Thursday, October 2nd, 2014

Bettman’s Nightmare

36

David Shoalts:

Of most concern to NHL GMs is the salary cap for the 2010-11 season. It will be based on revenue from next season, which is expected to be down considerably. (Well, expected by everyone except NHL commissioner Gary Bettman.)

That is why GMs may be slow to make deals this March. If you are expecting the cap to fall to $46-million, say, then you do not want to take on a big long-term contract that will eat up a lot of your potentially shrunken budget in 2010-11.

Burke is in good shape in this regard. The Maple Leafs have only five players under contract for 2010-11: forwards Jason Blake and Niklas Hagman, and defencemen Tomas Kaberle, Jeff Finger and Luke Schenn. There is also $1-million owing from the buyout of former Leafs winger Darcy Tucker’s contract.

Revenues would have to fall by about 15% to get to a $46 MM salary cap, so this may be a very pessimistic view. Nevertheless, if it happens, the NHL is screwed. The Leafs are in good shape but many teams are not, and the league as a whole would face a salary crunch of staggering proportions.

The league would go into 2010 season with a maximum payroll of $1.38 billion. Unfortunately, teams have already committed $825 MM  to 225 players. That would only leave about $550 MM for the other 465 players if every team spent to the cap. (They won’t. They will probably spend enough to pile a healthy escrow hit on top of the slashed cap, but they won’t spend the entire $550 MM.)

It isn’t enough.

The players signed tend to cost more than the average player – they will earn $3.7 MM in 2010 – but there are still lots of expensive players to be signed over the next two years. The Canucks have Luongo, the Sedins, Ohlund, Demitra, Mitchell, Burrows and Kesler on contracts that will expire, and all of them will get far more than the $1.19 MM per player that will be available.

If the league has salary troubles and some teams are in good shape – Vancouver, Atlanta, Montreal, Toronto,  and Minnesota are the five least encumbered teams in 2010 – then other teams must be in deep trouble.

Philadelphia has committed $42.1 million dollars to ten players in 2010. They will have to add 13 players with less than $4 MM. Unless they can give away some salary, they will have to sign a bunch of minor leaguers to minimum wage contracts and dump two or three big contracts to the AHL. Other teams with apparently impossible problems include Pittsburgh, New York, Calgary and Edmonton. A dozen teams lack the space to fill out their roster unless they pay under $1 MM a player.

(As a long time Kevin Lowe basher, I’m nearly delighted the Oilers show up on the disaster list. Assuming they let Cole walk this year, the Oilers would have less than $10 MM to sign 13 players including Gagner, Cogliano and somebody to play goal.)

This CBA can’t handle even moderate drops in revenue. A salary cap at $52 MM in 2010-11 will cause problems when a third of the players are already contracted to receive more than half the money available if everybody spent to the cap.

There are solutions to the salary problem but they all involve Gary Bettman asking Paul Kelly to reopen an unworkable CBA. Call it Gary Bettman’s nightmare.

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Comments

36 Responses to “Bettman’s Nightmare”
  1. Magicpie says:

    I’m sure the union would be all for solving this problem, as long as it gets solved their way. If the solution is keeping the cap higher than the CBA dictates for the next few years, and giving players a higher percentage of league revenues, I don’t think they’d have a problem with that. If anything it’s the owners who Gary’s going to have to convince.

  2. Gerald says:

    In a collective bargaining agreement of this nature, one side’s problem is the other side’s problem.

    That being said, I wooudl suggest that this is a much bigger problem for Paul Kelly, since his constituency is (a) much more divided and (b) has economic interests that are inherently divergent. For all that Bettman’s detractors may go on about his alleged deficiencies, i doubt that there would be anything but grudging respect for the following facts:

    (a) he has created a unity among owners that simply was not present under previous administrations; and

    (b) through the CBA, he has created a situation where the players are stuck together in a group where their economic interests are contrary to each other (thus always guaranteeing a certain lack of unity among them) and forced an increase in mutual economic interests among the owners (thus guaranteeing a certain amount of mutual economic interests among them).

    Regardless of where the salary cap is, players will get signed for what is available. As long as there is enough theoretical room for everyone to sign the requisite number of guys under the cap at minimum dollars, the main problem is that of the players. I agree that there are stellar names that will need to be signed, but the cold hard truth is that those guys may wind up being screwed out of their paydays by the players who signed the longer term deals. If no one has more than $3 million in cap room, roberto Luongo is not going to get signed for more than $3 million, no matter what he is worth.

    The real problem is Paul Kelly’s conundrum if there is a drastic contraction of the cap. He has two choices, each of which screws a major constituency of his membership. He can agree to keep the cap higher than warranted, with all of the players who have already signed contracts payigt he price through gigantic escrow, or he can let the cpa go lower, which hugely screws a free agent (and first round rookie) class. That is the type of decision that causes long term hard feelings in a swath of players, no matter which way you cut it.

    The only salvation for Kelly is if he pleads with Bettman for a higher percentage. One can only imagine the concession that Bettman will be able to extract for that little bone, but it would be a doozy, on the level of guaranteed contracts or exclusion of a significant future revenue source (like online revenue).

    Again, though, if the cap plummets so that there simply is insuffficient cap room arithmetically for the players, then that is a mutual problem. We have a ways to go for that, though.

  3. Tom says:

    The real problem is Paul Kelly’s conundrum if there is a drastic contraction of the cap. He has two choices, each of which screws a major constituency of his membership.

    Kelly doesn’t have to make any choices. The CBA sets the cap and the escrow rules. In other words, he has a third option, which is to do nothing and let the chips fall where they may. That is the option that serves his membership the best.

    It would result in the players getting precisely what they are entitled to in percentage terms while they play in the NHL. There would also be a raft of players getting millions to play in the AHL.

    It is Bettman who has two options. He can give the players more money to play in the NHL or he can damage the NHL product while paying the players more to play in the AHL.

  4. James Mirtle says:

    Wouldn’t Kelly rather have the UFA bidding wars and plenty of cap space to go around? If big market clubs like the Rangers can’t spend anything, doesn’t that hurt the NHLPA members who are coming up as free agents?

  5. Tom says:

    Wouldn’t Kelly rather have the UFA bidding wars and plenty of cap space to go around? If big market clubs like the Rangers can’t spend anything, doesn’t that hurt the NHLPA members who are coming up as free agents?

    Sure it hurts them (or actually the CBA hurts them.) What should Kelly do about that? Should he really take money away from all the other members via higher escrow so that these players are not hurt? Escrow is already going to be very high without deliberately making it higher.

    Why should Kelly choose to help one group of players at the expense of another group of players? For him there is no right answer, particularly if revenues go down two years in a row. Escrow would be through the roof.

    If I’m Kelly and Bettman comes to me for help, I’d deal, but my first demand would be that the player percentage stays at 56.x% and does not fall with revenues. That takes care of half the problem. After that, Kelly can set the cap to split the difference between more cap space and more escrow.

    Without that, I’d stick with the status quo. The NHL players would get the same money either way and AHL players would be ahead by millions and millions. (The NHL players who do get sent down might not be happy about it, but there will be some consolation – they’ll get paid way more than they would in the NHL because escrow wouldn’t affect them.)

  6. J. Michael Neal says:

    That being said, I wooudl suggest that this is a much bigger problem for Paul Kelly, since his constituency is (a) much more divided and (b) has economic interests that are inherently divergent.

    Bettman may have produced unity so far, but that doesn’t mean that the owners don’t have divergent economic interests. They are, if anything, larger than those of the players. Seeing the salary cap going down is probably the issue that would drive the largest wedge between high and low revenue teams.

  7. Magicpie says:

    There’s a question that’s relevant to this that I was wondering if anyone knows the answer to. Basically I’m wondering wether, when the owners get back the escrow money, is it evenly divided among the 30 teams or do the teams that contributed more to it get a bigger share?

    Like say the cap is set at $50 million, and the magic 56% of league revenues figure is reached when each team spends $47 million. Say every team spends $47 million except the Rangers who spend $50 million. Does that extra $3 million get divided evenly among the 30 teams at the end of the season, or does it all go back to the Rangers? If it’s the former, then raising cap (without raisng the percentage of overall revenues recieved by players) essentially amounts to giving poor teams a subsidy at the expense of rich teams.

  8. Tom says:

    There’s a question that’s relevant to this that I was wondering if anyone knows the answer to. Basically I’m wondering wether, when the owners get back the escrow money, is it evenly divided among the 30 teams or do the teams that contributed more to it get a bigger share?

    There is a complicated formula. First, teams that underspend the midpoint get a bonus $ for every dollar they underspend. Second, a chunk of it goes to fund the general revenue sharing fund. (This money ends up in the pocket of the top ten revenue generators because what escrow doesn’t fund, they do.) Finally, the remaining money is divided equally among all teams.

  9. beingbobbyorr says:

    It is Bettman who has two options. He can give the players more money to play in the NHL or he can damage the NHL product while paying the players more to play in the AHL.

    Assuming the later option is choosen:

    If more NHL-caliber players go down to the AHL (still making millions), and the NHL fills it’s bottom 1/3 with AHL-caliber players on minimum-wage (~$500k?) deals to meet their unmodified salary cap obligations . . . . could that end up helping the NHL more than hurting it? If the conventional wisdom still holds true, an increase in the talent gap = an increase in scoring, which theoretically leads to the NHL getting more press & casual-fan interest if we (thru financial artifice) return to the days of firewagon hockey.

    Granted, this may be like hoping that the fluttering wings of a butterfly will change the course of a hurricane, but it wouldn’t be the first time a bug turned into a feature in the wacky world of the NHL (although usually the transformations have been in the other direction).

  10. Dennis_Prouse says:

    The devil in me would love to see a falling cap, just for the bind in which it would place teams who have locked in players for pricey long term deals. If you think Wade Redden’s contract looks ugly now, just you wait until the cap drops 10% -15%. Watching veteran players have to sing for their supper somewhat, and have to accept smaller, shorter term deals, would also be good for the soul.

    The system itself is not going to change significantly — there is no way the NHL will ever allow itself to go back to an uncapped, unlinked world. What may happen, though, is that model on how to build a team under this CBA is about to be revealed, especially if a team with plenty of cap space is able to go out and sign a raft of quality players at rock bottom prices. There are always deals to be had during any recession, be it in real estate or in pro sports.

  11. Tom says:

    The system itself is not going to change significantly — there is no way the NHL will ever allow itself to go back to an uncapped, unlinked world.

    I think you are probably right, but it is hard to say. I think the most important point – and it is not good news – is that the CBA is going to have to be re-opened if revenues fall significantly. That’s going to open a can of worms on a range of issues.

    No matter what, a solution will favour some teams over others and some players over others. It will be hard to find a consensus.

    What may happen, though, is that model on how to build a team under this CBA is about to be revealed, especially if a team with plenty of cap space is able to go out and sign a raft of quality players at rock bottom prices. There are always deals to be had during any recession, be it in real estate or in pro sports.

    I disagree. I don’t think they even imagined this situation. When was the last time revenues dropped? 1982? Bettman expected revenues would always rise. This may tell us how teams should be built if revenues tank, but I don’t think planning for that makes sense for anyone.

    The devil in me will be delighted to watch Bettman squirm on this, but the idea that the league would have labour stability for at least another two years is going to be out the window. The chance for acrimony over this issue is very high in my view and it could culminate in another lockout two years down the road. Bettman will use this to tell us how those awful guaranteed contracts are to blame.

  12. Dennis_Prouse says:

    If no one planned for the possibility that revenues could go down, then they deserve everything they get. That is as bad as real estate speculators who believed that prices would continue rising forever. Nothing rises forever. Now, I’ll grant you that the current recession is sharper than most had anticipated, but the economic storm clouds have been gathering for well over a year now.

    I still don’t see why the CBA would have to be re-opened in the event of falling revenues. At worst, it means there would be some expensive talent playing in the AHL for a year or two. (I sure wouldn’t want to be the GM who has to explain to his owner why it is that he is paying huge money to a guy to play in Peoria.) No team is any more than two seasons away from having their cap situation sorted out. It might require a painful adjustment for some teams, i.e. having to fill out some of their roster with minimum wage guys they don’t like very much, but that is vastly preferable to re-opening a CBA that has enjoyed a remarkable degree of owner consensus.

  13. Gerald says:

    It would result in the players getting precisely what they are entitled to in percentage terms while they play in the NHL. There would also be a raft of players getting millions to play in the AHL.

    I guess we will agree to disagree on this point. Since the leverage will once again be entirely with the NHL owners if the scenario comes to pass (they can simply throw up their hands opposite the agents and rightly claim to a lack of cap space, comfortable in the fact that the players will not have many other teams to play off against each other), I have a difficult time visualizing a scenario where the teams simply pay a UFA a large amount. Perhaps one or two teams (and we know who they are) might be able to afford to do so, but i doubt it.

    Also, with the proliferation of NMC’s among the better players (those whose salary would make a big enough difference to stash in the minors), i suspect that a lot of hands are going to be tied in that regard.

    Finally, as I suggested, this will make a number of Kelly’s constituents furious. No one wants to play in the minors, whether or not they are making millions. Life in the A is much harder than the NHL. divisions among players will be inevitable either way you slice it.

  14. Tom says:

    Finally, as I suggested, this will make a number of Kelly’s constituents furious. No one wants to play in the minors, whether or not they are making millions. Life in the A is much harder than the NHL. divisions among players will be inevitable either way you slice it.

    The players are going to be pissed, but it will be against the CBA, Bettman and teams that are failing. It will not be directed at each other. Players did not create this problem. Under this CBA they have to pay for the incompetence of the league and for the historic fraud generated by the bankers and the corporate lawyers. One way or the other, the players have to pay.

    What are you suggesting that Kelly should do? Do you think he should take some action that screws one group of players over another to make it easier for the incompetents? His best move is to let the chips fall where they may. Its Bettman’s CBA.

  15. Gerald says:

    Enough with the corporate lawyer baloney, okay? You are mixing them up with investment bankers and analysts.

    That aside, to the extent that revenues fall it is not due to “incompetence” of the league. As a business, arguably they are currently kicking the ass of just about every pro sports league, with the possible exception of the NFL (and likely even them, %-growth wise).

    As for Kelly, that is exactly my point, Tom. I would not want to have his choices. Letting the chips fall where they may (i.e., allowing a 5% kicker) most certainly favours a group of players over others. He cannot simply say “that is what the CBA mandates” because the CBA also provides flexibility. Either way, it is the NHLPA’s choice. THEY and they alone decide how that 56% gets distributed, not the NHL. While the players might not conclude that on their own, their corporate lawyer agents sure will, since figuring that stuff out is what they do for a living.

    I suppose if I were him I would be straight with my membership and lay it out for them, and allow them to decide. Given that Kelly seems to have taken a populist approach on many issues, I suspect he might do that. One might say that is an abdication of leadership, but Kelly should put it back on the players and remind them that it is THEIR union and he works for THEM (thus truly differentiating himself from the NHLPA’s ugly past once and for all). He should point out that this populist approach, where players got actually involved in deciding their own affairs via Marvin Miller’s unending reservoir of patience in educating his members on the issues, is exactly how the MLBPA became a powerhouse.

    Either way, I am glad I am not Kelly. It is a dicey situation, since the NHLPA still seems to be a bit of a poisoned well, at least looking in from the outside.

  16. beingbobbyorr says:

    . . . and for the historic fraud generated by the bankers and the corporate lawyers.

    Where’s the vitriol for the Washington politicians (C. Dodd & B frank) who distorted markets and strong-armed banks into making high-risk loans (Community Reinvestment Act) to people who weren’t qualified to be mortgage borrowers?

  17. Tom says:

    Enough with the corporate lawyer baloney, okay? You are mixing them up with investment bankers and analysts.

    If you think you guys aren’t wearing this one, you are sadly mistaken. You might as well get used to the cheap shots and stereotypes. The innocent of the banker/lawyer/analyst class are only innocent because they didn’t happen to be working in the right industry at the right time. Too bad for you.

    He cannot simply say “that is what the CBA mandates” because the CBA also provides flexibility.

    He doesn’t have to say anything. The teams sell and report the revenue. Bettman announces the cap and the teams comply. How could anyone conclude Kelly is to blame for any result? In your world, does management bear any real responsibility except for cashing the big cheques and blaming the unwashed for everything that goes wrong?

    Either way, it is the NHLPA’s choice. THEY and they alone decide how that 56% gets distributed, not the NHL. While the players might not conclude that on their own, their corporate lawyer agents sure will, since figuring that stuff out is what they do for a living.

    The NHLPA decides how the money is distributed? That is is simply not true. It is so far from being true, it is absurd.

  18. Tom says:

    Where’s the vitriol for the Washington politicians (C. Dodd & B frank) who distorted markets and strong-armed banks into making high-risk loans (Community Reinvestment Act) to people who weren’t qualified to be mortgage borrowers?

    Nobody forced the banks to make bad loans and nobody forced anybody to take a loan they could not repay. That was not the problem anyway. A spike in foreclosures did not bring down Lehman Brothers and the rest of the American financial system.

    The problem was that the scammers in three piece suits converted very risky loans into Triple A securities with a wave of their hands. Shazzam! Trillions created! Hundreds of millions in bonuses! Hurrah!

    “Oops,” said the lawyers and bankers, “It looks like we mispriced the risk. Sorry about that. ” At best, it was incredibly, unbelievably, irresponsible. At worst – and I believe it was the worst – it was criminal.

    Everybody is worried about confidence, and rightfully so. Its going to be a long time before anybody with a brain trusts these clowns.

  19. Magicpie says:

    Where’s the vitriol for the Washington politicians (C. Dodd & B frank) who distorted markets and strong-armed banks into making high-risk loans (Community Reinvestment Act) to people who weren’t qualified to be mortgage borrowers?

    Oh for the love of… Forgetting for a minute that the Community Reinvestment Act was passed more than 30 years ago and this crisis happerned because banks started making bad loans in the last 5-10 years, are you honestly trying to claim these banks were forced to make these ridiculous loans to people who could never afford them? They were forced to give out loans with next to no credit checks? They were forced to try to entice people with low intro rates that jumped up 2 years later?

    Blaming this on the government is the cheapest kind of political cop-out. No one was forcing the banks to do shit all. This was greed and stupidity, pure and simple.

  20. rajeev says:

    Enough with the corporate lawyer baloney, okay? You are mixing them up with investment bankers and analysts.

    Are you kidding? They invented the complex products that no one really understands how they operate within the market on a macro level that significantly exacerbated, though did not create, the depth of the mess. Securitization, CDO’s, CDS’s, PVSF’s, etc. These are the instruments that helped lubricate the wheels of economic catastrophe, and corporate lawyers, many of my good friends (or at least their bosses) literally created these devices that enabled large amounts of profits, initially, and losses, ultimately, to whipsaw in every direction. I think it’s stupid to blame individual actors, be they bankers or analysts or whomever, where the real culprits are the institutions themselves, BUT, if you do want to cast blame, corporate lawyers are at the front of the line.

  21. Gerald says:

    rajeev, admittedly I am not a securities lawyer, but I would draw a huge distinction between being an inventor and being a mere draftsman. Outside lawyers love to think when working on this type of stuff as it being “their deal” and that they are the architects of this type of stuff, but I highly doubt that is anything more than typical outside counsel self-aggrandizement. My understanding is that corporate finance specialists (another group that loves to think of themselves as beyond clever simply because they can think up byzantine structures, regardless of whether they reflect actual business purposes) think this crap up and have counsel draft up the documentation. I would have no problem in characterizing those lawyers as facilitators, but hardly inventors.

    {That does not take into account that some of the corporate finance pros also have law degrees, although they are not practicing lawyers. I would not call them lawyers, any more than I would call the CA’s among them accountants.}

    “Oops,” said the lawyers and bankers, “It looks like we mispriced the risk. Sorry about that. ” At best, it was incredibly, unbelievably, irresponsible. At worst – and I believe it was the worst – it was criminal.

    Tom, I know you are aware that lawyers don’t have anything to do with pricing (or mis-pricing) risk. As I said, the role that lawyers would have played in all this would have been in drafting the mounds of requisite documentation, and little more than that. Facilitate? Sure. Responsible? Pfft. If you are going to hold them responsible, why do you never mention the chartered accountants and tax specialists (also CA’s) who also played an equally important role that was no less culpable (and arguably more culpable, especially for the tax guys) than the lawyers who put together the paperwork, a good proportion of which is simply standard boilerplate documentation?

    In honesty, if one wants to be mad at anyone, be mad at the quisling ratings agencies who rated the paper as investment grade, which was sufficient to fool the pension funds and institutional investors who rely on those grades. They allowed themselves to be fooled so that they could have more and more paper to rate and they were too consumed with ego to admit that the instruments were not understandable. God forbid these second-rate intellects admit to not being the smartest guy in the room.

  22. Tom says:

    A pox on all of them. It is institutional, Raj, but it isn’t going to matter. Somebody is going to get blamed and it is going to be all of them. Even the facilitators. I’m prepared to scapegoat them all.

    There are trillions more in losses to cover once the commercial real estate refinancing crunch exposes a similar derivitive fueled leveraging of trashy debt. Then there was the securitization and leveraging of credit card debt…

    A pox on all of them.

  23. rajeev says:

    Yea, I suppose, but what purpose does scapegoating serve without fundamental change? It’s all fine to say lawyers, bankers, credit agencies, their shoe shiners, etc. are all at fault, and I think they are (especially the shoe shiners), but I’m not sure that it means all that much without an examination of under-regulated financial markets themselves and the general financialization of the economy itself. The most significant international event over the last 60 years was the breakdown of the Bretton Woods system, much more important than the collapse of the Soviet Union. A pox on all of them, for sure, but a pox on all of us as well.

  24. Tom says:

    Yea, I suppose, but what purpose does scapegoating serve without fundamental change?

    I think it serves a very important purpose even with fundamental change. There is going to be new regulation and there is no doubt that the government is going to have to do some ridiculous things – probably nationalize the banks – to stop the bleeding. Even if the government does manage to stabilise the system – no sure thing – trust has to be restored before the economy can start to grow out of the hole that gets deeper by the day.

    Without the blame game, the arrogant masters of the universe learn nothing – watch some CNBC these days as these assclowns criticise every government effort to get the economy out of the ditch. Furthermore, they blame the chumps who took the loans, the autoworkers – or in Gerald’s case, the hockey players – who are going to pay the price for their (or their peer’s) incompetence, greed and criminal behaviour. How do they want to solve the problem? More tax cuts for them! Less spending on services for those who are hurting!

    The first thing these guys have to learn to do is shut up. Every time they open their mouth about wonderful free markets, big bad government and the need for huge bonuses to keep the “best” people, the public sees red. These guys are no less arrogant than they were before the crash. They’ve learned nothing and they are prepared to do nothing about the problem except complain about all efforts to fix the mess they created.

    If we have to shoot a few of them to change that tune, fine by me. Our ruling elite – and corporate lawyers are certainly in that class – have let us down very badly. The guy who wiped the ass of Louis XVI went to the guillotine, too. Fair? The mob won’t care.

    Even if the Obama administration does everything right – who knows what’s right? – and they manage to salvage something from the wreckage, trust will still have to be restored. I don’t think trust can be restored without putting heads on a pike. The worse it gets – and I think it is going to get much, much worse – the more heads will be required.

  25. Gerald says:

    I don’t necessarily disagree with what Tom says above. I am just a stickler for blaming people for the right things. Lawyers are to blame in their capacity as facilitators of dubious transactions (certainly, responsible lawyers should rein in their clients; that ablity to do so more effectively is why i went in-house), and in their capacity as part of the ruling elite.

    To apply it to hockey business, I would assign an appropriate level of blame to the hockey players – no more, no less – while also being understanding of the economic imperatives that drive them (limited career, a need for each one to take care of themselves, etc.). The owners get the same treatment.

    I am certainly not in the “tax cut” crowd. Tom is right. Trust (or “confidence”, same thing) is THE necessary pre-condition for any recovery. I would definitely be up for some severe executive compensation limitations, and it would not hurt me a bit if stock options were doen away with entirely (and I am speaking as someone who had some a few years ago, although I walked away from them). Derivatives are a curse invented by faux-clever finance pros, and we would be better off without many, many forms of them.

  26. beingbobbyorr says:

    Nobody forced the banks to make bad loans

    Oh for the love of… Forgetting for a minute that the Community Reinvestment Act was passed more than 30 years ago and this crisis happerned because banks started making bad loans in the last 5-10 years, are you honestly trying to claim these banks were forced to make these ridiculous loans to people who could never afford them?

    Yes, they were. I know the CRA was passed in the late 1970′s, but it wasn’t until the 1990′s when HUD (Department of Housing and Urban Development) started imposing requirements that mortgage lenders demonstrate with hard data (even if it required “innovative or flexible” mortgage eligibility standards) that they were meeting their responsibilities under the Community Reinvestment Act. Both HUD and the Department of Justice began bringing lawsuits against mortgage bankers when they didn’t meet the desired statistical ‘diversity’ profiles. Aside from lawsuits, regulatory agencies are another head-of-the-hydra that banks and other lenders must please for approval of many business decisions (that other businesses make without needing anyone else’s approval). As usual, when government edicts clash with the reality of the (semi-free) marketplace, the marketplace is blamed and new rules & regulations ‘come to the rescue’ to make it less free. No need to study history, as I’m sure the Roosevelt (and Hoover) administrations’ constant meddling had nothing to do with the 12+ year length of the Great Depresion (where previous depressions recovered in 2-4 years with government maintaining a laissez-faire approach).

    They invented the complex products that no one really understands

    Then no one really should have been buying those complex products.

  27. Tom says:

    Yes, they were. I know the CRA was passed in the late 1970’s, but it wasn’t until the 1990’s when HUD (Department of Housing and Urban Development) started imposing requirements that mortgage lenders demonstrate with hard data (even if it required “innovative or flexible” mortgage eligibility standards) that they were meeting their responsibilities under the Community Reinvestment Act. Both HUD and the Department of Justice began bringing lawsuits against mortgage bankers when they didn’t meet the desired statistical ‘diversity’ profiles.

    Banks did not lend the Mexican gardener who was making $15,000 a year $750,000 to buy a house because of the CRA. The CRA did not even enter the mind of the lender. The CRA is the boogeyman, something the thieves are pointing at to duck responsibility.

    They lent that money because the mortgage was immediately classified as an “asset”, bundled with thousands of other mortgages to create a “AAA” mortgage backed security. Then they levered that “asset” thirty, forty or fifty times. It was money creation on a scale that dwarfed anything the government generated. That’s how a unregulated derivitives market went from basically zero to $70 trillion in less than 10 years. Those trillions are the problem, the house of cards built on toxic assets.

    The bankers turned that $750,000 mortgage into about $30 million in debt. As long as they could find more Mexican gardeners, they could inflate the bubble forever. Loans got worse and worse because the lender passed on all the risk. They needed more and more “assets” to feed the leverage bear and they made fortunes along the way. Loans did not get worse and worse because of the CRA. The loans were a cash cow. The CRA did not create that cow – the free market created it. They would have been made without the CRA.

    The con worked as long as you could find more chumps and as long as housing prices kept rising. When the first subprimes began to foreclose, nothing happened. (And note that we are only talking a 3% foreclosure rate on the subprimes, even today.) It wasn’t until foreclosures actually started driving down prices. That’s when the house of cards began to collapse. Even if there had been zero subprime mortgages the house of cards would have collapsed when house prices fell. It was a giant pyramid scheme.

    Despite George Bush, US government debt expressed as a % of GDP has hardly grown at all in the past 35 years. It is financial debt that has exploded and it is the financial debt that is causing the problem. Nobody forced AIG to sell insurance on credit without the resources to pay off if the credit defaulted.

    I don’t get the libertarian position. Even if Ron Paul et al are entirely right – I don’t think they are – their bus left the station about 200 years ago and we cannot undo that history. We have to live in the world as we find it. What’s the point of hoping for or supporting a set of policies that will never, ever become part of the real political world?

  28. beingbobbyorr says:

    I don’t get the libertarian position. Even if Ron Paul et al are entirely right – I don’t think they are – their bus left the station about 200 years ago and we cannot undo that history. We have to live in the world as we find it. What’s the point of hoping for or supporting a set of policies that will never, ever become part of the real political world?

    The following more or less answers your question:

    http://www.capmag.com/article.asp?ID=5422

  29. Magicpie says:

    The following more or less answers your question:

    http://www.capmag.com/article.asp?ID=5422

    That link kind of reminded me of this one:

    http://www.theonion.com/content/news/u_s_to_give_every_iraqi_3_544_91

  30. Tom says:

    Well, okay, but the argument doesn’t do much for me. A nihilist or an anarchist or a Nazi or somebody who believes in the divine right of kings could make the same case. We are about as likely to go back to divine right, as we are to adopt a government Rand would like.

  31. Gerald says:

    BBO, I simply have to get you to send me a list of your favourite links, especially the Rand and Rand-ish (Randy?) stuff. We both know that our views are not at all compatible, but I do enjoy reading them, if only to challenge my own thinking.

  32. beingbobbyorr says:

    Well, okay, but the argument doesn’t do much for me. . . . . We are about as likely to go back to divine right, as we are to adopt a government Rand would like.

    First of all, likelihood has nothing to do with it. If you think something is right, you fight for it because you want the world to be better than it is, and failure is assured if you do nothing about it today. You don’t abandon trying to teach your teenager courtesy, morality, good work/study habits, etc., just because he’s likely to turn a deaf ear to you (you plant the right seeds in them now in the hope that they have something to rely on when a moment of truth arrives in their future).

    Second, the history of the human race is nothing but a history of change. People, cultures, nations, few of them are static for very long, and when they change, it’s usually due to ideas (good or bad).

    Third, neither Rand nor any of her intellectual heirs expect(ed) to makeover civilization in their lifetime. Nobody — of any political/philosophical bent — should underestimate the inertia of large social organizations.

    But, if you’re to resign yourself to things “as they are”, why doesn’t that apply to this blog? After all, if the TB Litany* is the hopeless quagmire that (it appears) you believe it to be . . . . then, why does Tom write?

    * ‘Gary is as Gary does’, the BoG is 30 dorks who’re oblivious to their mismanagement of the league (and the game) in their pursuit of profit, and the hockey media are venal sycophants eager to be the league’s (softball-throwing) marketing adjunct for a free ticket and a place in line at the press box buffet, etc., etc., [feel free to correct me if I'm mis-summarizing the more common Tom Benjamin complaints]

    A nihilist or an anarchist or a Nazi or somebody who believes in the divine right of kings could make the same case.

    No, they can not make the same case. They can’t call upon reason & the factual nature of mankind’s means of survival to logically argue their position. What they can do — and succeed with — is trumpet their desires in loud, bombastic ways, and expoit their audience’s propensity for un-reasoning.

  33. Magicpie says:

    No, they can not make the same case. They can’t call upon reason & the factual nature of mankind’s means of survival to logically argue their position. What they can do — and succeed with — is trumpet their desires in loud, bombastic ways, and expoit their audience’s propensity for un-reasoning.

    I’m sorry but “trumpeting his position in loud boombastic ways and exploiting his audience’s desire for un-reasoning” is exactly what I see the guy in the article you posted doing. It’s all a flowery, melodramatic, self-aggrandizing jumble with no..you know…actual logical arguments.

    Going through the thing point by point:

    -He starts off, and his whole article is essentially in response to, the “The possible fall of the United States”. Melodramatic, yes. Soundly reasoned, no.

    -He mentions an article on Social Security whose point is basically that in 10 years social security will start paying out more money than it takes in and that at some point social security taes will have to rise or benefits will have to fall. He treats this observation like some kind of divine revelation that the government and news media have been been hiding from the public all these years, notwithstanding that that fact has been widely reported in the media.

    -He goes on to compare himself go Galileo and Cicero and talks about his brave struggle to bring knowledge to the masses. Well that’s fantastic and everything, but I’d like to see more of this knowledge and less self-agrandizement.

    -then of course there’s lovely closing statements like this one:

    “Who and what will inspire legions to rise up, not only against the oppressors, but against the philosophy that sanctioned their power? Are not Americans being coerced now? Why do they tolerate it? Taxation, regulation and prohibition are all indirect but legalized forms of coercion. Who and what are to remind Americans that this is theft by stealth, and that it has the same consequences as undisguised armed robbery, serfdom and penury?”

    Let’s see. Melodrama: check. Boombast: check. Unnecessarily flowery language: check Wild alegations: check. Sound reasoning backing up these arguments: not so much.

  34. Tom says:

    You don’t abandon trying to teach your teenager courtesy, morality, good work/study habits, etc., just because he’s likely to turn a deaf ear to you (you plant the right seeds in them now in the hope that they have something to rely on when a moment of truth arrives in their future).

    I don’t this particular analogy works. I don’t think civilising your children is tilting at windmills. Its far from a hopeless exercise.

    But, if you’re to resign yourself to things “as they are”, why doesn’t that apply to this blog? After all, if the TB Litany* is the hopeless quagmire that (it appears) you believe it to be . . . . then, why does Tom write?

    I may be foolishly optimistic in this regard, but I think the NHL will change significantly in the next decade. It won’t be because of anything I write, but circumstances will change it. If the government changed the tax rules, it would change overnight. If the economy turns out to be as bad as I think it will, the league will change very quickly.

    (And, to be fair, if western civilization collapses, the Rand philosophy might actually become reality, too. I just don’t think that is very likely in the near term.)

    No, they can not make the same case. They can’t call upon reason & the factual nature of mankind’s means of survival to logically argue their position.

    I think you missed my point in this respect. Cline is not defending the libertarian position. He is explaining why he tilts at his particular windmill – because he thinks he’s right and because it is cathartic to speak out and because he is standing on principle. That’s fair enough, but a person who believes in the divine right of kings could think he is right, could speak out because it is cathartic and because he is standing on principle.

    I did not mean to imply that believing in the divine right of kings was as reasonable as believing in the Libertarian position. Just that reverting to a political system based on that principle was about as likely as reverting to laissez-faire. Both positions are summarily dismissed by the vast majority.

  35. beingbobbyorr says:

    I’m sorry but “trumpeting his position in loud boombastic ways and exploiting his audience’s desire for un-reasoning” is exactly what I see the guy in the article you posted doing. . . . Going through the thing point by point:

    Sorry you had to waste so much of your time ‘going through the thing point by point’, Magicpie, but your critique is based on a grossly unfounded assumption. I cited the Cline piece to Tom as an example of why he should fight for ideas (any ideas) he thinks are right even if his chances of getting others to accept them was poor. I never claimed that that particular Cline article — nor anything else he has written, since I haven’t read much of him — was an example of objectivism’s superiority in using reasoned arguments to prove their case (vs. nihilist, anarchist, somebody who believes in the divine right of kings, etc.,).

    I think you missed my point in this respect. Cline is not defending the libertarian position. He is explaining why he tilts at his particular windmill – because he thinks he’s right and because it is cathartic to speak out and because he is standing on principle. That’s fair enough, but a person who believes in the divine right of kings could think he is right, could speak out because it is cathartic and because he is standing on principle.

    We’re on the same page here, Tom (see my response to Magicpie). The point of my citing the Cline piece was to refute the sort of resignation-in-the-face-of-poor-odds position that you seem to advocate, because it does harm to the hackneyed (but true) notion that expressing ideas* and engaging in public debate is critical to a free/healthy society, etc., etc.,

    * especially non-mainstream ideas, that can act as a check on mob rule

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