Fannie, I wish I’d never seen your face

Why was there even such a thing as the “Zero Down Payment Act”?

This transcript of a public-radio interview with New York Times finance writer Gretchen Morgenson is long. I would have everyone read it anyway. Like the Great Depression before it, the Great Recession has put free markets on the defensive. It’s not quite clear to me how fair this is. It is surely fair at least to some trivial degree, in the sense that markets are ultimately made up of regrettably fallible humans, prone to superstitions and herd behaviour and poor judgments of risk. But everyone seems to have managed to take the lesson that is most convenient for himself from the crisis; for those on the left it has been “markets fail”, and for those in the muddled mixed-economy middle it has been “regulators fail to smack those nasty markets back into line”.

What I see when I look at the origins of the financial pandemic is the story “government-sponsored enterprises that subsidize crazy lending practices and puppetize legislators fail.” Mortgage-writing institutions did things throughout the late 1990s and early oh-ohs that weren’t just likely to turn out badly; they made enormous amounts of loans that were practically certain to go bust in the short-to-medium term, loans that your mother could have told you would go sour. It wasn’t a “free” market that relaxed mortgage underwriting standards to the point of annihilation; it wasn’t a “free” market that put unskilled workers in million-dollar homes in the Sand States, or that spent too long ignoring the rising default rates that resulted.

We know this, in part, because we know how  slightly freer mortgage markets traditionally behaved; they “redlined” the living heck out of low-income neighbourhoods. Because redlining resulted in racial discrimination—critics would just say it is racial discrimination—there has been a concerted attempt among economists to absolve the major U.S. anti-redlining statute, the Community Reinvestment Act of 1977, from any role in creating the housing bubble. Obviously it won’t do to pin the crisis on a 1977 law, but there is such a thing as the straw that broke the camel’s back; the CRA was followed by an even more intense fusillade of statutory and regulatory measures consciously designed to increase home ownership in America without making homes less expensive and valuable per se.

If you just sit and think about this policy goal—“give everybody a thing while making sure the price of that thing continues to appreciate”—you realize that there could never be any way of accomplishing it without harm to credit markets, or indeed without serious distortions of the whole concept of “credit”. How that harm got spread throughout the world seems, by contrast, a niggling detail. Morgenson focuses on how the regulatory and political environment turned Fannie Mae into Godzilla, but I don’t think that’s the whole story either, as crucial (and as sordid) as it obviously is. Why was there even such a thing as the “Zero Down Payment Act”? Does that sound like something we should probably hop in a time machine and go back and undo?




Browse

Fannie, I wish I’d never seen your face

  1. Just to be clear. Trillions of dollars of worthless “securities” (that practically weren’t) written and furiously traded by financial institutions without a scintilla of understanding of what they actually issued or owned.  And you put the blame for it all on… mortgage regulation?

    Try again.  Lending practices, encouraged (but hardly mandated) by the crappy mortgage regulation you’re highlighting, certainly had an ill effect, and the result would have badly dented lending institutions.

    Instead, we had the largest single destruction of wealth in the history of the world.

    If you try to build a castle on the sand, when it falls down and kills everybody don’t blame the laborers who shovelled the sand.I’d love to hear what you blame the asset-backed commercial paper blowup in Canada on… maybe on welfare policies?  Language laws?  Surely there must be a bureaucrat somewhere who can be ultimately at fault!

    • Well, maybe I should have suggested that the contagion issue wasn’t interesting, rather than that it wasn’t important. I’m not sure what you can say meaningfully beyond “socialization of business risk, moral hazard, etc., etc.” The fact is–and correct me if I’m wrong here–that the ABCP problem was “solved” in a way that involved relatively little socialization of loss, yes?

      • I’m not sure what you mean by “relatively little socialization of loss” but the resolution of th ABCP mess preceded the world financial meltdown by a full year; took 18 months to resolve; and a gov’t loan guarantee was needed at the last minute.

        I cringe every time someone mentions how great Canada’s banking regulation is. The ABCP crisis was a “made-in-Canada” financial fiasco where toxic paper was securitized in some fashion and sold as AAA short term paper. All the major banks participated in some fashion.

        When the markets froze, Canada’s banks were able to walk away. Since Canada does not have a national securities regulator, relying instead on the provinces to sort thing out, the possibilities for finger-pointing were vast. The federal government did nothing – relying on a private sector solution – the Purdy Crawford commission.

        Were it not for a few courageous and principled individuals, (this includes Purdy Crawford but no bankers, brokers,or security regulators) it could have been much worse. As it were, some good companies, like Air Transat, and some some very large pension funds (CPP and Caisse) took a big haircut.

        Tell me again how bank regulation in Canada is superior, or, as Monty Python would say, how sheep’s bladder’s can be used in the prevention of earthquakes.

  2. Michael Lewis – Liar’s Poker & Big Short – has made career out of writing about government agencies making banks issue dodgy loans in the late 1970s and then those bankers lobbied government to deregulate mortgage market and by early 80s there is bond market for mortgages for people who really should not have mortgages. 

    And from there, things got worse and worse and worse and then all of a sudden when we find out that itinerant fruit pickers from Mexico with no documents were given $700,000 mortgages that were passed on to suckers in America, Canada, France, Japan ….. etc.  

    Process was terrible – government forces banks to issue dodgy loans (Jimmy Carter), bankers know what will happen to those loans so they demand deregulation so they can spread the risk (Ronald Reagan), and quasi private/public institution is priming the pump (Clinton). 

    There is plenty of blame to go around here – trillions of $$$$ of wealth disappeared, vanished in an instant, and government is equally to blame as bankers. 

    This is not remotely a good process!

    Jane Galt wrote it best: “Libertarians are process people, something that our political opponents find impossible to believe can be real, rather than disingenuous …..Having a good process is better than getting a good outcome, because a good process is one that maximizes your chances of getting good outcomes over time. ”

    • Sorry Tony (and sorry Colby) I must respectfully disagree. One cannot write about the crash of 2008 without mentioning the repeal of Glass-Steagall. I know Fanny and Freddie fit the right-wing narrative quite nicely, but the repeal of Glass-Steagall was a classic case of a group of people completely forgetting why a law was passed in the first place. I think Roger Lowenstein made the best analogy when he compared the Act and its repeal to the watertight compartments of a ship. If a ship has 40 watertight compartments, the flooding of any 3 or 4 won’t cause much damage. Repealing Glass-Steagall enabled bankers to combine the compartments (investment and commercial banking) to the point where there were only 7 or 8 left, thus the flooding of one could be catastrophic, and indeed was. Pointing fingers at Fanny and Freddie as THE cause of the crash is, if I may be so bold, intellectually dishonest. 

      • ” Sorry Tony (and sorry Colby) …….. Pointing fingers at Fanny and Freddie as THE cause of the crash is …. ”

        I don’t speak for Cosh but I am not doing that. 

        If I am pointing finger anywhere, it is to Jimmy Carter and his Community Reinvestment Act in 1977.

        If Jimmy Carter would have read William Graham Sumner’s essay –  On the Case of a Certain Man Who Is Never Thought Of – published in 1883 we would have avoided much misery:

        “The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D …. the state cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it …. 

        The friends of humanity start out with certain benevolent feelings toward “the poor,” “the weak,” “the laborers,” and others of whom they make pets. They generalize these classes, and render them impersonal, and so constitute the classes into social pets ….. 

        Every bit of capital, therefore, which is given to a shiftless and inefficient member of society, who makes no return for it, is diverted from a reproductive use; but if it was put into reproductive use, it would have to be granted in wages to an efficient and productive laborer. 

        Hence the real sufferer by that kind of benevolence which consists in an expenditure of capital to protect the good-for-nothing is the industrious laborer”

        • My opening line left much to be desired Tony. What I should have said was “Pointing fingers at a single cause of the crash of 2008 is intellectually dishonest”. I stand by that observation. While I have some sympathy for your philosophical view of the world, I am never comfortable with anyone who can take something as complex and, well, human, as a market crash and reduce it to black and white terms.

          On the greater point though, my take is that the problem wasn’t with Fannie and Freddie per se, but rather the pressure they were put under by politicians (Barney Frank?!) to follow Countrywide, WaMu, New Horizons, and countless other PRIVATE lenders in generating lending fees. Fee generation was the name of the game- don’t lose sight of that. 

        • Summer’s essay must be just about essential reading for Ogliarchs from the barrios of S.America to the maifiaso of Russia – a convenient rationalization for establishing exclusive hierarchies if ever there was one. As Dave eloquently says, the world’s a complex place, not at all black and white. Why are so many libertarians addicted to such a simplistic view of the world?

          The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.
          John Kenneth Galbraith

          • Right, Bill Gates and Steve Jobs have done nothing to better the world or the common man. Greedy ba$tards is all they are. Henry Ford got rich and built a family empire on near-slave labour and pillaged the economy for decades. Whatever.

          • Once again, the plural of anecdote is not data.

          • What on earth is your point? It’s absurd to say neither Gates or jobs have done nothing to better the world in general – at least they have [ Gates anyway] attempted to mitigate some of the damage they’ve done through the support of endowment funds etc., and of course there is the direct and knock on effects of their businesses, even discounting the fact that they often work like monopolies. Besides, both these guys pay a lot of tax, and i doubt either man would enthusiasically second Summer’s pov. 
            I don’t know much about Ford’s life. But i’m pretty sure he was the one arguing for an increase in the working wage in order to make his cars affordable; again i don’t see your point.

  3. Redlining is criticized as racist for a reason:  It was racist.  Bankers would outline black neighbourhoods in US markets with a fat red marker and declare it a no-mortgage lending zone.  I don’t see how anyone can downplay such a practice.  The ideal free market, if such a thing actually existed, would have nothing to do with red-lining.  Red-lining was the work of fallible (and racist) individuals.

  4. There is an overdue magazine/newspaper profile due of a southern Californian blogger who has been writing about this particular topic, among many others, for as long as its been on anybody’s radar. I keep seeing things he writes about pop up everywhere, so it would be interesting if someone could get higher profile writers, who obviously read him even though he seems so radioactive they can’t even mention his name, to admit it.  

    • Facts have a well-known liberal bias.

    • But but, it doesn’t fit the narrative! Please delete your post!   ;)

    • “Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.He qualified for government insurance, which meant he needed only a small down payment.” NY Times, May 11, 2011

      Does Krugman have opinion about story that appeared in his paper about a flight attendant qualifying for $700,000 mortgage- it is not a palace, you know! – with little money down and lots of government insurance? 

      And if Mr Peterson does default and lose investors money, will that have anything at all to do with government policy?

      • Well hell, Tony, someone had to make the conscience choice to lend him the money. So here we have a PRIVATE lender, lending money JUST FOR THE SAKE OF THE FEE because the private lender can then turn around and sell off this extremely risky mortgage with 500 others that, conveniently, S&P and Moodys will rate as investment grade AAA. 

        But for you it all comes down to caveat emptor doesn’t it. 

        It still takes two to tango baby.

        • “Well hell, Tony, someone had to make the conscience choice to lend him the money.”

          It doesn’t take two to tango when you have government program subsidizing upscale housing market giving flight attendants million $$$ homes in Monterey during recession. 

          Everyone’s all about compassion – million $$$ homes in Monterey, California for flight attendants, sure, why not?

          But what happens to people’s money – the savers of society – when that flight attendant is laid off because people aren’t flying enough due to high taxes that are paying for million $$$ homes in Monterey, California? 
          ——–
          “By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government ….

          For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts.

          Without the government covering the risk of default, many lenders would have refused to make the loans. ” NY Times, May 2011

          • For a man that earlier this week spoke out against the danger of simple solutions to complex questions (see tax policy and the dangers of ‘social sciences’), you sure seem to have switched horses for this particular discussion. 

            My last word- your point about government greasing the wheels of the mortgage market is valid. However, remove Fannie and Freddie from the equation, and the collapse of 2008 still occurs. The only difference? My best guess is the bailout is around 600 billion instead of 750 billion. The blind drive for fee generation and the ability to unload debt in SIVs (thus freeing institutions from the pesky requirement to actually hold onto their loans and manage them with the borrowers like we used to do in the old days) played a far larger role in the crash than lending money to poor people. The private sector had a choice- they could make solid loans to solid people. They chose not to. They chose fees, short term profits, and unloaded the obligations as fast as they could. They had a choice, sir. They chose poorly. 

      • Plural of anecdote != data

        • Anecdote:

          “By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government.

          Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.

          He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”

          Data:

          “Sales of bank-owned homes and those in some stage of foreclosure accounted for 28 percent of all U.S. residential sales in the first quarter of 2011, up slightly from 27 percent …..” May 26, 2011

          “Here’s some more bad news for the housing market: U.S. home prices posted the sharpest quarterly decline in more than two years in the first three months of this year, according to a government index.” WSJ, May 25, 2011

          • Your point?

            So you have an anecdote about how one guy got into a home for a low down payment. Tell me, were the banks forced to offer such? Did the army come down and hold guns to their heads?

            Then you have data about how the private banks are being forced to lower home values to sell these homes they got into. Again, I don’t see what government had to do with this.

            The problem with Colby’s rather narrow thesis, is that it completely ignores that the exact same damn thing happened in Iceland, where there are no Maes or Macs to speak of.  And it happened for the exact same reason it happened here. Government money or no, investors were demanding too many mortgage-backed securities as it seemed like a great way to make money, and we de-regulated the market enough to allow banks to provide them.

          • Anecdote and data free answer, Thwim. Not very impressive.

            Your response is weak but this was best “Government monery or no …. ”

            Government money or no? Hahahahahahahahaha

            Isn’t that a pretty big factor to leave our of your thoughts?

            Where do bankers get the money to loan out ridiculous low rates like 1%?

            Who gave Greg Peterson insurance to buy $700,000 house he clearly can’t afford?

            Left wing types are classic – sure the government forced banks to give loans to people they didn’t think were qualified, and provided money virtually interest free to those same banks using other people’s money as collateral, but what does that have to do with anything.

          • Thwim: The plural of “anecdote” is not data.

            TonyAdams: Same anecdote plus irrelevant data.

            Thwim: The problem with this thesis is…

            TonyAdams: Bwahahaha! *flings feces

            Right wing types are classic: shamelessly drag the goalposts and steadfastly ignore any argument or information that challenges their beliefs. And when all else fails, unleash the inner 12-year-old, declare victory and congratulate themselves on being smarter than everyone else in the room.

          • No, it’s not a big factor at all. Examine iceland. Same problem. No gov’t money. Care to explain?

      • “….. I don’t see what government had to do with this.”

        Do you have any thoughs on why Savings and Loans, in the late 1970s,  would suddenly want to create new mortgage bond market? 

        1970s – Jimmy Carter – The Community Reinvestment Act – The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits.

        1980s – Ronald Reagan
        Liar’s Poker –  traces the rise of Salomon Brothers through mortgage trading, when deregulation by the U.S. Congress suddenly allowed Savings and Loans managers to start selling mortgages as bonds.

        1990s- Bill Clinton
         ”Loans made to people with FICO credit scores lower than 660 (which he called “subprime”) had substantially higher rates of delinquency and default than loans to people with credit scores above 660 (which he called “prime”) – these kinds of loans began to increase substantially after 1992, when affordable housing requirements were imposed on Fannie Mae and Freddie Mac, and began to default in unprecedented numbers ….” Peter Wallison, True Story of Financial Crisis, May 24 2011

        2000s – George Bush
        The discount rate is the rate at which the Federal Reserve sells or lends money to banks. In theory the rate should be lowered when business is good to prevent banks from over-lending  ……  In practice, the so called ‘discount window’ has, with few exceptions, always been jammed wide open, allowing banks to buy and borrow money cheaply.

        Asia Time – April 2010

        The financial crisis that broke out in the United States around the summer of 2007 and crested around the autumn of 2008 had destroyed US$34.4 trillion of wealth globally by March 2009, when the equity markets hit their lowest points.

      • “…. completely ignores that the exact same damn thing happened in Iceland“

        “Examine iceland. Same problem. No gov’t money. Care to explain?”`

        ` …. shamelessly drag the goalposts and steadfastly ignore any argument or information that challenges their beliefs.“

        Thwim and TJ Cook – I don`t care to explain because it is not accurate, not remotely.

        I am providing data and anecdotes to prove my assertion. You two are the ones that are making dubious claim that Iceland and US are exectly the same, or that Government had no role in US financial crisis.

        And we are still waiting for data or anecdote, anything at all really, from you two to illustrate how government giving insurance to flight attendents to buy $700,000 in Monterey, California when he can`t afford to pay mortgage has nothing at all to do with financial crisis.

        Michael Lewis – Vanity Fair – Wall St on Tundra – April 2009

        Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power?

        1) “An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could.

        In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. `Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for.

        2) By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry.

        3) At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times.

        • “You two are the ones that are making dubious claim that Iceland and US
          are exectly the same, or that Government had no role in US financial
          crisis”

          Priceless. My *actual* claim is that you argue like a 12-year-old. Your response is to misstate Thwim’s point and demand that I provide supporting evidence for the argument he didn’t make.

          Way to take the challenge head-on dude.

  5. I love my country!  I think we can go back even further to the, I’m sure free market decision, to make neighbourhoods of only ‘poor’ houses or ‘rich’ houses or ‘middling’ houses, instead of neighbourhoods with a mix of housing types as we so often find in this great land.  Making it impossible to redline an entire neighbourhood.  I do worry greatly that we’ve moved away from this concept in more recent years, but it’s hard to tell (or I don’t troll around new subdivisions much since I’m perfectly well aware without some bank telling me, that I can’t afford a house.)

  6. Fannie Mae and Freddie Mac were only one tiny part of the problem, so it’s hardly fair to blame them for the crash. By itself the mortgage problem was easily handleable…same as the Savings and Loan mess some years ago.  It should have been watched and warned about, however the SEC monitors spent their days watching porn….kidjanot.  However at the same time Greece had spent a fortune on weapons it didn’t need while it’s a national sport in Greece not to pay taxes.  Ireland and Icelandic banks lent out something like 5X the GNP, and the UK was technically broke yet still keen to spend money on wars and missile systems.
     
    The IMF….when they were working and not bed-hopping…. said banks now face a $3.6T wall of debt….but even that is handleable as long as countries continue to grow.
     
    However in the meantime manufacturing left for China, and China boomed. White collar work went to India and they boomed. 
     
    So we have a whole bunch of things coming together at once…, disappearing regulations, monitors who aren’t monitoring, money carelessly lent out, taxes lowered or not paid, wild spending, wars…..and then the growth engine disappeared.  And amidst all the chaos money also disappeared….into tax havens and secret bank accounts…. by everyone from dictators getting foreign aid to Joe Citizen. Everything finally came together and reached the tipping point….. critical mass, and it blew up.
     
    We have not yet learned to think in global terms….we only think in terms of our national economy…but we now have 200 different countries with 200 different ways of doing things all trying to trade and grow…and nobody was watching.  Gordon Brown has even apologized for this. No one realized how intertwined the world economy has become….nor were new regulations put in place to straighten things out. We are still operating on a system devised right after WWII, and we are light-years away from that era.
     
    So don’t blame some little two-bit mortgage outfit in the US for the global crash…they didn’t do it….they too were caught up in something much bigger than that.  Shouldn’t have been doing what they were, but only a tiny part of the whole. Or as  Warren Buffet said “Only when the tide goes out do you discover who’s been swimming naked.”

    As it turned out, everyone was swimming naked.

  7. When you look at the big picture, growth-based economic management is a gigantic Ponzi scheme.  The population of the planet has tripled since the end of the second world war.  Yet the planet is still the same size.  It’s difficult (probably impossible) to say when we will reach the limits of growth; all we can be certain of is that we are getting closer.  Yet our governments take their guide from economists who say that growing the economy is the only way to prosperity.  In the long run, it’s the sure way to disaster.  The recent Great Recession was only a slight taste of what will eventually come.

    Like the bloodsuckers of Wall Street, I’m old enough to hope I won’t be around for the big collapse.  Unlike them, I worry about what we’re leaving future generations.

    • I do like the quote that “There are only two things in this universe that grow without limits: sharks and cancer.  Unfortunately for us, Wall Street is both.”

    • As a logician, you should consider adding an axiom relating to human ingenuity to your toolkit.  And im not saying you’re a marxist, but your limited and false view of growth is actually a marxist construct – one that views growth simply as the increasing consumption of resources.  If you do consider yourself a logician, try considering where growth has come from in the last few decades and you’ll see how wrong that view is.

  8. The fact is that the direction of regulatory pressure in the States has been starkly in favour of looser loaning restrictions for decades before the crash. Deregulation became the standard culprit when, especially if you mean removing the influence of government from the market, it would have removed Fannie and Freddie and their shimmeringly idiotic process of having the gov’t guarantee loans instead of say subsidizing them. Hilariously enough Bush actually made an effort to tighten the regulations on Fannie and Freddie which of course didn’t fly. I would be incredibly surprised, if it could be delineated out, to find that government regulation was responsible for less than a quarter of the problem. Maybe it isn’t the right tack to try to portion out responsibility. It’s more like, after decades of community groups threatening bankers, publicly embarassing them for not doing it, offering government guarantees and AAA ratings if they would, the States finally got banks to start taking crack. That the bankers got addicted to it is less of a surprise.

    The question isn’t whether markets will fail/correct, but whether government regulations reduce or increase that failure. One example is how thousands of banks in the States failed in the Great Depression while none failed in Canada. The reason was that after the last recession banks in the States were not allowed to merge by law to prevent having several huge watertight compartments as in San Deigo Dave’s analogy. But in that case it turned out having thousands of ‘small compartments’ was more like having thousands of small bubbles.

  9. Reading this article and then the some of subsequent posts seem to be a debate about regulation/intervention vs. no regulation/intervention.  This is the wrong debate.

    Bad choices (by lenders, borrowers, insurers, investment bankers, legislators and regulators) caused the crisis.  If any one of these holes were patched, it likely would have prevented the crisis, including SMARTER regulation. 

    However, the inverse is NOT true. All else equal, in a totally free market, the crisis would still have happened.  Nothing that the non-regulatory bodies (investors/lenders/borrowers/bankers/insurers) did would have been stopped by an entirely free market.

    • All else equal, in a totally free market, the crisis would still have happened.

      Sorry, but that’s just nonsense.  You may get away with it using the “all else equal” qualifier, but that’s the point: with free markets, all else would not have been equal.  The free market players – investors, lenders, borrowers, bankers, insurers, would not have been forced (or have received strong incentives to) behave as they did, namely the repackaging of bad debt into a whole bunch of bad debt which somehow becomes less bad debt in the repackaged form.

      • Interesting. So what I’m hearing you say is when an institution, such as a lender, is driven by “strong incentives” from the government to act in a certain way, it’s the governments fault when things go bad. 

        However, when a consumer is presented with strong incentives to act in a certain way (hey! no money down! 1.5% for the first 6 months), and things go bad, it’s the consumer’s fault. 

        How bloody convenient.  You sir have a future at CNBC.  ;)

      • Sure they would have, because remember, these “bad debts” were being insured by a company that had the idea that real-estate values would never go down.

        Then they did.

        A free market doesn’t eliminate human stupidity.  It just concentrates the winners and losers thereof.. and doesn’t even guarantee that it’ll concentrate them onto the same people.

    • I like to believe in smarter regulation and it’s a fair point. The reason I think I lean more towards no regulation is that the same falliable people are making decisions in the private sector as are making regulations but the regulators are insulated from their decisions a lot more than in the private sector. Still, it’s not like the Dutch tulip bulb bubble for instance was anything but a free market thing.

      • That insulation can be a good and a bad thing though.. when you’re insulated from receiving the short-term profit of the bad decision, there’s less incentive to make it. In essence, they can take a wider view of the situation than those who stand to make/lose from it.

        • That is something I’ve recognized at times too. Conservatives expect people to make the best long term decisions they can come up most of the time but sometimes it seems more like a this quarter/paycheck economy. It would be interesting to wonder how the regulators could be insulated from the private sector too… Cosh’s link brings up ‘regulatory capture’ which is a recurrence of I think Keynes or Galbraith’s saying about regulatory boards always becoming lazy or tools of the industry they’re trying to regulate.

          That’s another point against having a lot of regulation come to think of it, John Stossel turned libertarian after seeing the regulatory boards he had pushed for earlier in his journalism actually making things easier for the established companies because no one had more interest in controlling the boards than the people they were supposed to control.

          • I would tend to agree with your assessment of conservatives. This is also why I think they often wind up being wrong. Most people don’t think long term. And even those who do still have to contend with the reality that most people don’t.

            This is why the banks were asking for legislation limiting the types of mortgages they could provide. Why? Because even though they were thinking long term enough to see how the long mortgages could bite them in the rear, they knew that if they simply stopped offering those mortgages they’d lose a considerable amount of business in the short term, and become more vulnerable to their competitors who were willing to take that risk.

            The point you make about Stossel is why we need active, aware governance, rather than laissez-faire governance. So that they can keep watch on that exact type of thing and make sure that the people on the boards are those who have the wider interest in mind.

  10. Wait a second, you mean it wasn’t all Bush’s fault? Outrageous!

    • Reagan pushed for it, Clinton enacted it, and Bush continued the mistakes of the past.  It was a team effort.

  11. The crisis (and its possible entrenchment into full blown debt deflation induced depression) can’t be explained away by the failings of particular organizations or individuals, lenders, borrowers or regulators be. It has to be understood from a long-term historical and institutional analysis of our transition into what Hyman Minksy called “money manager capitalism” from the interwar years onwards. As in the years leading up to 1929, approximately 40% of profits made in the USA go to the financial sector – Finance, Insurance and Real Estate are a mammoth symbiotic parasitical relationship whose only function is to redistribute wealth upwards by inflating asset prices with no corresponding change to the economic “fundamentals.”

    In Missouri-Kansas University economist Randal Wray’s terms: we need to de-financialize the economy. Or to use Keynes’ expression: finance needs to be eviscerated, their vital organs (capacity to create money ex nihilio in lending) have to be removed. This isn’t just “messy middle” regulation, there needs to be radical reform in order to save capitalism and liberal society itself. Getting regulation and enforcement ‘right’ is insufficient. These are questions of social control.

     “The aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist. If amplified uncertainty and extremes in income maldistribution and social inequalities attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions has to be constrained” (Minksy 1996, 15).
    http://www.levyinstitute.org/publications/?docid=1363

  12. “there has been a concerted attempt among economists to absolve the major U.S. anti-redlining statute, the Community Reinvestment Act of 1977, from any role in creating the housing bubble.”

    This sentence is a masterpiece of passive aggression, based on the assumption that the CRA needed absolving:

    “The Financial Crisis Inquiry Commission reported in January 2011 that “the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject
    to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same
    neighborhoods by independent mortgage originators not subject to the law.”

    Only 6% of subprime loans were connected to CRA, and those were _half_ as likely to default as non-CRA loans in the same neighborhood. How on earth was the CRA the “straw that broke the camel’s back?”

    If anything, it looks to me like a concerted effort on the right to blame poor people and liberals for the crisis, evidence be damned.

    • Rawwr poor people! It was poor people who got it the worst from the excessive subpriming and especially the economic conditions following. So we should really be happy about it all if we h8 teh poor. There is a lot of blaming liberals though, yeah.

  13. “Fannie, I wish I’d never seen your face”

    When “Maggie Mae” came out when I was 12, it struck me as just about the best rock song I’d ever heard. 

    It still does.

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