Financial Crisis Talk
[From a talk given to a Memphis-area discussion group on Tuesday, October 14, 2008.]
Here we are in the midst of a Great Financial Crisis, with some likening it to the Great Depression and with many more claiming that something must be done. Specifically, people are clamoring for government to fix this latest, greatest crisis of capitalism. Fortunately, there is a steady stream of high-quality analysis coming forth on a daily basis, and synthesizing these contributions gives us a clearer picture of what is going on and how we can fix it. First, I want to look at several proposed explanations for the crisis. Then I will talk about how financial crises are examples of government failure. Third, I want to discuss some of the lessons we learned from the Great Depression. Finally, I will close with my best assessment of what should be done.
I. What caused it?
A. GREED. My friend and co-blogger at www.divisionoflabour.com Lawrence H. White said it well: blaming "greed" for financial crises is like blaming gravity for plane crashes. People are and always have been greedy, so the question is not "how do we get people to be less greedy?" but "how do institutions emerge that harness greed in such a way as to promote social stability?" In other words, how do societies get the institutions right? Further, there remains an unasked — and uncomfortable — question about greed which is likely to be unpopular but is nonetheless very relevant: is it greedy to want a house that's priced at four, five, or six times your annual income? Is it "greedy" to want to spend your home equity on current consumption? Is it "greedy" to want to own a house when the financially prudent thing to do is rent? Further, is it responsible to agree to finance a house you can't afford by signing a contract you don't understand? The crisis was fundamentally the result of incentives that encouraged irresponsible behavior, but if we are going to put some of the blame on "greed," we need to make sure that the blame is spread evenly.
B. DEREGULATION. Pundits like to blame "deregulation," but they are usually silent on the specific regulatory changes as well as how they created the crisis. As a blogger for Asymmetrical Information has put it, many complex and opaque financial instruments are the unintended consequences of regulations (hat tip: MarginalRevolution.com). If we're going to have regulations at all, they shouldn't define the instruments that can and cannot be traded because with millions (and even billions) of dollars on the line, intelligent people can find a way around it. The key is to try to ensure as much transparency and information disclosure as possible.
C. CAPITALISM. Massachusetts representative Barney Frank either hasn't been watching or is deliberately making things up, which is the impression one might get from Frank's statement that "(t)he private sector got us into this mess. The government has to get us out of it." That isn't true. There is plenty of blame to go around, but the real culprits are people like Frank who can criticize Government-Sponsored Enterprises for focusing on their own financial health rather than the housing needs of the poor one year and then blame the free market when the housing market collapses under pressure he helped create.
D. GOVERNMENT. It's easy to blame the state for everything, and people who blame government failure are unfortunately dismissed as reactionaries and ideologues. However, this is the case that is the most plausible. Government intervention distorts price and profitability signals and brings with it a host of unintended negative consequences. The government necessarily has to redistribute resources if they want people who didn't qualify for mortgages to own their own homes. When the Federal Reserve is issuing guidelines saying that a lack of credit history should not be a deciding factor in whether someone gets a loan or not, something in the regulatory institutions is clearly amiss.
II. What Happened? Financial Crises as Examples of Government Failure
The current financial crisis offers several conspicuous examples of government failure. The first failures occurred because government backing of Fannie Mae and Freddie Mac socialized the losses associated with risky mortgages. Second, when markets are allowed to work, everyone who wants a loan at the equilibrium interest rate can get one. When Fannie and Freddie agreed to buy dangerous mortgages, it gave originators, lenders, and brokers incentives to write dangerous mortgage contracts. Moreover, Fannie and Freddie's willingness to buy junk mortgages meant that originators and lenders didn't have much of an incentive to perform due diligence with respect to who could and who couldn't repay. All they had to do was make the bad loan, sell it to Fannie and Freddie, and enjoy the profits. Barney Frank (again) was unconcerned about the problems posed by pressure on Fannie and Freddie. According to Jacoby, when Fannie and Freddie's accounting problems were first brought to his attention (by Bush Administration officials, including Harvard economist N. Gregory Mankiw), Frank suggested that the administration and its economists were more concerned about the financial stability of FNMA and FRMC than about the supply of affordable housing.
And one can't say that we didn't see this coming. Several commentators have pointed to an eerily prescient 1999 article in the New York Times written by Steven A. Holmes pointing out how congressional pressure has created easier lending rules that work while rising home prices keep default rates low but that can create a disaster when home prices start to fall: "In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders … In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry of the 1980's."
Yet another potential villain is the Community Reinvestment Act, which basically directed banks to make bad loans in the areas where they do business. Jeff Jacoby of the Boston Globe has an excellent commentary on this, and it is worth quoting him:
" … mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified buyers." CRA allowed "regulators to punish banks that failed to 'meet the credit needs' of 'low-income, minority, and distressed neighborhoods.' … As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs … When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?' … A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit."
Writing in the Wall Street Journal on October 3, my former supervisor Russ Roberts pointed to the problems created by Federal pressure on lenders. Congressional pressure started in 1992, with an explicit target set for 1996 by HUD, in Roberts's words, "42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005." In 1996, 12% of Fannie/Freddie mortgage purchases had to be "special affordable," meaning mortgages to people with 60% or less of median income in their area. The target for 2000: 20%. for 2005: 22%. and finally for 2008, the goal was 28%. Roberts describes the mortgage mess as "a political free lunch," at least in the short run, because it allowed Congress to subsidize housing off-budget. In a similar fashion, unusually low default rates meant that securitizing CRA mortgages (which Bear Stearns started doing in 1997) paid off profitably as long as "rising housing prices kept default rates unusually low."
In the Wall Street Journal on September 23, Charles W. Calomiris and Peter J. Wallison argue that the crisis has its roots in political pressure on Fannie Mae to finance more "affordable housing." Backed by the federal government, Fannie and Freddie were taking tens if not hundreds of billions of dollars worth of bad risks. As Calomiris and Wallison point out, the key problem with Fannie and Freddie is that they were government-sponsored and therefore had virtually unlimited access to credit with which they could buy mortgaged-backed securities. Their ability to socialize the risks they took on made them profitable and allowed them to buy political support from Congress by focusing on affordable housing.
The government's pursuit of its political goals created the mess. The government was able to expand the supply of affordable housing and do so off the books by weaking underwriting standards rather than by subsidizing home purchases. In an excellent discussion of the causes of the housing market collapse, Stan J. Liebowitz argues that the mortgage crisis had its roots in systematic government efforts to undermine underwriting standards that begain in the early 1990s. Aggressive credit expansion and changes in the tax treatment of real estate reduced default rates and fueled a run-up in housing prices, which ended in 2006. According to Liebowitz, foreclosures began increasing for both prime and subprime loans, which reduced the value of mortgage-backed assets. Fannie Mae, Freddie Mac, and several large banks were caught off guard. Liebowitz argues that political pressure also likely helped encourage the overly-optimistic ratings of mortgage-backed securities: SEC regulations hung over the rating agencies like the sword of Damocles, and the raters didn't want to attract undue regulatory attention by opposing a politically popular initiative.
The crisis is largely the result of government intervention rather than the government's failure restrain unmitigated greed. This has not stopped many from invoking the Great Depression in their clamor for increased government involvement. Research by Robert Higgs can teach us several lessons from the Great Depression that can help us better understand what caused the crisis, what further intervention will likely accomplish, and what should be done to help people weather the storm.
III. Learning our Lessons
Robert Higgs's 1987 book Crisis and Leviathan offers a brilliant theoretical and empirical examination of the evolution of government intervention during and after the World Wars and the Great Depression. State discretion expanded, and while it receded somewhat after the crises, the state had more discretion over economic activity as a result of the crises. This "ratchet effect" for government intervention explains in part the rise of bigger government during the twentieth century.
Recently, Higgs pointed out another important legacy of the New Deal after the Fed intervened on behalf of AIG. The ratchet explains short-run increases in state discretion, but government reactions to crises also leave long-run institutional and ideological legacies. In the case of the AIG intervention, the federal government used emergency powers that had been granted to it during the Great Depression.
Another relevant institutional and ideological legacy of the Great Depression is the popular view that some combination of the New Deal and World War II ended the Depression. As Higgs has argued in his 2006 book Depression, War, and Cold War, however, the uncertainty created by anti-business policies during the New Deal in fact exacerbated the crisis. Further, World War II led to net capital consumption as men and materiel were used to prosecute the War instead of being used to produce goods and services at home. An old maxim says that if you repeat something often enough, it become a fact regardless of whether it is true or not. Repeated comparisons of current conditions to the Depression and repeated exhortations to follow New Deal-esque policies will lead us down a policy road we should not wish to travel.
In his excellent essay "An Open Letter to my Friends on the Left," Steven Horwitz explains how government intervention rather than free-market capitalism has created the present unpleasantness and argues that deregulation, rather than an increased scope for government, is the appropriate way to deal with the crisis. In an earlier essay on inequality, Horwitz argues that before asking the "oughts" of ethics, we have to consider the "cans" of economics. The present crisis is humbling: it illustrates the unfortunate consequences of what F.A. Hayek called "The Pretence of Knowledge." A mixture of political incentives, hubris, and a desire to "help those in need" combined to create a financial disaster in which "those in need" are finding themselves worse off than they were before their anointed benefactors decided to lend them a helping hand.
The most important thing we can do is learn from the present crisis. Just because we think something is morally desirable — "affordable housing," for example — does not mean that it is economically feasible. Government intervention changes incentives and leads to calls for further government intervention, and while we can conceal the distortions with credit expansion in the short run, this is not a viable strategy in the long run. Precipitous drops in asset values and increases in home foreclosures bear testimony to this fact.
Comments (18)
smrstrauss
Okay, blame the Democrats and poor people for the financial crisis. Some people may believe you. Most will NOT believe you.
Even if it were true that the Democrats ALONE were behind the vast increase in loans to the poor, you would still have to show that it was mainly loans to the poor that caused the crisis. In fact, the Bush administration also increased loans to the poor, and the main cause of the crisis was the Real Estate Bubble (remember the bubble, when thousands of people, mainly middle-class people, were “flipping” houses?). The cause of the Real Estate Bubble was NOT sub-prime mortgages. It was low interest rates. Indeed, some investment banks were able to borrow money to make loans at virtually no interest expense to them, by borrowing on the Japanese market in the so-called “carry trade.”
To be sure, in the recent past a lot of poor people have defaulted on their mortgages, but they constitute only a small percentage of the defaults (after all, they got fewer loans and smaller loans than the average). And, it is to be expected that when the economy turns poor, poor people will default more than richer people. This has always been the case, and the Community Reinvestment Act (CRA) does not force any bank or any institution to lend to people with bad credit ratings.
But this is not the cause of the crisis. What about the banks and investment banks that took on billions of dollars in mortgage-backed paper? They did NOT do it because they were forced to, or because they are Democrats, or because they love the poor. For example, the Bank of China took $9 billion in sub-prime paper, and Switzerland’s UBS lost $30 billion (so far) on sub-prime paper. To some extent, they did this because the rating agencies (such as Moody’s and S&P may have rated that paper higher than they should have) but they did it to make money. There’s nothing wrong with making money, but neither the Democrats nor the US government were involved in these investment decisions.
What about the Auction-rate Securities that caused several money-market funds to fail. What about the trillions of dollars in Credit Default Swaps that no one regulates and apparently no one in government knows much about. All the regulators in these cases had their chairmen appointed by President Bush.
What about the regulator of Bear Sterns, Lehman brothers (and for that matter the late unlamented Enron), the SEC. Why didn’t they catch the off-balance sheet items? Why didn’t the rating agencies like Moody’s and S&P catch the enormous debt that these companies had? For that matter, why did Moody’s and S&P rate some of the mortgage backed securities, that are now nearly worthless as AAA, when they were more like DDD? We don’t know yet, but obviously there is a lot of blame to go around. And, not in the USA only. Reading up on the crisis last night I read that last year the Bank of China admitted to having bought some $9 billion worth of sub-prime mortgage paper. The Swiss investment bank UBS has already lost some $30 billion – and on and on.
Where this relates to the debate about Fannie and Freddy and about the Democrats is to remember that NO ONE forced UBS or Deutsche Bank or Bear Sterns or anyone to buy sub-prime mortgages. They did so out of the normal investment motive: They thought that they could make money on the investment. They were mistaken, much like the folks who in September 1929 (one month before the crash) bought stock. They might be blaming their broker for having advised them to buy, or Moody’s and S&P for having missed something. But ultimately it was their decision. This plus the practice of investment banks of holding their suspect sub-prime investments off the balance sheet plus ENORMOUS leverage (lousy debt-equity ratios), were main causes of the crisis.
There are those that think that the crisis was mainly caused by Democrats pushing banks to make loans in minority areas. It is true that Democrats did this, but so did the Bush Administration, and indeed, Bush helped expand home ownership among minority groups. Here he is when signing the “American Dream Downpayment Act of 2003.” (Begin quotes)
President Bush Signs American Dream Downpayment Act of 2003
I am here today because we are taking action to bring many thousands of Americans
closer to owning a home. Our government is supporting homeownership because it is
good for America, it is good for our families, it is good for our economy.
One of the biggest hurdles to homeownership is getting money for a down payment.
This administration has recognized that, and so today I'm honored to be here to sign
a law that will help many low-income buyers to overcome that hurdle, and to achieve
an important part of the American Dream.
This administration will constantly strive to promote an ownership society in America. We want more people owning their own home. It is in our national interest that more people own their own home. After all, if you own your own home, you have a
vital stake in the future of our country. And this is a good time for the American homeowner. Today we received a report that showed that new home construction last month reached its highest level in nearly 20 years.
The reason that is so is because there is renewed confidence in our economy. Low interest rates help. They have made owning a home more affordable, for those who refinance and for those who buy a home for the first time. Rising home values have added more than $2.5 trillion to the assets of the American family since the start
of 2001. ((IN retrospect, HA HA!))
The rate of homeownership in America now stands a record high of 68.4 percent. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50 percent. And that's not right, and this country needs to do something about it.
We need to -- (applause.) We need to close the minority homeownership gap in America
so more citizens have the satisfaction and mobility that comes from owning your own home, from owning a piece of the future of America.
Last year I set a goal to add 5.5 million new minority homeowners in America by the
end of the decade. That is an attainable goal; that is an essential goal. And we're making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there's more that we can do to achieve the goal. The law I sign today will help us build on this progress in
a very practical way.
Many people are able to afford a monthly mortgage payment, but are unable to make the down payment. So this legislation will authorize $200 million per year in down payment assistance to at least 40,000 low-income families. These funds will help American families achieve their goals, and at the same time, strengthen our communities.
End quotes.
The Community Reinvestment Act does NOT require that banks make loans in any particular case. There is nothing in any law that says to a bank: “You must make a loan to this guy even though he does not have a job and puts nothing down.” If banks made more loans to the poor than might have been prudent, it was not the law that required them to do so.
Why then did they do so? Not to fight racism. It was simply TO MAKE MONEY.
In retrospect, it seems absurd that increasing lending in poor areas might be considered a good risk-reward investment. But, you have to remember that the banks involved thought that they could get rid of the risk through the practice of “securitizing” the loans (dividing them up, bundling them with hundreds of other loans, getting them rated by Moody’s or S&P, and selling them off to some other jerks, like maybe the Bank of China, or maybe Washington Mutual and Citibank.)
Certainly it was this idea that a securitized package of loans was a highly secure investment that lead to the gigantic investments in sub-prime loans, NOT a desire to help the poor or to expand lending in redlined areas.
And Re: "42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005." In 1996, 12% of Fannie/Freddie mortgage purchases had to be "special affordable," meaning mortgages to people with 60% or less of median income in their area. The target for 2000: 20%. for 2005: 22%. and finally for 2008, the goal was 28%."
That should read 42% etc "at or below the median," meaning that they could lend to average wage people in the area.
You might ask yourself why? Why press Fannie and Freddie to make more loans to poorer people? Because if they made lots of loans to middle class and rich people they would be competing with Bank of America, Citigroup, Etc. And what would be the purpose in having another institution competing with our savings and loans and banks in lending money to the middle class and the rich?
But, despite being pressed to lend money to poor people, it seems that the default rates at Fannie and Freddie so far have been rather low (as compared with Wachovia, Commercial Credit and other mortgage lenders in any case).
But you can argue that we should not have had Fannie and Freddie at all, meaning that we should not have encouraged homeownership. Well, maybe. But as I say both Republicans and Democrats were responsible for that. And remember that the subsidy for homeownership includes the lack of a federal tax on the sale of homes.
And, it turns out that there was a real estate bubble and a subsequent crisis in a lot of other countries besides the USA. Spain and Britain being two that have been in the news.
Why no discussion of such other causes of the financial crisis as off-balance sheet assets, credit default swaps, Auction-rate securities, high leverage by banks, Etc?
Published: October 22, 2008 8:38 PM
Rubén Rivero Capriles
I will concentrate my comment on the following two quotes from your blog:
"What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs"
"Just because we think something is morally desirable — "affordable housing," for example — does not mean that it is economically feasible."
Well, past has already occurred. The contradiction is there. Some minorities got advantage of their loans, performed responsible payments and now enjoy the fruits of the American dream. Some others were not that lucky.
So something positive occurred. Today's American minorities are better economically than they were fifteen years ago. Perhaps this is still an aftermath of the long way minorities have had to climb since the abolition of slavery. Now let the free market correct the excesses.
The worst that can happen to America is to lose its focus and its succesful achievements because of crisis of which still there are tools to get out.
Published: October 22, 2008 9:02 PM
Inquisitor
"Okay, blame the Democrats and poor people for the financial crisis. Some people may believe you. Most will NOT believe you."
? did you even READ the article?
Published: October 22, 2008 9:52 PM
Mechanized
The same thought occurred to me Inquisitor.
Published: October 22, 2008 10:39 PM
A Reader
"The Community Reinvestment Act does NOT require that banks make loans in any particular case. There is nothing in any law that says to a bank: “You must make a loan to this guy even though he does not have a job and puts nothing down.” If banks made more loans to the poor than might have been prudent, it was not the law that required them to do so.
Why then did they do so? Not to fight racism. It was simply TO MAKE MONEY."
Ah, but the CRA does require the financial institution to work towards statistical parity between home ownership by minorities and that of the unfortunate non-minorities the measure of whose every trait, every activity, every achievement, every disease is the standard used for comparison. Failure to do this work, can end in a costly lawsuit.
"But, despite being pressed to lend money to poor people, it seems that the default rates at Fannie and Freddie so far have been rather low (as compared with Wachovia, Commercial Credit and other mortgage lenders in any case)."
I'm impressed with your interest in championing all those "poor" yet fiscally responsible people out there. And I'm sure that employees at Fannie and Freddie had the best of intentions when making loans unlike those private lenders whose greed obviously caused all of this mess - perhaps F & F didn't offer the ARM option?
"You might ask yourself why? Why press Fannie and Freddie to make more loans to poorer people? Because if they made lots of loans to middle class and rich people they would be competing with Bank of America, Citigroup, Etc. And what would be the purpose in having another institution competing with our savings and loans and banks in lending money to the middle class and the rich?"
I wasn't aware that F & F had only made loans to poor people while the other institutions had only made loans to the middle class and rich.
"Why no discussion of such other causes of the financial crisis as off-balance sheet assets, credit default swaps, Auction-rate securities, high leverage by banks, Etc?"
I'm very new to Austrian Economics but I wonder if Austrians wouldn't consider this a contagion of false value that entered the economy in the form of bad debt that was treated as if it was good debt, packaged with a AAA rating and spread to any buyers deceived by it because of the high rating.
Published: October 23, 2008 12:10 AM
fundamentalist
I have to agree with smrstrauss for the most part. Yes, Fannie and Freddie made things worse, but they didn’t cause the crisis, if there is a crisis. The Federal Reserve deserves all of the credit for what mess there is. House flipping, rapid house price increases, high leverage at all institutions, and the other usual suspects could not have happened had the Fed kept interest rates at a reasonable level. That’s why interest rates are so important. Without the fake money created by the Feds, the “criminals” in this “crisis” would not have had the money to operate with.
Published: October 23, 2008 8:57 AM
Kevin O'Brien
I would think both the Democrats and Republicans would be complicit in the problem. Problems of this magnitude are not created overnight. It is the culmination of year's of bad public policy. Lending to those who do not have the resources, is not a sustainable housing solution. It is a dream that is impossible to sustain. If a person lacks the funds to afford a traditional mortgage, how can it be expected they can also afford the yearly upkeep required of owning a home? The answer is they can not. So their home they can not initially afford declines in value due to lack of upkeep.
You might ask yourself why? Why press Fannie and Freddie to make more loans to poorer people? Because if they made lots of loans to middle class and rich people they would be competing with Bank of America, Citigroup, Etc.
How exactly do these organizations offer loans?
Published: October 23, 2008 9:41 AM
smrstrauss
Re: “Lending to those who do not have the resources, is not a sustainable housing solution. It is a dream that is impossible to sustain. If a person lacks the funds to afford a traditional mortgage, how can it be expected they can also afford the yearly upkeep required of owning a home?”
Obviously.
But I’m not entirely sure that this situation has much to do with the dream. The dream is that the poor will improve in economic status so that they can afford traditional mortgages. (AND, as I showed in my last post, there was some of this going on.)
There’s nothing about sub-prime mortgages in the dream, so far as I know. (That would be more like a nightmare.) The CRA specifically requires prudent lending. Fannie and Freddie were generally prudent in their mortgage portfolio, though they did take on some sub-prime backed paper—just as other lending institutions did. This was done to make a profit, nothing to do with the dream.
Sub-prime loans were mainly made by commercial mortgage companies, and I cannot imagine that they did so because they had a dream about home ownership.
There also has been a mortgage crisis outside the USA, in Britain and Spain and maybe some other countries. In both cases maybe their governments were eager to get more people to own homes, but this had nothing to do with the CRA, nor was it exactly the same as the USA’s dream.
Published: October 23, 2008 1:24 PM
Dick Fox
Great article! Sorry others have trouble reading you. I did not see you blame Democrats. I saw you blame central planning whether by Jimmy Carter, or George H. W. Bush, or Bill Clinton, or George W. Bush. Your analysis is spot on.
fundamentalist wrote:
The Federal Reserve deserves all of the credit for what mess there is. House flipping, rapid house price increases, high leverage at all institutions, and the other usual suspects could not have happened had the Fed kept interest rates at a reasonable level.
While this is true none of these things could have happened if lending standards had not been lowered. This was a group effort by just about every branch of government and lots of bureaucracy.
Fannie and Freddie assumed the risk allowing the mortgage companies to lend to higher risk borrowers, but also to lend to the get-rich-quick crowd. There were a lot of affluent people who took advantage of the lowered lending standards to try to make fast money by flipping or trying to move up by buying a home beyond their means assuming that inflation would cover them. I know some of these people who would have never borrowed under normal circumstances but they were convinced that inflation would allow them to refinance at a rate they could afford. After all their friends did just that only a year or two earlier. They did nothing that was not standard procedure at the hight of the boom.
Yes there were a lot of foolish decisions but most of those decisions were made because of the money illusion and credit illusion created by the FED and Fannie and Freddie.
Bottom line is that had the government not gotten involved none of this would have happened because the lending standards and sound money would have prevented it.
Published: October 23, 2008 3:12 PM
Dick Fox
smrstrauss,
Tell me, was it the first straw or that last straw that broke the camel's back?
Published: October 23, 2008 3:13 PM
Don Mynack
"Fannie and Freddie were generally prudent in their mortgage portfolio, though they did take on some sub-prime backed paper—just as other lending institutions did."
What is the source of this assertion? Fannie and Freddie were Countrywide's biggest customer for mortgage securities. In 2004, they purchased $175 billion in subprime securities — 44 % of the market. They were in this up to their ears, and second place isn't even close.
Published: October 23, 2008 4:42 PM
tr
I'm from a regular working class area, and the people losing their homes around here aren't minorities, and they're not poor either. They're regular boring white people with varied stories and reasons for their foreclosures: some had a serious illness in the family and couldn't afford medical bills and the mortgage, some had a poor understanding of their mortgage terms and saw their monthly payments balloon and couldn't sell in a bad market. Some were doing fine but lost a job and fell behind. Some were simply pursuing the American Dream of owning a home, and were lied to by predatory lenders. The point is, I don't think it's any one cause, and it's a waste of mindspace to try to figure out who to blame. Judgemental stereotypes that lump the innocent with the guilty will get us no where.
Since the taxpayers are bailing out the banks, shouldn't these banks stop foreclosing? I don't want my taxes going to some rich banker who's going to kick my neighbor and his kids out of their home while we pay for it. It's an outrage what the banks are getting away with, and Christian sympathies belong with those homeless families, not with the banks.
Published: October 23, 2008 8:26 PM
Maturin
tr-
You are absolutely right! This outrage should not be blamed on any one political party or demographic group. It did not simply start with the CRA or even Fannie and Freddie. It did not start with the civil rights movement which created government policies to favor the underprivileged. It did not even start with the New Deal.
This problem goes back to the Jekyll Island secret conference a century ago, in which the oligarchs of the banking industry set up the plan for the Federal Reserve (as Fundamentalist pointed out), to allow them to control and steal the wealth of everybody else, be they poor, rich, black, white, red or blue.
The problem is so big, in terms of multiple layers of governmental policy and regulations aimed at "promoting the American Dream for everybody," built up over many decades, that we all share some part of the blame for wishing to have our cake and eat it too. We, as a nation, have created a government that is out of control, and we have allowed unscrupulous oligarchs to push the government policies in directions that benefit them in the long run, at the expense of all. This was done in the guise of "helping the unfortunate" by government policy.
See opensecrets.org, to find out who scratches the backs of our elected leaders, and who expects them to reciprocate when it comes time to make more laws and policies.
We all wanted to have our "forty acres and a mule" and we all got screwed by the "carpetbaggers" who promised us a dream.
Published: October 24, 2008 7:23 AM
smrstrauss
Re: “What is the source of this assertion? Fannie and Freddie were Countrywide's biggest customer for mortgage securities. In 2004, they purchased $175 billion in subprime securities — 44 % of the market. They were in this up to their ears, and second place isn't even close.”
The figure of 44% is commonly used, but it is out of date, by 2006 it had declined as a percentage of the sub-prime market to 21%. The latest figure I have (see http://www.marketwatch.com/news/story/fannie-freddie-face-47-billion/story.aspx?guid={039A6514-2144-4BC7-B9F6-8573CC3699ED) is that as of July 2008 they had on hand $182 billion worth of sub-prime bonds, meaning that they must have been selling them, or not buying more, if they added $175 billion in sub-prime purchases in 2004.
The next question you should ask yourself is, wait for it, whether $182 billion is a lot of money????
Most of us would say so, but, wait for it, Fannie and Freddie have a total loan portfolio of $3 trillion. THREE TRILLION! $3,000,000,000,000.
And, within the broad category of sub-prime paper there are levels of quality. Most of what Fannie and Freddie purchased was AAA-rated sub-prime paper. (The highest.)
But you could say, “they shouldn’t have taken any.” And I would agree in the sense that if we knew what was going to happen, none of us would have any stocks in our 401K—only very secure bonds.
Yet that is not very fair to a private investment company. Virtually all the conservative bond/equity mutual funds still had 20 or 30% stock. So what is Fannie/Freddie’s sub-prime percentage of $3 trillion? (A little more than 6%.)
The next thing to remember is that at the time they were private companies, quoted on the stock exchanges, and they had a strong desire to increase their earnings to look good compared with other companies. This led them and many other banks to invest in paper that they thought was secure and which gave good yield. But, as I said before, the motive was not to be good to the poor, it was to make money.
Finally, you will be shocked to hear that our government has decided to buy up the bad paper that is floating around, using some of the $700 billion bailout, and Fannie and Freddie are buying some sub-prime paper as part of that (acting for the US Treasury). So, once when Fannie and Freddie bought the stuff as investments (or you could call it speculation), NOW they are doing it as part of public policy.
Our Secretary of the Treasury has said that if Uncle Sam does this job right, in time (decades???), we will be able to sell the sub-prime paper and make a profit. That is most likely to be baloney, but governments often deceive themselves.
Let me point out that the absurdity of thinking “I’m going to buy sub-prime paper for the government and hold it for a while, and buying it will help the economy, and in the end we can sell it and make money” is merely a more complicated form of the investment notion: “I’m going to buy sub-prime paper, It will pay me high interest rates, and in the end I will be able to sell it for just what I paid for it or maybe a little more, and it is perfectly safe.” The latter at least has the virtue of being a purely capitalist decision.
Are you blaming Fannie and Freddie for being, at the time, capitalist enterprises?
Published: October 24, 2008 3:33 PM
blacklight
To Art Carden:
What are you doing complaining that unemployment and welfare benefits are supposed to count as income for the purpose of determining mortgage eligibility, boy? Just how much of a house do you expect someone to buy with unemployment benefits that amount to $400 a week before tax, boy?
In addition, neither the CRA nor Barney Frank required lending institutions to throw their mortgage underwriting standards out the window, boy. And if you claim they did, show me the written documentation. You are scapegoating, boy.
And now, you are claiming that DE-REGULATION is the answer to our troubles? You are sick in the head or you dumb as a rock, boy.
Published: December 28, 2008 5:42 PM
Rob
I got my hours cut at work today, but I found the one answer to our economic crisis. The ONLY solution to our economic crisis is reforming our education system. No bailout money for failing companies, no bailout money for anybody. That's right, no money for you. Every single extra dollar should be put towards our education, EVERY DOLLAR. We need to hire more teachers and we need to pay them more. A happy teacher makes for happy students and happy students are better suited to learn. The more teachers, the smaller the classes, the more the students will learn. We need every student to have all the tools he or she needs to learn anything and everything. Every student should have their own computer with access to the internet. We are in this economic crisis due to lack of education, think about it. A student graduates highschool and does not go to college, college is not for everyone. We will call this student Jim. Jim is all of a sudden in the real world in need of an income. He was never taught in school how to balance a checkbook, write a check, fill out a resume or read a contract. So he goes to a job interview and gets a lower paying job due to his lack of knowledge in the real world, and his poor resume. Well he now needs a vehicle to get to work. Jim goes to the car dealership and takes a loan out for a new car he gets suckered into. He signs a bad contract due to his lack of knowledge in reading contracts. Instantly Jim is stuck in high payments for 5 years. He is now having a hard time affording other things, so he applies for a credit card. Once again Jim signs a bad contract and in a few months is in a debt he can never get out of. Now picture millions of "Jims" across the country doing the same thing, all of a sudden millions of people are in debt. Eventually the whole country is affected and now the economic crisis begins, people lose jobs and I get my hours cut all due to lack of education. Jim can do an algebra problem(a skill in which he will NEVER use again) but he can't handle his own finances, the education system is a joke. It is an old system that needs to be changed, it is time for a revolution folks.
Every middleschool and highschool in America should have a "Real World" class, and it should be mandatory for every student, every semester. This class should teach students to read contracts, balance checkbooks, write checks, pay bills, job interview skills, resume and application skills, basic business and finance skills etc. and should be tested in real world environments. Secondly we need to figure out what students are good at early and gear classes to help them excel in their natural field. I mean if a student knows he/she doesnt want to go to college, then begin to teach them a skilled trade such as carpentry, welding, construction etc. Also have internships with real companies to get hands on experience before jumping into the real world. This all should begin at a highschool level or sooner and should be mandatory across the country.
It's a disgrace to me that our coutries' solution to this crisis is to basicly print more money and send checks to failing companies, this will not work. It's really sad that states are saving money by cutting school budgets, ARE YOU SERIOUS!?!? This is the complete opposite direction we need to go to succeed. That will simply make our future generation of children dumber and cause more economic hardship. In doing this we are only digging the hole deeper, our education is already far behind other countries, and worsening quickly. An undereducated society is a failing society. There could be many geniuses who lived long lives and died without living up to their potential, due to an education system that teaches every kid the same thing, in the same manner. People are different, and need to learn different things, and need to be taught in different ways, not all the same.
It may be hard at first, but once the education system is reformed the snowball effect will begin. Brighter more educated students will become future leaders. More brilliant ideas will come about due to a generally more intelligent society. The smarter we are as a whole, the better off we will be. Economic crisises will solve themselves, or be solved by the intelligent population working together, instead of our unintelligent society fighting amongst itself. Everybody's thinking about solutions to our problems, there is only ONE solution and this is it. REFORM OUR EDUCATION SYSTEM BY PUTTING EVERY EXTRA DOLLAR WE HAVE INTO IT. It's not difficult to figure out, think about it.....it is the only answer.
Please send this message to everyone you know, this is how things begin to change. We have the internet now, so take advantage and let us make a difference and change the world for the better. Send it to friends, Senators, lawyers, politicians, Barack Obama, your mom, anybody in a position of power. Who knows maybe together we can make this happen. Thank you.
Published: February 7, 2009 11:00 AM
Rob
I got my hours cut at work today, but I found the one answer to our economic crisis. The ONLY solution to our economic crisis is reforming our education system. No bailout money for failing companies, no bailout money for anybody. That's right, no money for you. Every single extra dollar should be put towards our education, EVERY DOLLAR. We need to hire more teachers and we need to pay them more. A happy teacher makes for happy students and happy students are better suited to learn. The more teachers, the smaller the classes, the more the students will learn. We need every student to have all the tools he or she needs to learn anything and everything. Every student should have their own computer with access to the internet. We are in this economic crisis due to lack of education, think about it. A student graduates highschool and does not go to college, college is not for everyone. We will call this student Jim. Jim is all of a sudden in the real world in need of an income. He was never taught in school how to balance a checkbook, write a check, fill out a resume or read a contract. So he goes to a job interview and gets a lower paying job due to his lack of knowledge in the real world, and his poor resume. Well he now needs a vehicle to get to work. Jim goes to the car dealership and takes a loan out for a new car he gets suckered into. He signs a bad contract due to his lack of knowledge in reading contracts. Instantly Jim is stuck in high payments for 5 years. He is now having a hard time affording other things, so he applies for a credit card. Once again Jim signs a bad contract and in a few months is in a debt he can never get out of. Now picture millions of "Jims" across the country doing the same thing, all of a sudden millions of people are in debt. Eventually the whole country is affected and now the economic crisis begins, people lose jobs and I get my hours cut all due to lack of education. Jim can do an algebra problem(a skill in which he will NEVER use again) but he can't handle his own finances, the education system is a joke. It is an old system that needs to be changed, it is time for a revolution folks.
Every middleschool and highschool in America should have a "Real World" class, and it should be mandatory for every student, every semester. This class should teach students to read contracts, balance checkbooks, write checks, pay bills, job interview skills, resume and application skills, basic business and finance skills etc. and should be tested in real world environments. Secondly we need to figure out what students are good at early and gear classes to help them excel in their natural field. I mean if a student knows he/she doesnt want to go to college, then begin to teach them a skilled trade such as carpentry, welding, construction etc. Also have internships with real companies to get hands on experience before jumping into the real world. This all should begin at a highschool level or sooner and should be mandatory across the country.
It's a disgrace to me that our coutries' solution to this crisis is to basicly print more money and send checks to failing companies, this will not work. It's really sad that states are saving money by cutting school budgets, ARE YOU SERIOUS!?!? This is the complete opposite direction we need to go to succeed. That will simply make our future generation of children dumber and cause more economic hardship. In doing this we are only digging the hole deeper, our education is already far behind other countries, and worsening quickly. An undereducated society is a failing society. There could be many geniuses who lived long lives and died without living up to their potential, due to an education system that teaches every kid the same thing, in the same manner. People are different, and need to learn different things, and need to be taught in different ways, not all the same.
It may be hard at first, but once the education system is reformed the snowball effect will begin. Brighter more educated students will become future leaders. More brilliant ideas will come about due to a generally more intelligent society. The smarter we are as a whole, the better off we will be. Economic crisises will solve themselves, or be solved by the intelligent population working together, instead of our unintelligent society fighting amongst itself. Everybody's thinking about solutions to our problems, there is only ONE solution and this is it. REFORM OUR EDUCATION SYSTEM BY PUTTING EVERY EXTRA DOLLAR WE HAVE INTO IT. It's not difficult to figure out, think about it.....it is the only answer.
Please send this message to everyone you know, this is how things begin to change. We have the internet now, so take advantage and let us make a difference and change the world for the better. Send it to friends, Senators, lawyers, politicians, Barack Obama, your mom, anybody in a position of power. Who knows maybe together we can make this happen. Thank you.
Published: February 7, 2009 11:01 AM
cliff gibson
Dear Sir,
I have been putting some thought to the current global financial crisis and would like to put forward to you a hypothesis for consideration, if it is a viable solution to the increasingly catastrophic situation the global financial system is currently experiencing.
It is about time that someone came up with some constructive thoughts and started to look at the 'credit crunch / recession /depression) as an entirely global problem that is not going to improve in anything like the near future.
Global problems require global solutions and the only REAL solution is to tackle the problem on a global scale.
Consider this hypothesis - the only way to revive the world economy is to instill confidence in the public mind, give investors something to invest in!
Banks and bankers cannot do this anymore nobody trusts them
The answer is to respond to the masses in such a way that they have the power to bring the world economy back on track.
Bring confidence back and it will turn around very quickly, the burning question is HOW?
A simple solution is available, provided that the world financial systems and all governments work as one entity for one goal.
THE SOLUTION IS SIMPLE IN CONCEPT BUT DIFFICULT TO RESOLVE WITHOUT 100% GLOBAL COOPERATION AND METICULOUS PLANNING TO IMPLEMENT THE CHANGEOVER TO REVALUED CURRENCIES AND ALL FINANCIAL TRANSACTIONS ADJUSTED TO THE NEW LEVEL.
Close down all financial dealings for 48 hours
The concept is to take all global assets, everything but hard cash and reduce their value to one tenth
Next take all cash assets and multiply value by ten
(this would require revaluation of every world currency) yes print new money
This would create wealth for every man and women in the world overnight and create a differential of 100 times between asset values and cash values globally and therefore will not have any inflationary impact whatsoever.
after 48 hours all transactions would recommence with all assets a tenth of what they were before, but cash assets having being multiplied by ten they would be worth 100 times more. However the status quo of assets, wages, prices, etc., relatively, will remain the same.
The windfall from the change gives revenue back to the people to spend but they will have 100 times more spending power. The value of assets are slashed and the cash assets allow people to buy houses and spend while still maintaining the original differential as the revaluation is totally global therefore there will be no difference in the relative values of assets compared to incomes.
If such a plan was considered and published globally it would almost certainly create confidence, in fact ity may even improve the world economy before it is applied. Just the knowledge of global improvement may give the kick-start the banking bail-out strategy has not.
I am an engineer, not an economist, I look for solutions to problems every day.
Regards,
CG London
Published: February 10, 2009 1:43 PM