In non-campaign news, it seems that people are waking up to the extent to which the crisis in asset values and credit markets goes way beyond the specific issue of subprime mortgages. Since mortgages are big, and subprime borrowers are the least creditworthy, problems struck in that particular sector in the fastest, largest way. But the issue is fairly general -- during a period of pretty stagnant incomes, people have been ratcheting up consumption based on increased wealth derived from their homes. People weren't, however, actually selling their homes to get money and buy stuff. Instead, they borrowed. But with home values plummeting, now there's big trouble.
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Beyond "Subprime"
12 Feb 2008 09:28 am
Comments (56)
The question is, why does anyone finds this disaster surprising? Broadly speaking, there's good debt and there's bad debt. 'Good debt' is when you borrow money to purchase an asset whose value will probably increase, 'bad debt' is when you borrow money for consumption. The basic direction of the financial industry over the past few years has been to invent ways of converting good debt into bad debt. Oops.
I recommend everyone, Matt especially, to take a walk back to hallowed Greenspan land at how he systematically undermined our economic system for his crazy Reaganite / Randian lunatic principles.
Particularly at how the repeal of Glass-Steagall's banking regulations just made all of life super awesome and exciting and made all of us fringe-y lefty extremists look all stupid just 'cause we thought banks ought be properly regulated before the 21st century economy proved that nothing could ever ever ever stop our awesome de-regulated growf.
An online audio interview is available from KPFA's "Guns & Butter" program (which is usually taken up by 9/11 conspiracy shows):
http://kpfa.org/archives/index.php?arch=24565
Not having any involvement with the housing and easy credit boom, I find it easy to shake my head at how foolish people were. Reading that NYT article, I was struck by how the rationales of the prime borrowers seemed just as vapid as those of the sub-prime borrowers—people expected the gravy train to run forever.
But then I recall my own experience in the dot-com boom. I made some bad decisions that cost me hundreds of thousands of dollars because I, too, expected that the status quo would remain that status quo...even though it quite obviously could not. In 1998 I was telling people that the market was in a bubble and bound for collapse, but by 2000 (when I was making lots of money from it), my thinking had changed.
It's easier to get caught up in these messes than some might think.
Matt you are missing something. Lots of people used their equity to trade up their house. They also did this based upon being able to refinance their equity in 5 years time to deal with ARM adjustments, teaser rates and balloon payments. On a $400K house they expected it to increase in value at 7% per year so after 5 years thats 160K to use. Of course expecting housing to continue at that pace was foolish, but thats what happened.
Of course these same people who couldn't forecast housing prices correctly, you know their biggest purchase, you somehow expect them to figure out lifetime costs (with a carbon tax) of CFL vs incandescent lighting which in many ways is more confusing and has much less benefit to undertaking the calculations.
Keith:
Why did your thinking change? Did it go further then you thought it would? When something is too good to be true, it usually is. It didn't take a genius to see this problem coming over the hill. I love how Lazear is still hoping for his ponies. He must be good friends with Little Tommy Friedman.
Charming beach cottages at bargain-basement rates for ALL (with cash).
Woo-hoo! Fall 2010 cannot come soon enough for me!
“Why did your thinking change? Did it go further then you thought it would? When something is too good to be true, it usually is.”
Yeah, partly it was because I was sure the bubble would collapse by 1999, it didn't, and I started to question my own certainty.
But the real force was just the thinking of my peer group and my concerns about making decisions that were in my best interests. Among my peers, it was considered the smart thing to do to leave our exercised stock options alone, not sell them, because “of course” our company's stock would continue to keep climbing in value. At the time, it actually seemed reckless to sell. And then when the bubble burst, it was hard to sell and realize a big loss because that made it permanent and the alternative was to wait and hope for the possibility that the stock would recover. Which it didn't, but the bigger the loss became, the harder it was to realize it.
Groupthink and powerful self-interests tend to confuse things mightily. In the case of the housing/credit bubble, everyone was taking advantage of it, making tons of money, and it seemed like the smart thing to do. It's hard to resist those pressures. And I'm the most peer-pressure resistant person I've ever known. When I think back to how sure I was that it was a bubble in 1996-98, and then how I didn't think it was in 1999-00, it's confusing. Why did my thinking change? How could I have let my thinking change? Well, it did.
It is amazing how the financial industry pitched borrowing money as "tapping your home equity." Lends new meaning to "tapped out" I suppose. For myself, I am pretty much beginning to think there is no such thing as "good" debt. It's all bad. Seven years to pay off the mortgage and counting.
It shouldn't be forgotten that stagnating real wages for 30 years had people borrowing any way they could, including against their houses, to keep up a certain standard of living.
One of the few silver linings of this is that housing prices may reset in several markets where it was impossible for a middle class family to buy a house. I'm an academic in the LA area; it wasn't easy recruiting people to come to my school: Oh yes, by the way, you'll never be able to afford a house here.
But it's really dark right now, and it's pretty heartbreaking for many people around here.
But the issue is fairly general -- during a period of pretty stagnant incomes, people have been ratcheting up consumption
I see graduating magna cum laude in math has messed me up for life. Because I've become obsessed waiting for someone in the MSM to notice this and to ask how this adds up.
If incomes are all so stagnant yet people are consuming more and more, where is the money going? Incomes all being so stagnant means the aggregate income is probably pretty stagnant. Yet the agregate "outcome", which itself is income for people selling stuff, is growing and exceeding the income? But that means all the people selling stuff do have increasing incomes, so the aggregate income isn't stagnant, is it?
Can the descrepency be explained away by trade? I.e. is our agregate debt = the cumulations of trade deficits? Or are incomes really not all that stagnant? And if so, who's raking in the big bucks and how and why? Call me a Marxist, populist, liberal fascist whatever, but something's amiss here ...
Matt and you guys sound like Jews in Germany circa 1938. "It can't get really bad. SERIOUS people will intervene and do something."
Yeah, right.
Well , here's what one serious person thinks:
http://www.bloomberg.com/apps/news?pid=20601088&sid=aImBVle3OMyo&refer=home
Some excerpts:
"Biggs is no paranoid survivalist. He was chief global strategist at Morgan Stanley before leaving in 2003 to form hedge fund Traxis Partners"
"Jan. 30 (Bloomberg) -- Barton Biggs has some offbeat advice for the rich: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with ``seed, fertilizer, canned food, wine, medicine, clothes, etc.''
The ``etc.'' must mean guns.
``A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage,'' he writes in his new book, ``Wealth, War and Wisdom.'' "
Wages are only one payment to inputs. There's capital rent (ie higher profits for shareholders).
Re Don Williams
Mr. Williams must be a a fairly good mood (for him) this morning. He's not blaming the subprime mortgage mess on Hiam Saban.
Unfortunately, our dear Matthew is doomed. With his well-known laziness, he will wait until it's too late to GFOOD. (Get the Fuck Out of Dodge).
Matthew will fall to the horde of hungary cannibals because (a) Matthew is not particularly fleet of foot and (b) starving cannibals like well-marbled flank steak.
Plus downtown Washington is one of the worst places to try to evacuate from -- far worst than New Orleans.
You JUST KNOW some stupid fucker on I66 out around Fair Oaks will slam on his brakes, cause a wreck and you will have a wave of Instant Gridlock rippling from Fair Oaks back to Tyson's Corner, around the Beltway and back up I95 past Baltimore. (about 50 miles) That why I left that miserable shithole 18 years ago -- and it's only gotten worst.
But for some of you wondering about GFOOD, here's a study on the relative difficulties of evacuating various cities:
http://www.highways.org/pdfs/evacuation_report_card2006.pdf
Steve Duncan,
The White House forecast of 2.7% economic growth this year seems high, but they aren't alone in predicting that there won't be a recession. According to a Bloomberg survey (referenced here), only 12 of 62 economists forecast a recession (two consecutive quarters of economic contraction) this year. Their average growth forecast for the year is far lower than the White House's, at 1.6%. Then again, this survey was conducted before the size of the Fed's recent rate cuts and the fiscal stimulus package were known.
As far as the panic about real estate, much of it is unwarranted. Housing price appreciation can't be decoupled from incomes indefinitely, and we are experiencing a necessary adjustment. That said, there is no epidemic of mortgage defaults. For starters, a third of homeowners don't even have mortgages, having paid theirs off. And 99% of those who do have mortgages aren't in default. Those who are having trouble making their current payments, and are viable borrowers, will have the opportunity to refinance at 40-year record-low rates. Those who aren't viable borrowers, because they bought more house than they could afford, will go back to renting. Plenty of first time homeowners will find housing bargains and be able to lock in 30-year mortgage rates for ~5%.
The real losers here are the stand-alone mortgage lenders (most of which have gone bankrupt), Wall Streeters laid off from investment and money-center banks that took huge hits on complex mortgage-backed securities, and the shareholders in these firms; in other words, the sort of folks Democrats generally demonize as "the rich". So why the long faces?
"Particularly at how the repeal of Glass-Steagall's banking regulations just made all of life super awesome and exciting and made all of us fringe-y lefty extremists look all stupid just 'cause we thought banks ought be properly regulated before the 21st century economy proved that nothing could ever ever ever stop our awesome de-regulated growf."
Funny how lefties seem to forget the regulations that precipitated the sub-prime crisis, namely, the Community Reinvestment Act and similar measures designed to force lenders to extend credit to marginal borrowers in low-income and minority communities. Fifteen years ago, the horror was that these marginal borrowers were being discriminated against and were being denied access to credit; today the horror is that they were given too much credit.
Re, Don Williams' comment.
This sort of class war almost happened a few times in our country's history. Of course, a few rich folks (often named Roosevelt) made reforms and made sure things didn't get so bad that the class war actually happened.
And what did the rich folks do? They fought FDR, et al., tooth and nail. How's that for gratitude?
Re Don Williams
Gee, Philadelphia is a lesser shithole then the Washington/Baltimore area. He could have fooled me.
Re Don Williams
Apparently, Mr. Williams has been absent from the Washington area for a long time. I66 West of the interchange with US Route 50 is now 8 lanes, 4 in each direction. Traffic moves like a bat out of hell.
lefties seem to forget the regulations that precipitated the sub-prime crisis, namely, the Community Reinvestment Act and similar measures designed to force lenders to extend credit to marginal borrowers in low-income and minority communities.
People keep bringing this up and it's making me curious. Can someone point me to any credible and non-anecdotal evidence that lenders were ever "forced" to lend to borrowers with dubious credit?
Fred, I agree many buyers will find bargains in the housing market. Take apart the word "bargain" though and a rethinking of that assumption is warranted. I own a home in a very stable, older neighborhood. I'm buying the home three doors down, vacated due to the owner's untimely death, and flipping it. My real estate friend couldn't even perform a comp because there is nearly nothing for sale 1/2 mile in any direction of my purchase. I'll do fine because by the time I'm done rehabbing experience dictates demand is high in this enclave and available homes for purchase are few. How many neighborhoods having homes for sale (bargains) are the opposite of mine? Skim the internet, tabloids and periodicals and the television news. Reports of neighborhoods with dozens of abandoned homes are rife. Boarded up, robbed of anything of value, overgrown lawns and squatters neeeding evicted. These are what I derisevely call "Tan lands", newer housing developments with 10 shades of tan vinyl siding to choose from and shoddily constructed. Just the sort of neighborhoods lenders filled with buyers lapping up ARMs and other ill advised financial paper. Now they're wastelands. Are these homes bargains? Sure, they can be bought on the cheap but how long will owners have to wait for the entire tract to be repopulated with responsible owners (if that ever even happens)? These homes are not bargains but I suspect these are the residences you suggest people will be in line to purchase. Bargain hunters planting roots in suburban ghettos is not the economic model that's going to salvage the housing sector of this nation.
Well, one thing I've learned in my middling amount of time as an adult is that whenever almost everyone in the economy finally "wakes up" to something, that thing is soon going to be no longer true (if it isn't untrue already). So hopefully Matt is right, because that would mean the broader credit crisis is nearing an end.
That said, I suspect the housing-centric former-boom economies of the Sun Belt are in for an extended period of pain (also known as an "adjustment").
That said, there is no epidemic of mortgage defaults.
Good to know.
James, of course fred's point is crap (it's fred, after all!): no one in this entire country went into a mortgage office with a gun and insisted upon a mortgage, no questions asked. there was a complete collapse in underwriting standards as a result of the decoupling of mortgage granting and mortgage servicing as a result of mortgages being bundled and sold, pure and simple. the Freds of the world don't have the slightest frickin' clue what they are talking about.
(let us also note that at peak, 68% of american households owned homes; the last few percent may represent some low-income houeholders, but the fact is, this problem is a problem of those with money, not those without.)
DAS, increasing consumption has been funded three ways: a.) enormous income gains in the upper one-tenth of one percent of households; b.) mortgage equity withdrawal; c.) increased household credit card debt.
so yes, we can look at those in conjunction with the income figures and assume the income figures are correct.
...people are waking up to the extent to which the crisis in asset values and credit markets goes way beyond the specific issue of subprime mortgages.
This crisis is systemic. The greed and fantasy that created it didn't just appear. It was created over sixty years of post-WW2 assumptions about growth, and turned out to be based on a myth of advertising, unsustainable consumerism, and the lure of unlimited wealth.
That hasn't changed. I hear financial commentators talking about this situation as if it should all end soon; a second-quarter turnaround; everything will go back to just the way it was, I hear them hoping, and it's a lie. The American Dream has become an expectation of a never-ending party on the edge of a volcano -- more than our Rights under Law, or a prudent, sustainable concept of lending and investment.
This meltdown was allowed to occur because regulation and oversight in the corporate financial community has deteriorated into a joke. Prudence and due diligence turned into labels applied to people who don't have the balls to take real risks and be Masters Of The Universe.
And that same philsophy of avarice and unaccountability is still very much alive among the responsible parties in Congress, and on The Street, who helped to make all this possible.
Billions in defaulting home loans, affecting billions more in losses on securities created from those home loans -- and those losses affect trillions of dollars tied up in LBOs, in municipal bonds, in 'credit swaps'... and an ocean of consumer and credit card debt. It's financial 'Jenga'.
I believe people in the U.S. understand this is a financial crisis -- I believe they know that it involves more than subprime loans; and that they think the situation is "bad". But I don't know if people really understand where its roots are, and how bad it actually is.
btw, i should note in general that anyone with a serious interest in this matter should be reading calculate risk daily:
http://calculatedrisk.blogspot.com/
James Gary,
You can start here for starters, and continue doing your own homework. Essentially, federal regulators in the early '90's assumed that disparities in loan approval among different racial groups were evidence of racial discrimination, and used their power over banks to intimidate them into increasing lending to minorities, including those with dubious credit. In some cases, the banks simply abandoned minority neighborhoods, so they wouldn't be forced into this. Stand-alone mortgage lenders filled void.
The roots of this go back to the CRA of the Carter Administration, but the insistence on mortgage lending to marginal minority borrowers accelerated during the Clinton administration. Bush continued trumpeting the benefits of minority home ownership, bragging about how the percentage of minority home owners had increased to record levels under his administration. This despite research that demonstrates that homeownership is generally a losing proposition for low-income, marginal borrowers.
jeez, here's a surprise: fred's link to justify his inane argument is an inane argument! when you have any actual, you know, evidence Fred that the problem is the federal government intimidated a mortgage provider into granting a mortgage that shouldn't have been granted, you be sure to write and tell us about it, willya?
meanwhile, in the real world, the problem has nothing to do with the carter administration or the clinton administration and everything to do with very low long-term interest rates and the securitization of mortgages, as i noted above.
Steve Duncan,
Shoddily-built homes in over-built ex-urban areas like the Inland Empire of California, the outskirts of Phoenix, etc. aren't bargains. But they also aren't representative of the nation's housing stock in general. Real estate markets are local. There are bargains elsewhere.
Fred may have a partial point about banks being pressured to not discriminate --but a look at the foreclosures also show many middle class and upper-middle class homes being foreclosed or being taken in bankruptcies: http://www.foreclosure.com
Some of this is likely the result of speculators (flippers) being caught without a chair when the music stopped. Doesn't anyone remember those TV ads from two years for seminars on how You Too can Become a Millionaire Investing in Real Estate? IF home prices are going up rapidly and interests rates are low, then you put a minimum amount down, make a few months payments, and then sell to collect $100,000 profit.
Wash, rinse, repeat --but with the number of outstanding purchases increasing because your profit lets you buy more houses. Of course, if you can't sell the houses for a profit --or even SELL the houses at all -- then you're screwed because you can't make the mortgage payments on vacant houses forever.
Similarly, Some of the bankruptcies are probably home builders being caught out building houses on spec. The guys construct homes --they're not Fed watching economists. (Well, the successful ones are.)
DAS, increasing consumption has been funded three ways: a.) enormous income gains in the upper one-tenth of one percent of households; b.) mortgage equity withdrawal; c.) increased household credit card debt. - howard
So, the people that have extra money they really just cannot spend instead "invest" the money so that it is available to lend to the rest of us -- but we have to pay that money, that otherwise would have just been sitting there, back with exhorbitant interest rates: leaving those with extra money with even more and the rest of us with even less?
Sounds like a good system to my capitalist heart, but I wonder what the Bible would have to say about it? I think there may be a Biblical prohibition or two being violated here.
But I guess since it doesn't involve teh cute, innocent fetususes or teh hawt gay sex, the so-called religious right doesn't care?
Perhaps though the way out is actually to follow the Bible and declare a Sabbatical year? Or even a Jubilee?
Real estate markets are local. There are bargains elsewhere. - Fred
You say that as if the costs of picking up and moving are negligible ... what kind of highly transferable skill do you have and where can I learn it?
I am a "scholar" of sorts, which is one of the most transferrable skills out there (you can always teach anywhere they have a school), and it's non-trivial even for me to pack up and move and get a new job elsewhere ...
With all due respect, Fred, leading your presentation off with a National Review article from 1993 (titled "Assault on the mortgage lenders: in the name of racial justice, the Clintonites want the power to decide who gets a home of his own") is not tremendously persuasive.
But I read the linked piece anyway. The only hard fact the author cites is that in 1993 the Fed "prevented Shawmut National Bank from acquiring New Dartmouth Bank of Manchester, N.H., under a rarely used provision of the Community Reinvestment Act (CRA) of 1977, claiming Shawmut had discriminated against minorities" and then goes on to prophesy doom if such things are allowed to continue. He's sure where the blame lies, too: on Bill Clinton and Janet Reno.
I tried to search for anything written in the period 2000-2006, though, on the topic of banks being hurt by making required loans to people with dubious credit-- and I couldn't find anything. You'd think such a manifestly unjust and potentially disastrous policy might've seen some political opposition from the GOP (or at least gotten some press coverage) after Clinton left office. Hm.
Wash, rinse, repeat --but with the number of outstanding purchases increasing because your profit lets you buy more houses. Of course, if you can't sell the houses for a profit --or even SELL the houses at all -- then you're screwed because you can't make the mortgage payments on vacant houses forever.
Clinton also insulated this process (from the "forever" part at least) and helped to blow the bubble bigger by focusing HUD spending on the Section 8 voucher program. Subsidizing the middle-class speculator/flipper buying up crappy homes in poor neighborhoods to rent (or sell) with guaranteed government $$$$s.
This is why Hillary's "freeze" plan is the way it is with no requirement that a person actually live in the house. They don't want to kick all those middle-class flippers in the teeth because those are Bill's homeboys. And by "homeboys" I mean, "greedy crackers".
James, let me add a couple of points before i have to give up on this thread and run to the airport: if you eliminate the people who own 100% of their house, home equity is at roughly (i'm doing this from memory, i don't have time to find the calculated risk analysis of this, but go to the site i mentioned above and you can probably find it) 32% - at asset-bubble house prices. now suppose house prices fall 10 - 20%: there's lots of people underwater altogether, which is why the biggest fear most mortgage issuers have today is that people will conclude that there is no upside to paying off their mortgage, since the mortgage is at a price level the house no longer supports.
fred would have us believe that this is entirely because the dastardly clinton and carter administrations strongarmed mortgages for low-income people, but of course the numbers are much too large for that to be the prime factor.
DAS, hope springs eternal, doesn't it?
This is why Hillary's "freeze" plan is the way it is with no requirement that a person actually live in the house. They don't want to kick all those middle-class flippers in the teeth because those are Bill's homeboys. And by "homeboys" I mean, "greedy crackers".
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Yeah, the flipping is almost being exclusively engaged in by "crackers". No people of color, any color, involved in commercial and residential real estate speculation and investment. Of course there is an accepted census you can cite to back such a claim?
We don't really know who's holding the mortgages that are in trouble. Except that a low income person is not likely to be buying a $300,000 house.
I very much doubt that Bush or Cheney give a hairy rat's butt of some low income family has their belongings tossed out on the street. After all, we have military veterans sleeping on heating grates in this freezing cold.
I think the people being bailed out are Republican real estate operators , investors and bankers who got their gonads caught in the wringer throught stupidity and greed. And want Bush to start the music back up until they can find some moron who will give up his chair.
I gotta say, blaming Bill Clinton for the subprime crisis really takes some huevos.
I'd say that Fred's analysis of the "anti-redlining" origins of the Housing Bubble is pretty silly.
Let's remember that all the companies making those loans generated huge profits while it lasted, and their CEO's made gigantic fortunes (e.g. didn't that Countrywide guy make about $500M or so total?).
Then, they sold those future bad loans to the investment banks, which also made huge profits by repackaging them and selling them to investors. All the I-Bank execs *also* earned gigantic bonuses, often in the tens or hundreds of millions of dollars over a few years.
Why would anyone think the government needs to force all those people into doing something that generated such huge profits and bonuses for them?
Did the government similarly have to pass a law to force the creation of the earlier Tech Bubble?
People often tend to do pretty stupid things even without the government forcing them to do so.
"The only hard fact the author cites is that in 1993 the Fed "prevented Shawmut National Bank from acquiring New Dartmouth Bank of Manchester, N.H., under a rarely used provision of the Community Reinvestment Act (CRA) of 1977, claiming Shawmut had discriminated against minorities""
James Gary,
What impact do you suppose that had on the rest of the regional banks? The "hard fact" is that banks were intimidated into lending to minorities, even if those minorities were poor credit risks.
"You say that as if the costs of picking up and moving are negligible"
Who's telling you to move? Here's a little common sense for you: live where you can find work. Buy property when you can afford it, and when the cost of buying isn't significantly higher than the cost of renting a similar property.
"I am a "scholar" of sorts, which is one of the most transferrable skills out there (you can always teach anywhere they have a school), and it's non-trivial even for me to pack up and move and get a new job elsewhere ..."
If you are an academic, you ought to know that the real estate markets in college towns have remained pretty robust.
Take this for what it is worth, but I saw someone on TV the other day claiming a nontrivial number of foreclosures have been in cases where the buyer lied to the lender, falsely claiming they owned no other property and that they intended to live in the property.
RKU,
I never said that the regulatory policies used to force banks into lending to marginal borrowers for political reasons were the sole cause of the mortgage boom and bust; there were a number of causes, including new structured finance products that increased the demand for mortgage-backed securities (and thus made it easier for mortgage lenders to package and sell their loans). My point was that these regulations played a role, in contrast to the current meme that the problem was caused primarily by an absence of regulation.
Here's a good counterpart for those nice right wingers trying desperately to blame their anti-regulation sub-prime based mortgage crisis on those danged ethnics and the blacks and all their danged liberal friends.
Of course, you could save yourself some time by simply ignoring each and every right wing argument which blames the n****** for all our problems, but since they get the national media to parrot their arguments, you'll hear some of these idiots blaming the Community Reinvestment Act for their own Reaganite / Greenspan fundamentalist deregulatory fevers.
From The American Prospect, December 18, 2007:
The Conservative Origins of the Sub-Prime Mortgage Crisis
...And It All Started with Deregulation
There was a time, not too long ago, when Washington did regulate banks. The Depression triggered the creation of government bank regulations and agencies, such as the Federal Deposit Insurance Corporation, the Federal Home Loan Bank System, Homeowners Loan Corporation, Fannie Mae, and the Federal Housing Administration, to protect consumers and expand homeownership. After World War II, until the late 1970s, the system work[ed].
The savings-and-loan industry was highly regulated by the federal government, with a mission to take people's deposits and then provide loans for the sole purpose of helping people buy homes to live in. Washington insured those loans through the FDIC, provided mortgage discounts through FHA and the Veterans Administration, created a secondary mortgage market to guarantee a steady flow of capital, and required S&Ls to make predictable 30-year fixed loans. The result was a steady increase in homeownership and few foreclosures.
In the 1970s, when community groups discovered that lenders and the FHA were engaged in systematic racial discrimination against minority consumers and neighborhoods -- a practice called "redlining" -- they mobilized and got Congress, led by Wisconsin Senator William Proxmire, to adopt the Community Reinvestment Act and the Home Mortgage Disclosure Act, which together have significantly reduced racial disparities in lending.
But by the early 1980s, the lending industry used its political clout to push back against government regulation. In 1980, Congress adopted the Depository Institutions Deregulatory and Monetary Control Act, which eliminated interest-rate caps and made sub-prime lending more feasible for lenders.
The S&Ls balked at constraints on their ability to compete with conventional banks engaged in commercial lending. They got Congress -- Democrats and Republicans alike -- to change the rules, allowing S&Ls to begin a decade-long orgy of real estate speculation, mismanagement, and fraud. The poster child for this era was Charles Keating, who used his political connections and donations to turn a small Arizona S&L into a major real estate speculator, snaring five Senators (the so-called "Keating Five," including John McCain) into his web of corruption.
The deregulation of banking led to merger mania, with banks and S&Ls gobbling each other up and making loans to finance shopping malls, golf courses, office buildings, and condo projects that had no financial logic other than a quick-buck profit. When the dust settled in the late 1980s, hundreds of S&Ls and banks had gone under, billions of dollars of commercial loans were useless, and the federal government was left to bail out the depositors whose money the speculators had put at risk...
...Into this vacuum stepped banks, mortgage lenders, and scam artists, looking for ways to make big profits from consumers desperate for the American Dream of homeownership. They invented new "loan products" that put borrowers at risk. Thus was born the sub-prime market.
At the heart of the crisis are the conservative free market ideologists whose views increasingly influenced American politics since the 1980s, and who still dominate the Bush administration. They believe that government is always the problem, never the solution, and that regulation of private business is always bad. Lenders and brokers who fell outside of federal regulations made most of the sub-prime and predatory loans.
In 2000, Edward M. Gramlich, a Federal Reserve Board member, repeatedly warned about sub-prime mortgages and predatory lending, which he said "jeopardize the twin American dreams of owning a home and building wealth." He tried to get chairman Alan Greenspan to crack down on irrational sub-prime lending by increasing oversight, but his warnings fell on deaf ears, including those in Congress.
...Those who profited handsomely from the sub-prime market and predatory lending, the mortgage bankers and brokers, are working overtime to protect their profits by lobbying in state capitals and in Washington, DC to keep government off their backs. The banking industry, of course, has repeatedly warned that any restrictions on their behavior will close needy people out of the home-buying market. Its lobbyists insisted that the Bush plan be completely voluntary.
This isn't surprising, considering who was at the negotiating table when the Bush administration, led by Treasury Secretary Henry Paulson, forged the plan. The key players were the mortgage service companies (who collect the homeowner's monthly payments, or foreclose when they fall behind) and groups representing investors holding the mortgages, dominated by Wall Street banks. The Bush plan reflected both groups' calculation that -- for some loans -- they would do better temporarily freezing interest rates than foreclosing. Groups who represent consumers -- ACORN, the National Community Reinvestment Coalition, the Greenlining Institute, Neighborhood Housing Services, and the Center for Responsible Lending -- were not invited to the negotiation.
http://www.prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_mortgage_crisis
Fred:
Well, let's consider the timing. The CRA was passed back in 1977 and the resulting trigger was in 1993. Those dates seem a pretty long time ago to be very persuasive as causes of our current problems.
Meanwhile, there have been occurring rapid and gigantic changes in the marketplace of mortgage-derivative products, and some of the financial regulations regarding them. Also, the Fed kept on lowering interest rates for a few years to make up for the Tech Bubble.
I'm certainly not saying that anti-redlining movement played NO role in the Housing Bubble. Just that it's guilt relative to that of the evolution of derivatives and low interest rates seems around 1% or so...
Fred at 11:08: "Funny how lefties seem to forget the regulations that precipitated the sub-prime crisis, namely, the Community Reinvestment Act and similar measures designed to force lenders to extend credit to marginal borrowers in low-income and minority communities."
Fred at 1:07: "I never said that the regulatory policies used to force banks into lending to marginal borrowers for political reasons were the sole cause of the mortgage boom and bust;"
life is too short and fred is too dumb and i do have a plane to catch, so i'll just repeat the same basic mantra: when fred can show us any actual evidence that what he's talking about makes any sense at all, we'll be glad to listen.
until then, the idea that the problem we face is all "subprime" and that it's rooted in anti-redlining is about as deranged as (one of my alltime favorites, and comparable here) the way that the WSJ editorial page claimed that the 1993 clinton tax hike would cause a recession - and 8 years later it showed up!
if anti-redlining were the cause, or even better, the "precipitant," it shouldn't have taken until 2007 for the problem to manifest itself.
This just in from Bush's Treasury Secretary Paulson:
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"Paulson said. "However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process."
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ha ha ha
Using Williams' Primal Rule of Semiotics (Trademarked) --that Republican statements always mean the OPPOSITE of what they say --(e.g., Patriot Act), I interpret the above to mean that the real purpose of these efforts IS
" to bail out real estate speculators or those who committed fraud during the mortgage process"
ha ha ha
Using Williams' Primal Rule of Semiotics (Trademarked) --that Republican statements always mean the OPPOSITE of what they say --(e.g., Patriot Act), I interpret the above to mean that the real purpose of these efforts IS
" to bail out real estate speculators or those who committed fraud during the mortgage process"
Posted by Don Williams | February 12, 2008 1:29
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Don, the one safe assumption in this entire mess is there will be hundreds of billions of taxpayer dollars given to various financial businesses. If Congress can be depended upon to pony up 75 billion in "off the book" money every 6 months for a lost war they'll do the same for the corporate holders of lost equity.
steve duncan,
Yeah, the flipping is almost being exclusively engaged in by "crackers". No people of color, any color, involved in commercial and residential real estate speculation and investment. Of course there is an accepted census you can cite to back such a claim?
Nah. This is just anecdotal crap/bs I trot out to Clinton lovers from my years working Urban Housing at the Legal Aid in a top 30 population sized city (as well as 2 years doing the same in the surrounding rural areas) in a border state (south/mid-west). And I like saying "cracker".
In all truth and FWIW, based on population percentages, I'd guess that a less than proportional number of speculators/flippers were "of color, any color", but nevertheless, there would still be a non-trivial number. And I have met some. There just weren't as many doing it as there were "crackers".
Told you I like saying "cracker".
El Cid
each and every right wing argument which blames the n****** for all our problems
that's funny, since it's actually the "n******" blaming "the man" for all of their problems. Or haven't you heard the term "financial apartheid" yet?
In any case, Fred is correct, banks being strong-armed into loaning to low-income minorities is a big piece of the collapse in many areas (not the only cause of the collapse, ok) and you only have to listen to what these minority groups are saying themselves to understand this.
No, this is nonsense. Banks being strong armed into proving they can loan in low-income minority communities is not the source of the sub-prime crisis. Again, feel free to once again blame the poor for the consequences of your deluded deregulation manias, but it's not true. It isn't.
Nice observation Matt. 11 1/2 months too late but better late than never. Well a couple of years late but a casual observer should be granted some slack.
The biggest political/social/economic event in the lifetimes of most is unfolding and it's only recognized by even serious observers of the scene as an item.
In other news tax receipts are cratering as spending is going strong. This week the Treasury needs $76 billion extra dollars. They are borrowing it this week via Cash Management Bills. These are surprise unplanned borrowings. The Bills are set to expire on April 17th, tax day.
To everyone who gets their economic and financial news from the MSM, OMG! MSM coverage of public policy and political issues is 1000% better than their coverage of those., if you get my drift. You just as well read the National Enquirer or better yet Soap Opera Digest. True stories about make believe. .
http://wallstreetexaminer.com/blogs/winter/?p=1415
Re rapier's comment "Nice observation Matt. 11 1/2 months too late but better late than never "
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Hey, rapier, the smart money started leaving the party 14 months ago -- that tide of money flowing into Treasuries inverted the yield curve.
Here's my Dec 2006 post to Matthew:
http://matthewyglesias.theatlantic.com/archives/2006/12/the_sweet_sweet_fed.php#comment-119132
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"Ah, Matthew. You don't realize the evil genius of Karl Rove.
When the bill for 6 years of corruption, venality, and economic incompetence comes due, someone has to be the designated scapegoat. And if Nancy Pelosi doesn't make sure that it's the Republicans, then it's going to be her.
The Republicans are handing the incoming giddy Democrats a big brown bag of cat manure called an "inverted yield curve." "
El Cid: "for his crazy Reaganite / Randian lunatic principles."
Uh, a slight correction. Ayn Rand was a supporter of the Austrian School of economics - and while she may have supported Greenspan way, way back in the day, and Greenspan may have paid lip service to Austrian monetary policy in the same distant past, while he was head of Federal Reserve nothing he did was in accordance with the Austrian School.
You can't blame the Austrian School for this stuff, no way.
Reagan, yeah, no doubt.
RSH: I am no admirer of Rand or of Hayek or of the Austrian school. But I would not blame *them* for Greenspan's corrupt coddling of the wealthy, and I frankly do not care whether or not his Randian enthusiasms would be accepted as legitimate by that shallow pseudophilosopher Rand or other followers of the ridiculous inanity known as "Objectivism".
I probably sound callous but the two homeowners featured in the article both tried to get something for nothing. One bought a home she could not afford without a payment that did not equal minimum principal + interest. The other refinanced his home EVERY YEAR from 1995 to 2004, the last occasion he claims was to pay for his daughter's college. The other nine times -- oops, bad investments. Maybe his daughter should have gone to a school they could all afford.
Comments closed February 26, 2008.
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Heads in the Sand
Matt, you are soooo out of touch:
By JEANNINE AVERSA, AP Economics Writer
Mon Feb 11, 4:45 PM ET
...."I don't think we are in a recession right now," said Edward Lazear, chairman of the White House Council of Economic Advisers, told reporters at a briefing. Lazear said the administration is not forecasting a recession, but rather "slower growth" in the first half of this year.
The White House did not change its economic forecasts for this year and next, which were previewed in November. The administration is still predicting the economy will grow by 2.7 percent this year, as measured from the fourth quarter of this year from the fourth quarter of last year. That would mark a slight improvement from the 2.5 percent growth logged in 2007 but would still be considered a sluggish pace. The economy should pick up strength next year, growing by 3 percent.
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I see the UPS man rounding the bend as we speak. I'm sure he has my pony in the back of his truck.
Posted by steve duncan | February 12, 2008 9:47 AM