readers will note you didn’t exactly claim that it would have. You just left enough innuendo to make it sound like it was September 2008 all over again.

            Freddie uses interest rate swaps to hedge against sudden interest rate rises that could cost them money. When you hedge against a sharp interest rate rise, a sharp drop will always cost you money. The whole point of a hedge is to trade one risk for another. It’s an interesting question how much these kinds of derivatives help and whether or not they should be allowed but that’s a separate issue.

            Profits from Fannie and Freddie flow directly into Treasury every quarter with none put away as capital to cushion losing quarters so if that flow is reversed for a quarter it is reversed for a quarter. That is nothing like a huge bailout when you don’t know whether or not you are going to get paid back.

            And yes, Dwight Shrute. He was the character who played the role of the buffoon on The Office. He always shouted “False” overtime he disagreed with someone. The similarity is uncanny.

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          • “More deliberately misleading half truths of course.”

            And yet, you have no supporting facts. And, Federal Housing Finance Agency Director Mel Watt disagrees with you. “I am signaling my belief that some of the challenges and risks we are managing are escalating and will continue to do so the longer the Enterprises remain in conservatorship,” Federal Housing Finance Agency Director Mel Watt said Thursday in an address at the Bipartisan Policy council. So, in your opinion, Freddie and Fannie are doing great, yet Mel Watt, THE CHAIRMAN OF THE FEDERAL REGULATOR OF FREDDIE AND FANNIE DISAGREES WITH YOU. It is also important to note that Freddie and Fannie are in CONSERVATORSHIP. That is bankruptcy. Apparently, you do not read too carefully.

            “You just left enough innuendo to make it sound like it was September 2008 all over again.”

            Nope. I spoke the truth. You ought to try it. Of course, that means leaving your leftist ideology in the trash….where it belongs.

            “…The Office.”

            You watch too much television. But, that explains why you live in a make believe world instead of the real one.

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          • Greg W,

            I don’t disagree with anything in that Mel Watt quote you so pompously presented and nothing in that quote contradicts anything I have said here.

            So much for reading carefully. You’ll get better at it as you calm down.

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          • “I don’t disagree with anything in that Mel Watt quote . . .”

            . . . except you said that “Fannie and Freddie continue to pour huge profits into Treasury”….and Mel Watt said they are in conservatorship and the “challenges and risks . . . are escalating.” Oops!

            So much for careful reading. Turn off the television, dump the leftist propaganda, use a good dictionary, and try to think. It probably won’t work for you, but at least you will have tried.

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          • Greg W,

            >—“. . . except you said that “Fannie and Freddie continue to pour huge profits into Treasury”

            I did and they do. Both have already netted the taxpayers a profit on the bailout capital invested. Fannie will pay this quarter. Freddie will skip this quarter. Both will pay next quarter.

            >—“….and Mel Watt said they are in conservatorship”

            They are and have been for years and I never denied it. Profits flow directly into Treasury BECAUSE they are in conservatorship. If they weren’t in conservatorship that WOULDN’T be the case.

            >—” and the “challenges and risks . . . are escalating.”

            The challenges and risks ARE escalating and I never denied it.

            >—“Oops!”

            Yes, Oops indeed. What’s your point? I’m dunking on you. This is getting too dumb for me to even respond to.

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          • “Both have already netted the taxpayers a profit on the bailout capital invested.”

            Nope. Freddie lost $475 million in the 3rd quarter of 2015. It reported a loss of $354 million in the first quarter of 2016.

            http://finance.yahoo.com/news/freddie-mac-posts-475m-loss-134450335.html

            http://www.housingwire.com/articles/36946-freddie-mac-reports-354m-net-loss-in-first-quarter

            “Fannie will pay this quarter. Freddie will skip this quarter. Both will pay next quarter.”

            Perhaps, but they will do so only because they are drawing down their loan loss reserves, and as a former community banker, you should know that is a huge regulatory violation. From the article: “More important than the results from one quarter are Freddie’s steadily shrinking reserves, according to Goodman and Zandi. Freddie will hold $1.2 billion in 2016, $600 million in 2017 and zero by 2018, its fourth-quarter earnings release noted.”

            http://www.marketwatch.com/story/freddie-mac-may-need-another-taxpayer-bailout-next-week-2016-04-29#:eMs1fuIUF1uxEA

            >—“….and Mel Watt said they are in conservatorship”

            And, despite a huge capital injection by the federal government that allowed it to write off billions in bad loans, Freddie is losing money again, its federal regulator says the risks are rising, and it is taking its reserves for loans losses to 0 to inflate earnings…..and it and Fannie are likely to ask for another federal bailout. From the article, “Despite the positive aspects of the results, calls to recapitalize Freddie Mac and Fannie Mae will likely increase. Some analysts argue that Fannie and Freddie are moving more into a position to need additional intervention by the federal government; something brushed off by Freddie Mac repeatedly.Rafferty Capital Markets equity analyst Dick Bove, for example, worries that the lack of alternatives to housing finance is problematic mainly due to his opinion that both companies are facing insolvency.”

            “The challenges and risks ARE escalating and I never denied it.”

            It is easy to make short-term profits, while taking on more and more risky assets and by taking your loan loss reserves to 0. That is what Fannie and Freddie did before….to create a false boom with the resulting bust. Oops!

            ” This is getting too dumb for me to even respond to.”

            No. Your comments have been dumb since the beginning. I just find it amusing to watch you lie and try to bluff your way through things that you do not understand . . . and all to advocate a worthless leftist ideology.

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          • Greg G said, “Both have already netted the taxpayers a profit on the bailout capital invested. Fannie will pay this quarter. Freddie will skip this quarter.”

            Freddie lost $475 in the third quarter of 2015. Freddie lost $354 million in the first quarter of 2016. All the while both GSE’s reduced their loan loss reserves each quarter while risks were escalating. As you should know, reducing your loan loss reserve while risk is increasing is a big regulatory no no.

            http://finance.yahoo.com/news/freddie-mac-posts-475m-loss-134450335.html

            http://www.housingwire.com/articles/36946-freddie-mac-reports-354m-net-loss-in-first-quarter

            From the article: “More important than the results from one quarter are Freddie’s steadily shrinking reserves, according to Goodman and Zandi. Freddie will hold $1.2 billion in 2016, $600 million in 2017 and zero by 2018, its fourth-quarter earnings release noted.”

            http://www.marketwatch.com/story/freddie-mac-may-need-another-taxpayer-bailout-next-week-2016-04-29#:ZpUjvoGbTZuxEA

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          • Greg W.

            And yet AGAIN you fail to come up with a a single thing that contradicts anything I’ve said. You just robotically keep repeating the same information.

            YES, the risk of quarterly losses and possible Treasury draws IS increasing at the GSE’s. It is increasing BECAUSE they are required by Congress to pay all their profits (and over time all their capital) to the Treasury. Capital is the main insurance for ANY business against losses.

            This arrangement was made by Congress on the assumption that, when the taxpayers were fully compensated for the bailout money, Congress would reform housing finance and replace Fannie and Freddie with something else. That might or might not happen.

            Either way, the bailout has succeeded beyond anyone’s wildest hopes when it was started. That certainly doesn’t mean that there isn’t a rising risk that Congress will screw things up going forward now that the taxpayers have already been paid back. Which is an entirely different question than how well the bailouts did what they were designed to do.

            Ironically, one of the main obstacles to completing GSE reform is the fact that the bailouts have worked so well to this point. Few Congressmen want to stick their necks out proposing a reform that might fail, and will certainly be compared to this period where Fannie and Freddie were throwing off profits into the Treasury.

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          • “And yet AGAIN you fail to , , , ”

            . . . understand that Freddie and Fannie are not doing well. Freddie is losing money despite huge bailouts, both are taking on too much risk, both are draining their loan loss reserves to make it appear they are profitable, the federal regulatory chairman says they are doing poorly, and various analysts say they may need an additional bailout.

            I provided supporting articles. That is known as evidence. You provided your own false conclusory statements. Yes, robotic, indeed.

            “. . . they are required by Congress to pay all their profits (and over time all their capital) to the Treasury.”

            And, that is another bad idea…which makes Fannie and Freddie political entities and not businesses.

            “Capital is the main insurance for ANY business against losses”

            As any community bank director knows, businesses engaged in lending must set aside loan loss reserves. And, if you knew any accounting, you would know that is how banks manipulate their earnings to show profits when losses are being incurred.

            “Either way, the bailout has succeeded . . . ”

            Nope. Again, Freddie is losing money despite huge bailouts, both are taking on too much risk, both are draining their loan loss reserves to make it appear they are profitable, the federal regulatory chairman says they are doing poorly, and various analysts say they may need an additional bailout.

            “Ironically, one of the main obstacles to completing GSE reform is the fact that the bailouts have worked so well to this point.”

            You keep robotically repeating this despite all the facts showing otherwise.

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          • “This is getting too dumb for me to even respond to.”

            Yes, I agree.

            You keep saying that Fannie and Freddie are doing great and are government success stories. You provide no independent evidence to support your view.

            In reality, Fannie and Freddie are not doing well and are government disaster stories. I provided indented evidence supporting all of these points:

            1. Fannie and Freddie are in conservatorship (bankruptcy) and required massive government bailouts to remove all of their bad assets.

            2. Freddie incurred substantial net losses in the 3rd quarter of 2015 and the first quarter of 2016.

            3. Both are manipulating their earnings by lowing their loan loss reserves when their risk is increasing.

            4. The chairman of the federal agency overseeing these failed institutions says that Fannie and Freddie are not doing well.

            5. Various analysts believe that Freddie and Fannie will require another bailout by government.

            “Too dumb?” Yes, indeed, your position is too dumb even for you to continue.

            Like

          • GW,

            I can’t tell if you are too dumb or too dishonest to see that I am agreeing with you about the most consequential of problems that still exist at the GSE’s. I am just pointing out that those problems are the result of Congress’s failure to make further reforms in the GSE’s, NOT the bailouts themselves. All the bailouts could be asked to do was recover as much of the taxpayers money as possible (in this case well OVER 100%), stabilize markets and give Congress a CHANCE to then reform the model. They succeeded at all of that better than anyone dared hope in 2008.

            There is no way the bailouts could have guaranteed that a Congress eight years after the crisis would do their job and reform the system. They might do it or they might not. Either way, that is not something a bailout could possibly guarantee.

            Let’s review. Fannie and and Freddie ARE in conservatorship. That was never in dispute. Conservatorship was never intended to be a permanent solution.

            Risks at Fannie and Freddie ARE now rising. That was never in dispute. We have a disagreement about whether that is more due to declining capital or loan loss accounting but that’s a side issue.

            Mel Watt DID cite his “belief that some of the challenges and risks we are managing are escalating and will continue to do so the longer the Enterprises remain in conservatorship” AND he is right about that. That was never in dispute.

            Freddie Mac DID have two quarters in recent years where they lost money and failed to pay additional profits to Treasury those quarters. They did NOT require draws from Treasury in either case because they had enough capital left to cover those losses. That was never in dispute.

            As for the your straw man paraphrasing of what I have said, I have lost interest in responding to that nonsense. At this point, all careful readers know what I really said.

            Like

          • ” . . the fact that the bailouts have worked so well to this point.”

            And, for all the reasons you cited above, your statement about the success of the bailouts of Fannie and Freddie are patently false. So the only remaining question is: Are you too stupid to understand what you said or are you just being disingenuous? Based on your many previous incorrect correct statements, I have to say both.

            Like

          • “We have a disagreement about whether that is more due to declining capital or loan loss accounting but that’s a side issue.”

            No, we don’t. You do not understand regulatory capital of financials institutions, which includes loan loan reserves. The GSEs are lowering loan loss reserves (part of capital) in order to pay dividends at the same time that their risks are rising. That is a huge regulatory no no.

            Like

          • GW,

            >—“You do not understand regulatory capital of financials institutions, which includes loan loan reserves. The GSEs are lowering loan loss reserves (part of capital) in order to pay dividends at the same time that their risks are rising. That is a huge regulatory no no.”

            Sure, if by “regulatory no no ” you really mean “regulatory requirement.” It WOULD BE a regulatory no no for a REGULAR bank expected to stay in business but Fannie and Freddie are NOT regular banks expected to stay in business. They are organizations in conservatorship for the purpose of being wound down and replaced.

            The terms of their conservatorship make it a regulatory REQUIREMENT that they reduce capital to zero by paying it into Treasury within the next few years as YOUR own link confirmed.

            The purpose of that requirement was to set the stage for Congress to replace the GSE’s with something else. If Congress fails to do that then that’s on Congress, not on the bailouts which have given Congress the opportunity to replace them now with no losses to the taxpayers.

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          • “Sure, if by “regulatory no no ” you really mean “regulatory requirement.””

            No, Wrong Way Feldman. Financial institutions may NOT lower loan loss reserves (part of capital) in order to pay dividends at the same time that their risks are rising. That is prohibited under regulatory requirements and it is improper accounting. .

            “It WOULD BE a regulatory no no for a REGULAR bank expected to stay in business but Fannie and Freddie are NOT regular banks expected to stay in business. They are organizations in conservatorship for the purpose of being wound down and replaced”

            Nope. Regulatory and accounting requirements prohibit such practices. That is called “window dressing.” And, it is improper for all organizations whether under conservatorship or not.

            “The terms of their conservatorship make it a regulatory REQUIREMENT that they reduce capital to zero by paying it into Treasury within the next few years as YOUR own link confirmed.”

            Nope. That is a CONTRACTUAL requirement, which is superseded by REGULATORY and ACCOUNTING requirements.

            “The purpose of that requirement was to set the stage for Congress to replace the GSE’s with something else.”

            That requirement is suspended if the GSE loses money that quarter or does not have sufficient capital. They are drawing down loan loss reserves while risk is increasing in order to create paper profits.

            “If Congress fails to do that then that’s on Congress, not on the bailouts which have given Congress the opportunity to replace them now with no losses to the taxpayers.”

            This totally makes no sense. The taxpayers incurred huge losses from the bailout of Fannie and Freddie, and, as several analysts expect additional bailouts are likely to occur. And, it is all on Congress (both “progressive” Democrats and Republicans) who, as part of the policy of increasing home ownership among people who cannot afford them, created incentives that lead to taxpayer funded bailouts and the risky and questionable accounting practices currently going on. Neither Fannie nor Freddie should be replaces. They should be liquidated and abolished.

            Like

      • And let’s not forget that a housing bubble only developed to such an extent because of Fed monetary policy of lower than market interest rates over a long period of time. Some suggest it was done intentionally to softening the landing after the dot-com bubble burst. Since I know you reject Austrian Business Cycle theory, I won’t bother to cite it again here.

        Like

  3. Ron,

    >–“I’m sure you learned that in government schools, but it’s just not true.”

    It’s interesting that you are so “sure” about that.

    I never learned any Economics or Economic history in government schools. I had none in High School. I went to a private college where I took only Econ101 and 102. I didn’t find it interesting and don’t remember whatever they “taught” me.

    I learned most of what I know about Economics from running a business and reading on my own. If you run a business, you learn about opportunity cost real fast. Once you see the world through the lens of opportunity cost, it’s impossible to see it exactly the same way again as before. Some form of economics applies to almost everything.

    Luckily, I had a dad who was a successful layman investor. He was really disciplined about it and good at it. Of course it didn’t hurt that he was investing during one of the very best periods in history to do that.

    Once I started to make real money, he insisted I needed to save and invest. I was happy to trust him and take his advise but had zero interest in learning how to invest. I asked him to pick stocks for me. He did so within the limits of my lower risk tolerance.

    One day, about 12 years later, I got looked at an account statement and was amazed to find it had gone up by more than I had earned working in the previous month. That got my attention. You see, I never liked working all that much. I did it well, but I did it for the money.

    So at that point, I started making my own investment picks and learning about investing. I made some great picks and never learned anything from those choices. Every time I lost money , I learned something important.

    Then, 16 years go I was chosen to be on the board of a local community bank. When I saw how much they would be paying me and how little work it involved, I decided I owed it to them to learn a lot more about economics. Ever since then, I have been reading economics pretty much non-stop.

    I know my views look to you pretty much like most other people who think we should have a government. In fact my views are more eclectic than you think. I think most major schools of economics get some important things right AND overemphasis the importance of their own theories.

    Like

    • Greg

      I never learned any Economics or Economic history in government schools. I had none in High School. I went to a private college where I took only Econ101 and 102. I didn’t find it interesting and don’t remember whatever they “taught” me.

      That’s great news! In that case I withdraw my “government schools” comment and I feel less ‘sure’ about your economics education, except to opine that it’s probably better than the one you got in school.

      I feel fortunate to have mostly missed the Keynesian flavored economics education I would have gotten in school. It appears to be hard to undo. I too only took 101 and 102. Just enough basics, and not enough to do any harm.

      Your experience in investing sounds a lot like mine except my dad was no help so I started later in life. What I learned is that I can’t pick stocks so I shouldn’t do it. Luckily I learned this during the late ’90s when a person had to work hard to lose money, so I wasn’t hurt too badly.

      Like

      • Ron,

        >—-“I feel fortunate to have mostly missed the Keynesian flavored economics education I would have gotten in school. ”

        Yeah, me too. It helped me avoid the popular misconception that all deficit spending is Keynesian. I simply read Keynes directly rather than relying on someone else’s interpretation. He advocated countercyclical government spending, not ever growing amounts of debt. That seems to me like an ideal policy. Of course actual policy always falls short of ideals but it helps to know what you should be aiming at.

        Libertarians always complain (usually without any apparent sense of irony) that you could never really implement Keynesian surpluses for long in a democracy. Well, you can get a lot closer to it than we ever got to an an-cap arrangement. Libertarians are throwing stones from glass houses with that criticism.

        I read a lot of Hayek too. He is brilliant on the role of prices in putting decentralized knowledge to work. He is also brilliant on the problem of prediction in complex systems. I wouldn’t trust him on monetary policy or banking though.

        It took me a long time to learn index funds were a better choice for me than individual stocks. I buy almost nothing else now. Trying to pick stocks did teach me about diversification. It also taught me how easily a single bad premise can topple a beautiful chain of logic.

        Like

        • Greg

          He [Keynes} advocated countercyclical government spending, not ever growing amounts of debt.

          In my (limited) experience, most people who have a basic understanding of economics and some exposure to Keynes understand what he intended, but like those un-ironic folks, I’m not sure how ‘level pay’ could ever work when those who write the checks are trying hard to get re-elected every 2 years. It’s virtual suicide to suggest spending cuts or reducing taxes, but to set money aside? No way. There is no indication we will ever again see a balanced federal budget, let alone a large surplus to stash away for a rainy day.

          Favoring one group of voters or another is a way to get votes. Saving money isn’t.

          The problem Keynes had, other than the above (well, one of the several problems) is the silly notion that ‘aggregate demand’ drives economic growth instead of savings and investment. Entrepreneurs invest in new ideas and offer new products and services on the market that save time, money, and generally make people’s lives better. That creates economic growth.

          There was no ‘aggregate demand’ for iPhones until Apple created them and offered them for sale. Now the market is flooded with competitive brands and other very useful devices and we can’t live without them. The benefits are enormous. Government spending to equalize demand could never have created such a great improvement in our lives.

          BTW I predicted that smart phones were a fad that would soon fade away. I already had a computer, camera, MP3 player, cell phone, etc. – all better quality than the ones offered in an expensive, tiny, handheld device. I didn’t see a need to have all those things in my pocket. I now realize it’s the most powerful tool I’ve ever had.

          Like

          • Ron,

            In terms of paying down government debt, it is debt to GDP that matters, not the nominal amount. Between the end of WWII and the late 70’s debt to GDP was reduced by about 2/3. It was also reduced substantially in the late 90’s.

            It was Supply Side Economics, not Keynesianism that blew up the debt in the 80’s. Then of course under GWB it was decided that “Reagan (not Keynes) proved deficits don’t matter” in Cheney’s immortal words.

            More than one thing drives economic growth. Savings and investment matter and so does aggregate demand. Steady aggregate demand doesn’t matter because it replaces the need for savings and investment. It matters because it supports savings and investment.

            Like

  4. Greg

    ” It [debt] was also reduced substantially in the late 90’s.”

    Yes it was, and that trend has reversed. Debt has grown to potentially dangerous levels relative to GDP. At some point a a modest increase in interest rates could consume most of the total annual tax collections. The Fed has painted itself into a corner where it can’t lower interest rates and can’t raise interest rates. What to do, what to do?

    It was Supply Side Economics, not Keynesianism that blew up the debt in the 80’s.

    I don’t know anyone who claims otherwise. Tax cuts and reduced government spending would be the correct course of action, but there is never a serious suggestion to reduce spending. Politicians just can’t be trusted. They either have no understanding of economics or believe the rest of us have none.

    Then of course under GWB it was decided that “Reagan (not Keynes) proved deficits don’t matter” in Cheney’s immortal words.

    And that’s correct if you can inflate the currency enough.

    Savings and investment matter and so does aggregate demand. Steady aggregate demand doesn’t matter because it replaces the need for savings and investment. It matters because it supports savings and investment.

    You might want to inform the Fed that their plan to put however many trillions of dollars of “stimulus”they created since 2009 into the hands of consumers to be saved and invested hasn’t done the job. Oh wait…was that supposed to be spent?

    Production before consumption – always.

    Like

    • Ron,

      >—“Fed has painted itself into a corner where it can’t lower interest rates and can’t raise interest rates. What to do, what to do?”

      A national bank running a fiat currency can always increase or decrease the money supply. We disagree on whether that is a feature or a bug. I hope we don’t disagree on whether or not it is the case.

      >—“You might want to inform the Fed that their plan to put however many trillions of dollars of “stimulus”they created since 2009 into the hands of consumers to be saved and invested hasn’t done the job.”

      The left tends to favor fiscal policy for getting new money into the economy because that makes redistribution easier.

      The right tends to favor monetary policy for getting new money into the economy because that tends to put more of the new money in the hands of the investor class because you have to be able to borrow to get it.

      >—“Oh wait…was that supposed to be spent?”

      The Austrians who were in a panic that it would cause hyperinflation sure thought it would be spent.

      That didn’t happen because most of the new money simply replaced money destroyed in the collapse of the Shadow Banking System or wound up in idle bank reserves. It did play a large part in turning around a catastrophic economic decline in late 2008 and early 2009.

      Like

        • Greg W.

          What you are saying is that an increase in the money supply hasn’t lead to increased GDP, therefore the velocity of money has decreased. Since velocity is a derivative of the other factors in the equation, and has no life of it’s own, it’s hard to imagine why anyone assigns any importance to it.

          Like

          • “Since velocity is a derivative of the other factors in the equation, and has no life of it’s own, it’s hard to imagine why anyone assigns any importance to it.”

            Velocity is an important factor and not merely a derivative as you suggest. In a strong economy with good consumer confidence, the additional money supply would have been used to chase too few goods and services, and the velocity would have remained about the same, thus creating inflation. The economy was not strong and consumer confidence fell during the period the money supply was expanded so velocity fell, thus there was no inflation.

            Like

          • Velocity is an important factor and not merely a derivative …

            Assuming you are using the formula MV = PT or something similar to describe the relationship between money supply and what is essentially GDP, I notice that each of the factors except Velocity can be defined on its own without reference to the formula. Money supply, prices, and transactions can all be defined and understood by themselves, but describing velocity requires referring to money supply and either prices, transactions, or both.

            While it’s convenient to refer to the “flow” or “circulation” of money, in reality money is at all times owned by someone, and moves in discrete steps from owner to owner in exchanges for goods and services. A change in velocity results from a change in one of the other three components, and doesn’t cause a change in any of them.

            Like

          • No. Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy’s inflation calculation. Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant. So, no, it is not merely a derivative of the other three factors. Also, remember that economics uses mathematics to teach ideas and concepts, but economics is about human action, which often does not correspond very well with the mathematical formulas constructed to teach those concepts.

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          • Greg W.

            … but economics is about human action, which often does not correspond very well with the mathematical formulas constructed to teach those concepts.

            Here we agree 100%. In fact I believe you are making my point for me, which is that the simple formula MV = PT isn’t very useful in the real world, nor is its factor ‘velocity’, which appears to be merely a ratio of money supply to PT (GDP) used as a fudge factor to balance the equation. In essence it says that the amount of money spent (MV) equals the value of goods and services received. (PT). True enough, but glaringly trivial.

            If you are using some meaning for Velocity other than the one implied in MV = PT, please redirect me so I can change course.

            Considering that every transaction involves an equal and opposite exchange of money for goods and services, please explain how velocity can be anything other than a result of a change in one of the other three factors? How would it change independently?

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          • I am using the same definition of velocity as is used for the equation. The velocity of money changes over time and is influenced by a variety of factors, including consumer confidence (the human factor). And, that means, velocity is not simply a mathematical variable solely dependent on the other three.

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          • Greg W.

            OK, velocity is “influenced by” a variety of factors. I don’t see “Consumer Confidence” or “Human Factor” in the equation MV = PT. Is “Human Factor” a part of one of the other three factors, and does a change in that factor *cause* a change in velocity?

            In an earlier comment you wrote: ” The economy was not strong and consumer confidence fell during the period the money supply was expanded so velocity fell, thus there was no inflation.

            Does “so velocity fell” in that sentence mean “therefore, as a *result* of” other factors” velocity fell?

            Do you mean “Velocity must have fallen concurrent with an increase in the money supply because we see no increase in PT”?

            To be useful, I would think the formula MV = PT should include all factors that affect it. Should ‘consumer confidence’ and/or ‘weak economy’ be included as additional factors?

            Like

          • Edit:

            Please read the following part of the above comment without bold:

            “… thus there was no inflation.

            Does “so velocity fell” in that sentence mean “therefore, as a *result* of” other factors” velocity fell?

            Do you mean “Velocity must have fallen concurrent with an increase in the money supply because we see no increase in PT”?

            To be useful, I would think the formula MV = PT should include all factors that affect it. Should ‘consumer confidence’ and/or ‘weak economy’ be included as additional factors?”

            Like

          • “Is “Human Factor” a part of one of the other three factors, and does a change in that factor *cause* a change in velocity?”

            No to your first question. A change in consumer confidence, among other things, can cause a change in the velocity of money.

            “Does “so velocity fell” in that sentence mean “therefore, as a *result* of” other factors” velocity fell?

            No. It means that velocity fell. I did not address the cause of why velocity fell.

            “Do you mean “Velocity must have fallen concurrent with an increase in the money supply because we see no increase in PT”?”

            PT?

            “Should ‘consumer confidence’ and/or ‘weak economy’ be included as additional factors?”

            Those are factors affecting the variable “velocity.”

            Like

          • Greg W.

            PT?

            Half of the equation MV = PT. Prices times Transactions. GDP – as described in a previous comment. You are reading my comments, aren’t you?. Do you have a different definition of PT?

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          • “Do you mean “Velocity must have fallen concurrent with an increase in the money supply because we see no increase in PT”?”

            Yes, where T means Q.

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          • MV = PQ

            Great. We are on the same page. MV = PT is the older Fischer quantity theory of money equation. Hopefully we agree that PQ is essentially GDP.

            I am left where I started.

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          • “Hopefully we agree that PQ is essentially GDP.”

            Yep. And, I am left with velocity is affected by many factors. See, Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets.

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        • It is very misleading to attribute the expansion of monetary policy to “the left.”

          “The left” tends to prefer fiscal policy for achieving its goals. The two most influential economists in advocating for more emphasis on monetary solutions have been Milton Friedman and Scott Sumner. Both are libertarians and not leftists at all.

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          • Milton Friedman and Scot Summer argue for restricting growth of the money supply and the actions of the Federal Reserve, while Federal Reserve Chairmen like Janet Yellen, Ben Bernanke, and Arthur Burns were appointed by, and followed the wishes of the “progressive” presidents who appointed them.

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          • >—-“Milton Friedman and Scot Summer argue for restricting growth of the money supply and the actions of the Federal Reserve,”

            This is a misleading half-truth.

            It is true but but only to the extent that “restricting” means following a rules based policy. Friedman faulted the Fed for causing the Great Depression by causing monetary policy too be TOO TIGHT, not too loose. He wanted MORE growth in the money supply than the Fed allowed in the Great Depression.

            Sumner likewise believes that monetary policy has been TOO TIGHT, not too loose since before the Great Recession. He also wants MORE, not less growth in the money supply and is constantly criticizing the Fed for UNDERshooting its inflation targets.

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          • “This is a misleading half-truth.”

            False. Read “A Monetary History of the United States” by Milton Friedman and Anna Schwartz.

            “Friedman faulted the Fed for causing the Great Depression by causing monetary policy too be TOO TIGHT,”

            False. Friedman faulted the Fed for being too loose and thus causing the boom. He also faulted the Fed for doing the exact opposite of what it should have done once the Fed-sparked boom became a bust.

            “Sumner likewise believes that monetary policy has been TOO TIGHT, not too loose since before the Great Recession.”

            Like

          • Greg W,

            Oh Yeah, everyone interested definitely should read ” A Monetary History.” You finally got something right there.

            Those who DO read it will see that Friedman did blame loose money for the boom that PRECEDED the Great Depression.

            He claims there never would have been a Great Depression at all if the Fed had not followed far, far, too tight a monetary policy once that boom ended.

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          • ” You finally got something right there.”

            That puts me one ahead of you.

            “He claims there never would have been a Great Depression at all if the Fed had not followed far, far, too tight a monetary policy once that boom ended.”

            He claims that the Fed lengthened the recession it created through expansionary monetary policy into the Great Depression contracting the money supply by one third.

            Like

          • And, here are the key words that you failed to address:

            “Federal Reserve Chairmen like Janet Yellen, Ben Bernanke, and Arthur Burns were appointed by, and followed the wishes of the “progressive” presidents who appointed them.”

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          • Greg W,

            >—““Federal Reserve Chairmen like Janet Yellen, Ben Bernanke, and Arthur Burns were appointed by, and followed the wishes of the “progressive” presidents who appointed them.”

            Hilariously disingenuous “key words” there.

            Arthur Burns was a Republican chosen by Nixon. He also had other jobs in the Eisenhower and Reagan administrations.

            Bernanke was a Republican nominated by Bush and renominated by Obama. Bernanke was a Milton Friedman disciple.

            It was Paul Volker who tamed inflation. He was nominated by Carter and later renominated by Reagan.

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          • “Hilariously disingenuous “key words” there.”

            Another false statement with no supporting evidence.

            “Arthur Burns was a Republican chosen by Nixon.”

            Nixon was a “progressive.” He was for bigger government. That is why Nixon instituted wage and price controls.

            “Bernanke was a Republican nominated by Bush and renominated by Obama.”

            You confuse party with ideology. Both Bush and Obama were bigger government advocates.

            “Bernanke was a Milton Friedman disciple.”

            And yet, he used a highly expansionary monetary policy, which would have been opposed by Friedman.

            “It was Paul Volker who tamed inflation.”

            After years of expansionary monetary policy pursued by “progressives” of both parties.

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          • Greg W.

            Nixon was a “progressive. He was for bigger government.

            Both Bush and Obama were bigger government advocates.

            Correct. There is only one major political party, and that is the Big Government Party. There is an ideological continuum from the left wing of the BGP to the right wing of the BGP, but the differences are minor.

            Like

          • Greg W,

            >—“And yet, he used a highly expansionary monetary policy, which would have been opposed by Friedman.”

            Check out the EconTalk interview that Russ Roberts did with Milton in late 2006 at the peak of the housing bubble. In that interview Milton said the recent (at that time) monetary policy of the Fed had been excellent even though he would have preferred a rules based system. Milton totally failed to see the credit bubble happening at that time because he was too focussed on M2. That became apparent later. Maybe we disagree about how open he would have been to new evidence. I think he was a great economist who would have been very influenced by new evidence.

            It later became apparent that he simply missed the enormous growth in money and credit supplied by the shadow banking system which fueled the bubble. Bernanke responded in a way that prevented the money supply from shrinking. That was entirely consistent with Milton’s core philosophy.

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          • Milton Friedman missed the impact of well intentioned government policies in creating significant mal-investment in residential real estate. Almost everyone missed it. There is no one single indicator that will reveal when assets are overvalued.

            Like

          • Ron H.,

            The issue is not democrat v. republican, nor “progressive” v. conservative, nor left v. right. The issue is corrupt politicians, their cronies, and their useful idiots v. those of us who have to pay for their follies.

            Like

          • Greg G.

            It later became apparent that he simply missed the enormous growth in money and credit supplied by the shadow banking system which fueled the bubble. Bernanke responded in a way …

            “Bernanke responded …” Where were the Bernank and his predecessor when it was time to prevent a crises instead of coming by later to pick up the pieces, and even then using the wrong tools? If the problem was too much credit and money supply – no matter where you claim it came from – who in their right mind would think the fix was to create MORE credit and increase the money supply?

            You keep making this excuse for the Fed’s failure to control the money supply and smooth out business cycles, apparently unaware that this is a serious indication of the incompetence of the entire monetarist school.

            Will you really accept such an excuse from the very institution tasked with controlling the economy through monetary policy?

            “Oh, we’re sorry, we didn’t know what those folks in the shadows were doing. We can’t be blamed for things we can’t see or don’t understand.”

            Pathetic.

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          • Greg W.

            Federal Reserve Chairmen like Janet Yellen, Ben Bernanke, and Arthur Burns were appointed by, and followed the wishes of the “progressive” presidents who appointed them.

            That is a sad but true comment on the supposed “independence” of the Fed.

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          • Also, let’s add some more. The socialist (leftist) regime of Venezuela has vastly expanded its money supply and the currency is virtually worthless. How many more do you want? Consider Argentina at various points in its history. How about Brazil? There are so many others. And, all were leftists who used the word “socialist” proudly.

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          • Yep. And, the money supply has a tremendous effect on the economy. Just consider the leftists in Venezuela was destroyed the Venezuelan economy by rapidly expanding the money supply to make the currency virtually worthless.

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          • Greg W.

            I Understand that “money printing” may soon come to an end because the Venezuelan government can no longer afford to buy the paper on which to print the inflated notes.

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          • Ron,

            Of course Friedman and Sumner are both monetarists – well known libertarian monetarists who think that government should use monetary policy to manage aggregate demand. If I recall correctly, it was Milton who got you interested in libertarianism in the first place.

            As for whether you and Greg W want to define Nixon and Bush as “Progressives,” I don’t really care. I am very familiar with the common libertarian insistence that many words have real meanings different from their conventional meanings. As you know, I believe that language is convention all the way down. And those conventions are established in the most libertarian way possible – the voluntary choices of all who speak the language.

            Like

          • “who think that government should use monetary policy to manage aggregate demand”

            No. Friedman argued that the Fed should adopt a 3% growth rate for money supply and then leave it alone. He did not advocate managing aggregate demand with monetary policy. That is the leftist approach that Friedman opposed.

            “the common libertarian insistence that many words have real meanings different from their conventional meanings”

            I use definitions in the dictionary and apply the facts. What do you leftist propagandists use?

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          • Greg W,

            >—“I use definitions in THE dictionary…” (emphasis added)

            It is hilarious that you think there is one correct meaning you get from checking THE dictionary. As the famous linguist Steven Pinker said: “Dictionaries are consumer products, not scientific instruments.”

            The reason that dictionaries are revised every year is to keep up with changes in conventional usage. English from more than a few centuries ago reads like a different language.

            The reason there are so many DIFFERENT dictionaries is that they DON’T all agree on word meanings although there is a lot of overlap.

            Yes, Friedman wanted a steady 3% growth rate for money. The REASON he wanted that is that he thought it would do the best job of keeping aggregate demand steady and healthy.

            Austrians by contrast don’t want the money supply to grow (unless maybe gold miners have a big year) and don’t think government policy can or should steer aggregate demand.

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          • “…it would do the best job of keeping aggregate demand steady and healthy.”

            And, the REASON he wanted to do that was to keep government from “MANAGING AGGREGATE DEMAND.”

            “The reason there are so many DIFFERENT dictionaries…”

            Is that we have more of a market based economy where people have choices, but as you noted “THERE IS A LOT OF OVERLAP.” And, we have that OVERLAP precisely because SO MANY PEOPLE AGREE ON THE MEANINGS. Seriously, are you this stupid? BTW, you forgot to say what you use to determine the definitions and meaning of words. Nice dodge though. A typical tactic of the left primarily used when they are wrong.

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          • Greg W,

            >—” And, we have that OVERLAP precisely because SO MANY PEOPLE AGREE ON THE MEANINGS.”

            And therefore it’s the cases where people disagree on the the meanings that clarify the issue.

            Are you genuinely unaware how few English speakers regard Nixon and GWB as “progressives” or do you just think the vast majority of English speakers get the meaning wrong? I really can’t tell which it is in your world.

            I use my understanding of conventional meanings to determine the meanings of words. I don’t pretend that my word choices, or anyone else’s word choices, rest on some bedrock of objective correctness. I’m wondering if you even know what it means to say that languages are entirely conventional? Do you? Which is “THE” dictionary you view as objectively correct and why then do they change it every year?

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          • Greg W,

            >—–“And, the REASON he wanted to do that was to keep government from “MANAGING AGGREGATE DEMAND.”

            So then why did he advocate the Fed using rule based 3% growth over no growth in the money supply? Why didn’t he advocate no role at all for government in managing the money supply as some others have done? Clue: He thought government management fixed at 3% growth would provide better results.

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          • “He thought government management fixed at 3% growth would provide better results.”

            No. Milton Friedman thought that, if government was involved, then it ought to not have any ability to manage money supply BECAUSE politicians will always seek to keep interest rates arbitrarily low through active money supply management.

            “Clue”

            You ought to get one.

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          • “And therefore it’s the cases where people disagree on the the meanings that clarify the issue.”

            No. Many times the left uses words incorrectly. Examples are “racist” and “bigot.”

            “Are you genuinely unaware how few English speakers regard Nixon and GWB as “progressives” or do you just think the vast majority of English speakers get the meaning wrong?”

            Are your so uninformed that most Americans regard Nixon and GWB as advocates of bigger government and the power of bigger government. Examples include wage and price controls (Nixon) and government policies to encourage lending to people who could not afford homes in order to increase home ownership in the US (GWB). Or do you think the vast majority of Americans are wrong. I am curious as to know how leftists view it in their world.

            “I don’t pretend that my word choices, or anyone else’s word choices, rest on some bedrock of objective correctness.”

            That is because you make things up.

            “I’m wondering if you even know what it means to say that languages are entirely conventional?”

            “Conventional” does NOT mean the words mean what you want them to mean based on how you feel at that particular moment.

            “Which is “THE” dictionary you view as objectively correct and why then do they change it every year?”

            It appears you do not understand the market for dictionaries nor your own words “THERE IS A LOT OF OVERLAP.” Try looking the words up in the dictionary, old chap. Your choice of which dictionary you would like to use. Avoid titles like “The Progressive’s Dictionary,” “The Socialist’s Definitions of Words,” and “The People’s Workers Party Big Book of Words.”

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          • Greg W,

            >—“Are your so uninformed that most Americans regard Nixon and GWB as advocates of bigger government and the power of bigger government. ”

            Well, that was a little garbled but I am going to assume YOU meant to say that anyone advocating bigger government for any reason is a progressive. Very few people use the term that way.

            Reagan increased the size of government a lot to build a bigger military. Progressives opposed that.

            GWB increased the size of government a lot to invade Iraq. Progressives opposed that.

            >—“Conventional” does NOT mean the words mean what YOU (emphasis added) want them to mean based on how you feel at that particular moment.”

            Correct. It does NOT mean that. It DOES mean that words mean whatever MOST speakers of that language want them to mean at that particular moment.

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          • Greg W,

            >—“BTW, Milton Friedman argued that the Fed be abolished.”

            Yeah, if by “abolished” you mean replaced by some other federal agency that would manage the money supply in the way that it increased by 3% a year. That’s still government management of the money supply. Friedman was a MACROeconomist who thought proper management of the money supply could smooth aggregate demand in a beneficial way.

            At least Ron has the sense to know he agrees with Friedman on some things and disagrees with him on others.

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          • “I am going to assume YOU meant to say that anyone advocating bigger government for any reason is a progressive. Very few people use the term that way.”

            Swing and another miss. The early 20th century “progressives” believed that government, though military power, can be used to help other countries. See Barack Obama and Hillary Clinton.

            “Reagan increased the size of government a lot to build a bigger military.”

            Reagan increased the size of the military to defeat the Soviet Union in the Cold War. He thought that was the most important issue of his day.

            “Progressives opposed that.”

            No, they did not. The liberals opposed a strong military. The “progressives” of the early 20th century favored a strong military and advocated its use. See Woodrow Wilson and Theodore Roosevelt.

            “GWB increased the size of government a lot to invade Iraq. Progressives opposed that.”

            “Progressives” would not have opposed the military intervention in Iraq. See Woodrow Wilson and Theodore Roosevelt. Many “liberals” did not either. See Hillary Clinton and John Kerry. And, no, you can’t vote against it before you vote for it.

            “It DOES mean that words mean whatever MOST speakers of that language want them to mean at that particular moment.”

            Nope. Definitions are determined based on how the word is used by the vast majority of people. They do not change frequently or quickly. Words mean things.

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          • Yeah, if by “abolished” you mean replaced by some other federal agency. . . ”

            Nope. Again, Friedman did not allow any leeway to allow government to “MANAGE” the money supply. He advocated no new agency to replace the Fed. He said

            “Friedman was a MACROeconomist…”

            That word does not mean what you think it means.

            mac·ro·ec·o·nom·ics
            [ˈmakrōˌekəˈnämiks, ˈmakrōˌēkəˈnämiks]
            NOUN
            the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
            Powered by Oxford Dictionaries

            Thus, Friedman could be interested in macroeconomics and oppose bigger government. Duh.

            “At least Ron has the sense to know he agrees with Friedman on some things and disagrees with him on others.”

            At least Ron understands words like “macroeconomist” and “abolished.”

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          • Greg W,

            >—” Definitions are determined based on how the word is used by the vast majority of people.”

            Yes, that’s what I’m saying. Do you seriously think the “vast majority of people” see Nixon and GWB as progressives? Too funny. You are failing to understand that there are some differences between the way the word is used today and the way it was used a century ago – especially regarding foreign policy.

            And how is it you think Milton thought 3% growth in the money supply would be achieved if not by government?

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          • “Do you seriously think the “vast majority of people” see Nixon and GWB as progressives?”

            Yes. And, if you read the progressive party platform, then you would too. You seem to have fallen for the politically correct view of democrats v. republicans. Too funny.

            “You are failing to understand that there are some differences between the way the word is used today and the way it was used a century ago – especially regarding foreign policy.”

            Nope. You are failing to understand that Hillary Clinton and Barack Obama, self-described “progressives” of today love military intervention today. See Syria, Libya, Yemen, etc.

            “And how is it you think Milton thought 3% growth in the money supply would be achieved if not by government?”

            By abolishing the Fed and setting up a computer program. Try reading Milton Friedman’s book “Free to Choose.”

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          • Greg W,

            “Friedman’s k-percent rule is the monetarist proposal that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles.”

            From YOUR link. First sentence: Note “by the CENTRAL BANK” (emphasis added)

            Do you really think Friedman didn’t intend for that computer program to be run by the government? If not then by who?

            Also note that, by your definition, Reagan was also a progressive. He made government larger because he thought a much larger military run by the right experts and interventions like Grenada, Iran/contra, etc were necessary to defeat the Soviet Union.

            In reality, communism failed because it is at odds with human nature and always rots from the inside. It didn’t fail because Reagan wasted a lot of taxpayer’s money and stopped them in Grenada.

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          • “Do you really think Friedman didn’t intend for that computer program to be run by the government? If not then by who?”

            Lol! Nice trade by Friedman to get 1 Treasury Department employee and computer program to handle everything the hundreds of employees at the Federal Reserve do now.

            “Also note that, by your definition, Reagan was also a progressive.”

            Reagan said that he was an FDR democrat, not a LBJ democrat.

            “In reality, ….”

            Reagan built up the military to cause the Soviet leaders to realize they could not win…not matter how many US “progressives” who felt it was “better to be red than dead.” During Reagan’s terms, the Soviets knew they would be both red and dead.

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          • Greg G.

            Austrians by contrast don’t want the money supply to grow (unless maybe gold miners have a big year) and don’t think government policy can or should steer aggregate demand.

            Actually, Austrians generally have no preference as to the size of the money supply, except that it should be just right like Baby Bear’s porridge. Not too hot & not too cold, and they feel strongly that government shouldn’t control it or interfere with it. Only the market can determine how much money is demanded at any one time. And of course aggregate demand isn’t the primary decider of economic growth, so that’s the wrong end of the rope to push on. Production before consumption.

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          • Ron,

            >—“…no preference as to the size of the money supply, except that it should be just right like Baby Bear’s porridge. Not too hot & not too cold…

            Yeah, we can all agree on that much.

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          • Greg G.

            So then why did he advocate the Fed using rule based 3% growth over no growth in the money supply?

            Friedman thought 3% would most closely track population growth, thus providing “price stability”, although it’s not clear why unchanging prices are desirable or even possible. Prices change all the time both up and down based on supply and demand. We deal quite easily with technology and electronics prices dropping like stones despite constant erosion of the purchasing power of the dollar, while other prices increase due to that erosion.

            At least Friedman broke with those who believe the fed can juggle unemployment and inflation while keeping prices stable.

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          • Greg G.

            If I recall correctly, it was Milton who got you interested in libertarianism in the first place.

            Yes he did! Thank you Uncle Milty. I only learned later that he was wrong to advocate government interference in he market through manipulation of the money supply. That doesn’t negate any of the many things he got right. No one is perfect, and as we’ve discussed before, one can take what they find that’s good, and leave the rest. Plenty to like about Friedman.

            I don’t think I’ve claimed that all US presidents are, or have been progressives, only that since the start of the 20th century, they have all represented the left and right wings of the Big Government Party. There is not enough daylight between them to matter. It’s become a matter of arguing which are the cleaner smelling turds.

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  5. “The Community Reinvestment Act . . . lead to The Great Recession.”

    That is a tad strong. The Community Reinvestment Act was one of the many well-intentioned government policies that led to lower credit standards, which fueled the great residential real estate boom of the late 1990s and early to mid-2000s that resulted in the bust now known as The Great Recession. Other factors included well-intentioned, but misguided, government fiscal, monetary, regulatory, and tax policies. All of these policies provided incentives to build, buy, and invest in residential real estate by making credit easier and less costly to obtain. But, like most government policies, politicians and bureaucrats saw only the short term results, but failed to consider the long term effects.

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  6. Jon, a fitting ancient proverb is: “The road to hell is paved with good intentions.” I believe that most bigger government advocates have the best of intentions, but reality has proven that their good intentions were not worth a bucket of warm spit.

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    • Greg W,

      And where exactly have I “advocated bigger government”?

      Apparently by “bigger government” you really mean bigger than YOU want in your fantasies, not bigger than we have here in reality.

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      • “…most bigger government advocates….”

        Who said anything about you?

        “not bigger than we have here in reality.”

        To believe that a government that has borrowed $19 trillion is not too big is to live in a fantasy world all your own. Wrong again, old boy.

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  7. Greg G said, “Both have already netted the taxpayers a profit on the bailout capital invested. Fannie will pay this quarter. Freddie will skip this quarter.”

    Freddie’s net loss for the third quarter of 2015 was $475 million and its net loss for the first quarter of 2016 was $354 million. Despite a massive bailout, Freddie is still losing money while taking on more risk and reducing its loan loss reserves.

    http://finance.yahoo.com/news/freddie-mac-posts-475m-loss-134450335.html

    http://www.housingwire.com/articles/36946-freddie-mac-reports-354m-net-loss-in-first-quarter

    http://www.marketwatch.com/story/freddie-mac-may-need-another-taxpayer-bailout-next-week-2016-04-29#:ZpUjvoGbTZuxEA

    Oops, indeed.

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