Krugman jumps the shart
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Beet
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« Reply #25 on: August 27, 2011, 02:52:54 AM »

You first said it was CRA and Fannie and Freddie, now you're changing your tune to moral hazard.

I did not change my tune. I have always said, as summarized in the last paragraph of the above post, that a combination of perverse incentives and moral hazard, both of them created by government entities/policies such as the CRA/Fannie/Freddie, are the root of the problem. Deregulation and securitization itself are not the problem.

And CRA/Fannie/Freddie have existed for decades, but it wasn't until securitization that we had a crisis.

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Correlation does not imply causation.
[/quote]

But if it was causation, how come we didn't have a crisis in the 1940s, when the government extended massive loans to households through Fannie?
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Politico
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« Reply #26 on: August 27, 2011, 03:30:40 AM »
« Edited: August 27, 2011, 03:44:30 AM by Politico »

The problem is that there is still no mortgage lending without the FHA, Fannie and Freddie. You understand that, right? The banks are not giving anyone mortgages, period. So your plan not only have the government continuing to support the housing market by providing mortgages, but another bank bailout.

Do you think banks are not receptive to making loans to people with good credit scores who are also willing to make 5-20% down-payments? Of course they are. Do you think there are not buyers out there who are willing to flat-out purchase houses without taking out a loan? Of course there are once it is clear the market price has reached its low, implying that house prices moving forward will be on a positive trajectory as seen throughout history prior to the bubble bursting.

The market will take care of itself after the market is allowed to clear. It is basic supply and demand. Will the transition be painful for some? Absolutely. It will be like finally cutting out the tumor that has been eating away at the economy for over three years. But at least we can start to recover afterward. It is a hell of a lot better than continuing to allow the cancer to spread throughout every god damn sector of the economy.

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That is what they say, but it is a ruse and the potential and interested buyers out there know it.

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Nonsense. Just like the technology sector recovered after the dot-com bubble, the housing market will recover and be back on a sustainable path.

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Do you think all of these USDs floating around the world are just going to do nothing, or suddenly the Chinese are going to request actual bills so they can feed pieces of paper to their people or to utilize in their fireplace? No, of course not. We are going to see massive capital inflow in the housing market as soon as the market hits bottom. But that is not going to happen until the market hits bottom. That is the point.

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I did no such thing. I made the argument that banks are not going to loan out hundreds of thousands of dollars to people who cannot possibly pay back the loans, coupled with zero down-payment, unless a government entity creates such an environment where such behavior is rational (i.e., perverse incentives and moral hazard created by government)

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Many studies show that when you control all factors, poor people regardless of the color of their skin do not get loans simply because they are judged as being either unlikely or unable to pay back the loan. It is business, not nefarious. It is not because of the color of one's skin that they do not get a loan. That just does not happen outside of the most remote locations, and stating otherwise is just an excuse for having politics get involved in business.

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It was an environment where banks faced the threat of fines that severely outweighed the costs of the loan, specifically the amount loaned and the risk of not getting repaid for the loan.  Since they faced this threat, they turned around and securitized these type of loans in order to shed themselves of the risk. Meanwhile, everybody engaged in this behavior under the belief the government would "bail out" most folks if, or when, the CDO/MBS markets collapsed due to these dogsh**t loans. Of course, you also had companies engaging in predatory lending as you have pointed out, which contributed to the problem as well. But those companies are a completely different beast from the banks themselves (And, I may remind you, those companies were very bipartisan in their political donations)

By the way, who really lost the most in this whole thing and is suffering the most right now? The poorest. And that is the saddest part, in my book, especially when you consider the good intentions behind such regulations as the CRA and so forth. As they say, the road to hell is paved with good intentions...

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You probably cannot even explain the primary functions of money, let alone generate a real business cycle model, but you can continue to believe you know everything. I admit that I do not know everything and I certainly do not subscribe to the idea of government being some sort of infallible panacea that always creates good results with its good intentions. However, I certainly know quite a bit about economics, but you can believe otherwise while you cling to our failed president.
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Politico
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« Reply #27 on: August 27, 2011, 03:36:43 AM »
« Edited: August 27, 2011, 03:47:52 AM by Politico »

And CRA/Fannie/Freddie have existed for decades, but it wasn't until securitization that we had a crisis.

Again, correlation does not imply causation.

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Because *BIG SHOCKER* the vast majority of the loans in the 1940s were actually made to people who could afford to repay the loans! It was not until government got into the business of essentially forcing banks to make loans to people who could not possibly repay loans that we had a problem, one of many problems of course.

By the way, there is absolutely nothing whatsoever wrong with a CDO or a MBS so long as the vast majority of the loans in the package are truly loans made in good faith by both sides with strong likelihood of repayment. But I am sick of defending the concept of securitization because it is blatantly obvious that the concept itself is not THE problem, or even a problem.
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Beet
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« Reply #28 on: August 27, 2011, 03:52:54 AM »

Do you think banks are not receptive to making loans to people with good credit scores who are also willing to make 5-20% down-payments?

No. Right now they are not taking any risk, even that kind of risk.



Right now the government is 100% of the mortgage market. 100%. There is no private sector mortgage market for anyone. Nada. Will you reject this evidence just like you reject all other evidence?

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If you do it without a massive bank bailout and continued government support to the mortgage market, you will send the economy into Great Depression II, for all the reasons I've already listed, and it's not even clear if you would succeed in clearing the market.

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That is what they say, but it is a ruse and the potential and interested buyers out there know it.[/quote]

You don't understand. If a house can't be foreclosed on, it can't be sold to someone else, no matter how many buyers are 'interested'.

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Nonsense. Just like the technology sector recovered after the dot-com bubble, the housing market will recover and be back on a sustainable path.[/quote]

The housing sector has the potential to damage the economy a lot more than the dot-com bubble, just as we saw in 2008. The two aren't comparable in the least.

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LOL. Ok. So instead of eating pieces of paper, the Chinese are going to eat houses out in bumb, Michigan? If the Chinese wanted cheap housing, there's plenty to be had in Detroit, where they can get a house for a few thousand. They're not interested in our uninhabitable real estate.

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I did no such thing. I made the argument that banks are not going to loan out hundreds of thousands of dollars to people who cannot possibly pay back the loans, coupled with zero down-payment, unless a government entity creates such an environment where such behavior is rational (i.e., perverse incentives and moral hazard created by government)[/quote]

You just made it again- the bank will never loan out a bad mortgage coupled with zero down payment unless it's the government's fault. The government never forced the bank to make any loan. The banks' perverse incentives are all their own. The loan originator gets paid a fee by the loan company for originating more loans-- he doesn't care after that. The loan company is paid a fee by the bank. The bank is paid a fee by the securities buyer in another country. The securities buyer is buying because the paper is rated AAA. This is unguaranteed, completely private sector securitized paper we're talking about here. It's rated AAA because of financial 'innovation'. That is how it worked. It required no government hand-holding whatsoever.

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Sorry, but this is bullsh**t.

http://www.law.fsu.edu/journals/landuse/vol141/seit.htm

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It's a human institution. One can discriminate without being 'nefarious'. For example many studies show that attractive people get higher salaries, etc., that people are less likely to call back a resume applicant if they think it's a black person, etc. Also, the restaurants of Jim Crow were 'just business'es. Just because you operate a business, it does not mean you are free from discrimination.

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It was an environment where banks faced the threat of fines that severely outweighed the costs of the loan, specifically the amount loaned and the risk of not getting repaid for the loan.  Since they faced this threat, they turned around and securitized these type of loans in order to shed themselves of the risk. Meanwhile, everybody engaged in this behavior under the belief the government would "bail out" most folks if, or when, the CDO/MBS markets collapsed due to these dogsh**t loans. Of course, you also had companies engaging in predatory lending as you have pointed out, which contributed to the problem as well. But those companies are a completely different beast from the banks themselves (And, I may remind you, those companies were very bipartisan in their political donations)[/quote]

I have already posted links showing that the CRA pressures you refer to were a very minor part of loans that went bad and were not the cause of the crisis. You replied with my evidence dismissing it offhand and referring to 'common sense'-- which is bullsh it. Common sense is that the banks got greedy and decided to make short term profits at the expense of long term soundness, including private sector loan originators who did not get bailed out. That's because they wanted to make the money while they could and didn't care if they went bankrupt later.

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You're awfully condescending for someone who has made incredibly ignorant statements here, such as banks never fail together in a free market, banks never make bad loans in a free market, subprime lending is still happening, there is such a thing as a private mortgage market, and so on.

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I don't have to know all that much to debate with you. There is a lot that I don't know. The only reason I am responding to you is because you seem so brainwashed that it actually offends me. You seem to have encountered some sources that clearly went over your head, and it saddens me because I know there are a lot others out there like you who were never given the full picture and are now spouting all sorts of crazy stuff.
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Beet
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« Reply #29 on: August 27, 2011, 03:55:58 AM »
« Edited: August 27, 2011, 04:58:09 AM by Beet »

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Because *BIG SHOCKER* the vast majority of the loans in the 1940s were actually made to people who could afford to repay the loans! It was not until government got into the business of essentially forcing banks to make loans to people who could not possibly repay loans that we had a problem, one of many problems of course.

So *BIG SHOCKER* when you define the problem as being the same as the cause of the problem you have what is called a *TAUTOLOGY*! OMG!

Now where is your evidence that the government forced anyone to make any loan, and that such loans were the cause of the crisis?

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I see. Since housing securitization is such a great concept, why don't you go and try to sell it to Wall Street right now? I'm sure someone over there is willing to listen to your moneymaking idea. I'm serious -- go to one of the banks and tell them you're going to put together a housing CDO for them. See what they say to you.

-----

Update: While I think you are completely wrong about the causes of the crisis,

Lest I be accused of satisfaction with the (horrendous) status quo, let me say that I do think there is some merit to be had in speeding up the mechanism of clearing the housing market. Here is a version of your plan that I think could work.

(1) The government will set up an Asset Management Company (AMC) with the power to seize all mortgages of uncertain ownership and pay whomever it wants with it. The AMC will purchase toxic paper from everyone-- the banks, and investors of all kinds--- GSEs, insurance companies, private equity, private investors, etc. The AMC will also purchase mortgages that are underwater or close to being underwater. The AMC will also purchase REO.

(2) The AMC will initiate a massive debt forgiveness program for all underwater households, or "cramdowns." The AMC will initiate massive write-downs on toxic paper that it purchased from investors.

(3) The AMC will dump REO on the market at below market prices with the aim of clearing quickly. The FHA will support the housing market with regular mortgage lending. As prices fall, the AMC will be willing to work on cramdowns for performing mortgages whose homes are more than 10% underwater.

(4) The AMC will be capitalized with a massive injection of taxpayer money, preferably funded by monetization.

The end.
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Politico
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« Reply #30 on: August 27, 2011, 04:55:11 AM »
« Edited: August 27, 2011, 05:31:27 AM by Politico »

Do you think banks are not receptive to making loans to people with good credit scores who are also willing to make 5-20% down-payments?

No. Right now they are not taking any risk, even that kind of risk.



Right now the government is 100% of the mortgage market. 100%. There is no private sector mortgage market for anyone. Nada. Will you reject this evidence just like you reject all other evidence?

100%, huh? Here you go, buddy:

https://www8.bankofamerica.com/home-loans/mortgage-purchase.go
https://www.wellsfargo.com/mortgage/
https://www.citimortgage.com/Mortgage/Home.do?td=
https://www.chase.com/online/Home-Lending/mortgages.htm

As I understand it, current estimates peg the figure at 5-10%, not 0% which is clearly not the case as evidenced by the above-mentioned links.

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Of course the market will clear as soon as the supply of all foreclosures is put on the market. It is basic supply and demand! And it will easily happen by having the banks put all of their foreclosures on the market and not having anymore policies that artificially prop up the prices.

By definition, the bottom has to come sooner or later. It cannot be stopped. It is better to get it over with than to continue this nonsense for the duration of Obama's term.

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This is self-evident. The banks are not putting the entire supply of foreclosed homes on the market. Like I previously stated, blaming the delay on paperwork is a ruse and interested buyers are not falling for their attempt to artificially keep the price high by keeping the supply lower than it really is. It has been over three years since the meltdown started!

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Like any other market, the housing market will recover after prices hit bottom. Technology did not cease to be created after the dot-com bubble burst. The bubble burst, some people lost and some people won, but eventually the market cleared and everything worked itself out moving forward. If only we would let the housing market do the same, we could really start to go down the road to recovery instead of continuing on this stagnant, if not declining, path. Like I said, we need to cut out the tumor that is eating away at the entire economy. The tumor is the loss of confidence in the housing market. What we have been doing is allowing the cancer to spread, the cancerous cells moving from one market to every other market in the economy. If we take care of this tumor, finally just cut it out, then we can start to recover. It will be painful, but this type of therapy is necessary.

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Some real estate is a lost cause, such as much of Detroit (a city that is a good case study on the failure of liberalism, by the way), but there are PLENTY of GORGEOUS homes out there just waiting to be gobbled up by Americans and foreigners across every area of the globe as soon as the signal is sent that the market is clearing once again (On a side-note, China is more likely to spend most of their USDs on American imports in the future, such as movies/aerospace technology/etc., and investments, but surely some real estate will be consumed as well)

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Guaranteed. No way, no how this happens unless government has created a perverse incentive for this to happen and provided assurance of bailing everybody out if the sh**t hits the fan (i.e., created conditions of moral hazard). It is just absurd to imagine an environment where banks give out loans they know they are not going to get paid for...UNLESS they know they can shed that risk...BUT NOBODY is going to take on that risk UNLESS everybody knows the government is going to "bail out" everybody if it happens on too widespread of a scale. In other words, government is ultimately responsible for creating this environment, not private sector activity.

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It is not this simple. Watching a Hollywood movie (you know what I am talking about) that pushes an agenda is not going to lead you to the full truth of what went on. And nobody said anything about government hand-holding, by the way. The government does not need to intervene directly in order to indirectly cause bad results.

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Hello, 1960s! This is 2010s! The President is Barack Hussein Obama! Imagine that!

Here is one decent study quickly pulled up, and it's from the late 1990s: http://www.utdallas.edu/~liebowit/mortgage/mortgages.pdf

There are plenty of other economic studies from the past twenty years that show the same results. And you know what: Where the discrimination does take place, and I am sure it does still happen in some remote locations because it is impossible to completely do away with discrimination, it is doing more harm to the discriminator than the discriminated. After all, a discriminator who would turn down a good loan is harming themselves by turning down a profitable opportunity; the discriminated, in comparison, will find another bank that is willing to engage in the mutually beneficial exchange. Fortunately, the discriminatory company will probably not survive in the long-run because of the non-discriminatory companies being more competitive.

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Again, I am dealing in the 2010s, not the 1960s or 1950s. In any case, your emotional diatribe on this issue is probably better suited for the political forum.

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It is wrong to say they didn't care if they went bankrupt later because they knew their government cronies would bail them out. The lesson: We would not have these problems, the ones we are arguing over, if business stayed out of politics and politics stayed out of business. You really seem to be missing the philosophical aspects involved...

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Never in history has EVERY bank in the US failed simultaneously. That did not even happen in the Great Depression, which, by the way, was not a failure of free markets, but a recession that was turned into a depression by *BIG SHOCK* poor policy at a government agency (i.e., The Fed)

Source: http://www.amazon.com/Monetary-History-United-States-1867-1960/dp/0691003548

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I never said any of the above other than there being a private mortgage market, and I never said it was 100% of all mortgages.

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When facts fly in the face of one's ideology, they are faced with the uncomfortable thought that how they viewed the world may not jive with reality. It is not surprising to see them react with name-calling and the like as you have done. I am not a psychologist, but they have a term for what you are experiencing: cognitive dissonance. You should look it up. You are excused for being human, of course.
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Politico
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« Reply #31 on: August 27, 2011, 05:19:13 AM »
« Edited: August 27, 2011, 05:25:43 AM by Politico »

Now where is your evidence that the government forced anyone to make any loan, and that such loans were the cause of the crisis?

Here is an experiment: Go take a poor white person with no credit history into a bank to ask for a loan. Then do the same thing with a poor black person. Observe what happens. Make sure you have proper documentation and this is done in the branch of a major bank in an urban area.

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Again, the concept is perfectly fine and does not cause problems, but obviously the implementation of CDOs/MBSs was poor. I am defending the theory, not necessarily the practice (And securitization has proven to be a boon in other areas). In the real world, the credit rating agencies did not have sufficient information or else they would not have been rating CDOs/MBSs as AAA when they were actually dogsh**t.

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This is a good step, seeing you finally reject the status quo that is getting us nowhere. I do not necessarily agree with all of the above, but it is a step in the right direction by virtue of being something other than the status quo. Unfortunately, given political realities, some government intervention will be necessary in order to achieve the clearing of the market.

In any case, I hope we can at least agree that we need to eventually separate Washington from Wall Street (put another way, keep business out of politics and politics out of business) so that the type of moral hazard we saw in the 2000s does not rear its ugly head again.
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Beet
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« Reply #32 on: August 27, 2011, 05:24:48 AM »


LOL. You have no idea how the mortgage market works. 90% of that's all backed by the FHA/Fannie/Freddie. The other 10% is backed up by other government sources. The NY Times:

"[Fannie and Freddie] and the Federal Housing Administration together now guarantee about 90 percent of all new mortgages, far above their historic level."

http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.html

By the way, note the date that it was nationalized: September 2008. Prior to that it was a private entity, despite its implicit guarantee, it was ultimately beholden to shareholders and its officers were not civil servants, but private executives.

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The market *might* clear at horrendously low prices after the economy goes into Great Depression II, and the banks all collapse. Congratulations!
 
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Check out my Asset Management Company (AMC) plan from my previous post. That will help clear the market in an orderly fashion, but it will require a massive government intervention.

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It's not a ruse, the banks are desperately trying to foreclose, but they legally can't, because they screwed up the paperwork. Yes, it's been over three years since the meltdown started- over four actually, but there's still the rule of law, and until Congress acts otherwise, the banks will be stuck.

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It depends on how you clear it. Again, check out my Asset Management Company (AMC) plan. Just putting everything out there at once without a plan would not work, and would collapse the economy.

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The Chinese cannot live in US real estate unless there is a massive loosening of US immigration laws. The same goes for all other foreign nationals. It will never happen because it is politically impossible. China will gradually increase imports from the US but it will not help with the housing crisis. Btw, Detroit would be in a lot worse shape now if Obama had not stepped in and saved the auto industry. It is a victim of shifting circumstances as are many northeastern industrial cities- a casualty of capitalism, mainly.

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I just described it to you! The actors are
(1) The Loan Officer
(2) The Loan Company
(3) The Bank
(4) The Rating Agency
(5) The Foreign Investor

Everyone here is rational and they are all smart, except for the foreign investor, who is stupid. The foreign investor never expected the US government to bail them out, and they never were bailed out. They lost money. The Rating Agency only cares about its fee to rate the CDO triple A. The bank only cares about its fee to package the MBS into CDO. The Loan Company only cares about the fee it gets from originating the loan. The Loan officer only cares about the bonus he gets from signing a new customer. That's it. There's moral hazard without a shred of support from the government.
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Beet
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« Reply #33 on: August 27, 2011, 05:26:04 AM »

Your theory about Fannie/Freddie and CRA is absurd. First of all, during the worst years of the crisis, the proportion of loans made by Fannie/Freddie actually fell.

From McClatchy:

"More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics."

Read more: http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#ixzz1WDtkEu2Q

From a study of the impact of CRA from the Federal Reserve:

"Putting together these facts provides a striking result: Only 6 percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how "

http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm

"MBSs issued by Fannie Mae and Freddie Mac usually securitized conforming loans, which
met credit standards applied to most mortgages in earlier years. In contrast, nonprime mortgages
were mainly funded by being packaged into “private label” MBSs because they did not conform
to Fannie Mae or Freddie Mac standards, or were too risky to be held by regulated banks (Credit
Suisse, 2007).  "

Fannie and Freddie actually had HIGHER standards than the private sector, which wanted to push crappier loans so it CIRCUMVENTED Fannie and Freddie. The CRA did NOT EVEN APPLY to these companies.

The Financial Crisis Inquiry Commission found that:

"In the study, FCIC staff examined loan performance in 2008 and 2009. They found that that mortgages bought by Fannie Mae and Freddie Mac were more likely than privately purchased loans to require a significant down payment when borrowers had weak credit, and were therefore less likely to go into default.

For instance, GSE mortgages with a down payment of at least 10 percent that were rated Alt-A, a status between prime and subprime, had a serious delinquency rate of 5.7 percent in 2008, compared with a delinquency rate of 15.5 percent among mortgages in private-label securities, the FCIC staff found."

http://www.businessweek.com/news/2011-01-26/subprime-loans-by-fannie-freddie-performed-better-fcic-says.html

Even the dissenting view of the Financial Crisis Inquiry Commission reported that the causes of the crisis were broad-based:

"Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay.

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating... Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed? Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets."

http://economistsview.typepad.com/economistsview/2011/01/what-caused-the-financial-crisis.html

If you won't accept such overwhelming evidence, then you've got your head stuck in the sand and there is no way you will ever be willing to be educated.

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Actually, it is that simple. A simpler explanation still: Greed.

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Wow. Just because Barack Obama is President, it doesn't mean there is no racism. Obama doesn't even reflect the African-American experience, he is basically a privileged white guy in socioeconomic status anyway.

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LOL. Lots of companies that have discriminated and done bad things have survived for a long time. Nice to see you changing your tune though. That's not to say that you've yet cited a single source for a single opinion of yours.

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LOL, it's not an emotional diatribe, it's a strong statement of obvious truth.

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No, they didn't care because even if they did no bankrupt, they'd still keep the huge bonuses and earnings they kept during the boom years. I think politics should stay out of business in some respects, I certainly don't think politics should be in the business of supporting GSEs like Fannie and Freddie. But what I'm responding to, as I said, is your utter ignorance and astoundingly wrong statements on certain details.


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Every US bank didn't fail simultaneously in 2008 either. As for monetarism, that's discredited. The Fed tried monetarism in the past 2 years and it hasn't worked. It's just like Keynes said-- pushing on a string.

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The problem is you have not cited a single fact, and have showed a complete imperviousness to any facts cited.
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Beet
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« Reply #34 on: August 27, 2011, 05:31:26 AM »
« Edited: August 27, 2011, 05:33:51 AM by Beet »

Now where is your evidence that the government forced anyone to make any loan, and that such loans were the cause of the crisis?

Here is an experiment: Go take a poor white person with no credit history into a bank to ask for a loan. Then do the same thing with a poor black person. Observe what happens. Make sure you have proper documentation and this is done in the branch of a major bank in an urban area.
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And how does this show one way or another that the CRA was the cause of the housing crisis?

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Ah, we finally have some admission of market failure. Of course the 'theory' was perfect-- the 'theory' is always perfect. It's the practice that the idea is truly tested.

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I agree with this, yes. The GSE's should be broken up. While I do not think they caused the crisis, the model starting in 1968 with the privatization of Fannie, of a private entity with such a close government backing was not a good idea. The government should not implicitly guarantee any private institutions that are supposed to take regular business risks, and that could sink the economy.
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Politico
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« Reply #35 on: August 27, 2011, 05:41:46 AM »
« Edited: August 27, 2011, 05:48:01 AM by Politico »

You can pull up all the links you want, and there are obviously links that will provide the exact opposite information. We can play that game ad infinitum, but this game has gone on long enough. Furthermore, such a game is not going to change the fact that almost none of the predatory loans happen without the CRA, not to mention countless bad loans made out to poor people over the past few decades, and therefore the bubble never would have happened if we never had the CRA to begin with. Of course, we can also say the same thing about securitization. I think we can at least agree on that point. I admit that the bubble never would have happened if securitization of mortgages had never happened, so you should at least admit that the bubble does not happen without the creation of the CRA. Then we can move on to better conservations such as our level of agreement on social issues judging by our political matrix scores.
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Beet
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« Reply #36 on: August 27, 2011, 05:50:36 AM »

Well, I can agree that Fannie and Freddie by virtue of their sheer size and lobbying power, promotion of securitization, and implicit guarantee, had a very negative impact and raised moral hazard a great deal, even though strictly speaking the loans they originated were a higher quality and not subprime until very late. CRA did not help, but agreeing that it was anything more than a negligible factor and mostly a conservative talking point would be intellectual dishonest, for me at this point.

I do agree with you that the housing market is dragging along too slowly and we need a bolder plan to move sales along more quickly and get the inventory cleared out.
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minionofmidas
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« Reply #37 on: August 27, 2011, 07:59:48 AM »

A tax credit for demolitions of never-needed housing stock maybe? Tongue
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Politico
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« Reply #38 on: August 27, 2011, 08:10:43 AM »
« Edited: August 27, 2011, 08:14:16 AM by Politico »

CRA did not help, but agreeing that it was anything more than a negligible factor and mostly a conservative talking point would be intellectual dishonest, for me at this point.

I was going to leave this thread alone, but this particular quote has been bothering me. You asked for some links, so I guess I will end my contributions to this thread with the words of one of the commissioners of the Financial Crisis Inquiry Commission (the financial crisis equivalent of the 9/11 Commission), Peter J. Wallison:

"[W]hy did we have all of these bad mortgages? Of the 26 million subprime and Alt-A mortgages that I'm talking about, about 19 million are on the books of government agencies or on the books of banks that had to make these loans because of something called the "Community Reinvestment Act." They break down this way: Fannie Mae and Freddie Mac have about 12 million subprime and Alt-A mortgages; FHA, VA and, to some extent, the Federal Home Loan Banks have another 5 million, and then there are the four major banks -- Citi, Bank of America, JP Morgan Chase and Wells -- and they hold another 2 million mortgages on which they had to make loans under the "Community Reinvestment Act" to get government approval for mergers. Those 19 million mortgages turn out to be mortgages that are failing at very high rates. So government policy created, or was responsible for, almost three-quarters of the bad mortgages in our financial system today.

As I said, the members of the Financial Crisis Inquiry Commission on which I sit are considering the issue of what caused the financial crisis, and my view today is that government policy caused the financial crisis. However, if, in the course of the commission's work, something else comes to the fore, or there is evidence that something other than bad mortgages caused the financial crisis, I'll change my mind. But for months now we have been working on this subject, and nothing has appeared yet as a cause of the financial crisis that is even remotely as important as the mortgage problem.

So the point I'd like to leave with you today when we talk about the financial crisis is that it is not a problem of capitalism. It is not a problem that our financial markets were not sufficiently regulated. It is not a problem of greed on Wall Street. It is not the result of predatory lending. It is not all the things that the Obama Administration has been talking about, as far as I can tell, as causes of the financial crisis. And so the remedies for the cause of the financial crisis are not to regulate our financial system more heavily, but to change the government policies that created most of the weak mortgages that are failing today."

Source: http://www.hudson-ny.org/1344/what-caused-the-financial-crisis

If you want the nitty gritty details: http://www.aei.org/docLib/Wallisondissent.pdf
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Beet
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« Reply #39 on: August 27, 2011, 03:56:17 PM »
« Edited: August 27, 2011, 03:59:22 PM by Beet »

I think you need to ask yourself why my refusal to stoop to dishonesty "bothers" you. You would have been perfectly happy, content, and secure in your mind if I had just lied to you about what I see as the overwhelming facts, but not taking that step bothers you?

FYI, while Wallis is a member of the commission, that essay you cited is NOT a part of the FCIC report including the dissenting report endorsed by the GOP majority on the panel. It is misleadingly (and dishonestly) labelled "dissent" but it is not the official "dissent." Instead it is part of work he did outside the commission for the hyperpartisan AEI. It has not been endorsed by any of the other members.

It is also based on shoddy hack job research.

"Wallison’s argument, which places most of the blame on the affordable housing goals of the former government-sponsored enterprises Fannie Mae and Freddie Mac before they fell into government conservatorship in 2008, also ignores the actual delinquency rates. As David Abromowitz and I noted in December 2010:

“Mortgages originated for private securitization defaulted at much higher rates than those originated for Fannie and Freddie securitization, even when controlling for all other factors (such as the fact that Fannie and Freddie securitized virtually no subprime loans). Overall, private securitization mortgages defaulted at more than six times the rate of those originated for Fannie and Freddie securitization.”

So how did Wallison get to the conclusion that it was federal affordable housing policies that caused the crisis, despite the countervailing evidence? As Phil Angelides, chairman of the FCIC, has stated, “The source for this newfound wisdom [is] shopworn data, produced by a consultant to the corporate-funded American Enterprise Institute, which was analyzed and debunked by the FCIC Report.”

Angelides is of course referring to Wallison’s AEI colleague Edward Pinto. Wallison’s conclusion that federal affordable housing policies are primarily responsible for the financial crisis is based entirely on the research conclusions of Pinto, who finds that there are 27 million “subprime” or “high-risk” loans outstanding, with approximately 19.25 million of these attributable to the federal government’s affordable housing policies. As I point out in “Faulty Conclusions,” Pinto only gets to these numbers (which are radically divergent from all other estimates—for example, the nonpartisan Government Accountability Office estimates that there are only 4.59 million high-risk loans outstanding) by making a series of very problematic and unjustified assumptions."

Case in point: To support his claim that the Community Reinvestment Act, which requires regulated banks and thrifts to provide credit nondiscriminatorily to low- and moderate-income borrowers, caused the origination of 2.24 million outstanding “high-risk” mortgages, Pinto includes many loans originated by lenders who were not even subject to CRA. In fact, most of the “high-risk” loans Pinto attributes to CRA were not eligible for CRA credit.

Similarly, in arguing that Fannie and Freddie’s affordable housing goals caused the origination of 12 million “subprime” and equivalently “high-risk” loans, Pinto includes millions of loans that would not typically qualify for those goals. In fact, the vast majority (65 percent) of the “high-risk” loans Pinto attributes to the affordable housing goals of Fannie and Freddie fall into this category.

Wallison does not address these and other problems with Pinto’s research identified in “Faulty Conclusions.” Instead, he focuses all of his energies on defending one of my main critiques of Pinto’s work—that Pinto’s unilateral expansion of the definitions of “subprime,” “Alt-A,” and “high-risk” mortgages is both misleading and unjustified. So let’s deconstruct his attack on my research to demonstrate once again why he is simply wrong about the genesis of the U.S. housing crisis.

-----

The facts behind that essay are completely deconstructed as a dishonest hack job here:

http://www.ritholtz.com/blog/2011/07/why-wallison-is-wrong-about-the-genesis-of-the-u-s-housing-crisis/
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opebo
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« Reply #40 on: August 27, 2011, 04:00:31 PM »

I do agree with you that the housing market is dragging along too slowly and we need a bolder plan to move sales along more quickly and get the inventory cleared out.

It would be so easy if we just used the fed funny money to buy up houses instead of just treasuries, etc.

Just buy up about half the outstanding housing stock at pre-crash values and knock it down. Puts construction people back to work gets money flowing again, and really makes an impression.  Kaa-booom!
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Gustaf
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« Reply #41 on: August 28, 2011, 05:12:59 AM »

I didn't have time to read all of this, but there has obviously been moral hazard within banks and financial institutions. There has been a number of problems in recent decades regarding the fact that the firm is not a single agent, but made up of several agents. This is fairly standard micro theory and there are plenty of instances where a firm will not end up acting in a way that maximizes its profit.
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opebo
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« Reply #42 on: August 28, 2011, 12:39:25 PM »

I didn't have time to read all of this, but there has obviously been moral hazard within banks and financial institutions. There has been a number of problems in recent decades regarding the fact that the firm is not a single agent, but made up of several agents. This is fairly standard micro theory and there are plenty of instances where a firm will not end up acting in a way that maximizes its profit.

Actually the problem is never with moral hazard but with the opposite - restraint of demand and production due to too much of this 'morality'.  We need to make the taking on of debt free and easy, so that if the debt 'goes bad' it is simply inflated away upon a sea of fiat currency - thus eliminating the huge incentive towards deflation and depression inherent in capitalism and competition.
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Politico
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« Reply #43 on: August 29, 2011, 01:59:19 PM »
« Edited: August 29, 2011, 02:03:38 PM by Politico »

I think you need to ask yourself why my refusal to stoop to dishonesty "bothers" you. You would have been perfectly happy, content, and secure in your mind if I had just lied to you about what I see as the overwhelming facts, but not taking that step bothers you?

FYI, while Wallis is a member of the commission, that essay you cited is NOT a part of the FCIC report including the dissenting report endorsed by the GOP majority on the panel. It is misleadingly (and dishonestly) labelled "dissent" but it is not the official "dissent." Instead it is part of work he did outside the commission for the hyperpartisan AEI. It has not been endorsed by any of the other members.

It is also based on shoddy hack job research.

"Wallison’s argument, which places most of the blame on the affordable housing goals of the former government-sponsored enterprises Fannie Mae and Freddie Mac before they fell into government conservatorship in 2008, also ignores the actual delinquency rates. As David Abromowitz and I noted in December 2010:

“Mortgages originated for private securitization defaulted at much higher rates than those originated for Fannie and Freddie securitization, even when controlling for all other factors (such as the fact that Fannie and Freddie securitized virtually no subprime loans). Overall, private securitization mortgages defaulted at more than six times the rate of those originated for Fannie and Freddie securitization.”

So how did Wallison get to the conclusion that it was federal affordable housing policies that caused the crisis, despite the countervailing evidence? As Phil Angelides, chairman of the FCIC, has stated, “The source for this newfound wisdom [is] shopworn data, produced by a consultant to the corporate-funded American Enterprise Institute, which was analyzed and debunked by the FCIC Report.”

Angelides is of course referring to Wallison’s AEI colleague Edward Pinto. Wallison’s conclusion that federal affordable housing policies are primarily responsible for the financial crisis is based entirely on the research conclusions of Pinto, who finds that there are 27 million “subprime” or “high-risk” loans outstanding, with approximately 19.25 million of these attributable to the federal government’s affordable housing policies. As I point out in “Faulty Conclusions,” Pinto only gets to these numbers (which are radically divergent from all other estimates—for example, the nonpartisan Government Accountability Office estimates that there are only 4.59 million high-risk loans outstanding) by making a series of very problematic and unjustified assumptions."

Case in point: To support his claim that the Community Reinvestment Act, which requires regulated banks and thrifts to provide credit nondiscriminatorily to low- and moderate-income borrowers, caused the origination of 2.24 million outstanding “high-risk” mortgages, Pinto includes many loans originated by lenders who were not even subject to CRA. In fact, most of the “high-risk” loans Pinto attributes to CRA were not eligible for CRA credit.

Similarly, in arguing that Fannie and Freddie’s affordable housing goals caused the origination of 12 million “subprime” and equivalently “high-risk” loans, Pinto includes millions of loans that would not typically qualify for those goals. In fact, the vast majority (65 percent) of the “high-risk” loans Pinto attributes to the affordable housing goals of Fannie and Freddie fall into this category.

Wallison does not address these and other problems with Pinto’s research identified in “Faulty Conclusions.” Instead, he focuses all of his energies on defending one of my main critiques of Pinto’s work—that Pinto’s unilateral expansion of the definitions of “subprime,” “Alt-A,” and “high-risk” mortgages is both misleading and unjustified. So let’s deconstruct his attack on my research to demonstrate once again why he is simply wrong about the genesis of the U.S. housing crisis.

-----

The facts behind that essay are completely deconstructed as a dishonest hack job here:

http://www.ritholtz.com/blog/2011/07/why-wallison-is-wrong-about-the-genesis-of-the-u-s-housing-crisis/

Like I said, we can play the back and forth link game all day long. You can endlessly believe that somehow free enterprise, or at least the spirit of deregulation, fueled the crisis. It certainly is comforting to think that if you believe that government planning is better than free enterprise (And if you think that, you should really examine why South Korea and North Korea are so dramatically different despite consisting of the same people of the same culture with the same history). However, the fact remains that bad mortgages were essentially responsible for the subprime mortgage crisis. Once you roll back the layers and layers of disinformation out there, this is the ultimate fact. Further examination will show you that the vast majority of loans that defaulted in the run-up to 2008 were subprime mortgages connected to following CRA regulations in some way, shape or form over a thirty period. There are undeniably good intentions behind CRA, but it ultimately laid the foundation of the subprime mortgage crisis. If we want to blame somebody, there is really nobody to blame: We cannot honestly blame the wealthy nor the poor for behavior that would have never taken place if CRA had never been implemented. And it is not fair to blame people who backed CRA, including those who implemented it in the 1970s, unless they backed CRA and knew it would create the market distortions it did (I suspect nobody falls into that category). But you are not going to admit this, are you? Am I not right in saying that you would rather continue blaming the top creators of wealth and progress, the type of progress that has created such enormous wealth in America that one of our biggest problems is obesity among our poorest?
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Beet
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« Reply #44 on: August 29, 2011, 06:13:04 PM »

You want me to admit to a lie? Good grief. First of all, I do not only believe what is comforting to believe. Actually, when I was younger, despite being as liberal as I am today I was quite right wing on economics. It was various financial crises including the Asian financial crisis 1997-98, the Russian ruble crisis, the Argentine crisis and of course the Big Kahuna that shifted my thinking. Most mortgages were connected to CRA in "some way, shape, or form". Yes, they existed in the same world as CRA, and some air particles that hit a house connected to an actual CRA loan might also have hit one of these other houses, after being blown around by the wind.

All disagreement, politics, and economics aside, your behavior in this thread as been one of rank and very unattractive intellectual dishonesty, of the most flagrant and unselfconscious sort. I usually do not like to resort to ad hominem like this, but it's really the most remarkable part of this entire exchange.
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Politico
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« Reply #45 on: August 30, 2011, 05:41:29 AM »
« Edited: August 30, 2011, 05:52:59 AM by Politico »

What is remarkable is your failure to recognize the madness, and then regurgitate political talking-points instead. The madness was, in a word, widespread lending of hundreds of thousands of dollars to people who could not possibly ever payback their mortgage short of winning the lottery. What got us to that point of madness where economic agents, both lenders and borrowers, were behaving in such an irrational manner? CRA, of course. This madness does NOT happen without CRA. The widespread securitization of these junk mortgages did not become a shock to the financial market until people stopped attempting to pay for their unaffordable mortgages that they should have never been given in the first place (see asterisk below), thereby causing CDOs/MBSs comprised of such junk mortgages to fail. It is that simple, but almost nobody wants to talk about it because nobody wants to be accused of being against the good intentions behind CRA. Nobody wants to say an unpleasant truth: Some people are never going to be able to afford to buy a house, and all of the government legislation in the world is not going to change this fact (And, unfortunately, attempting to change this fact can have dire, unintended consequences for the entire economy).

* - These people never had to put up a down-payment, usually because these people had a negative net worth of thousands of dollars to begin with, so why should anybody have been surprised when they walked away from their mortgage?
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Beet
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« Reply #46 on: August 30, 2011, 10:35:31 AM »

What got us to that point of madness where economic agents, both lenders and borrowers, were behaving in such an irrational manner? CRA, of course.

Except I have proved this to be false, and you have not been able to provide an effective rejoinder. So this amounts to you refusing to admit that you have been shown to be wrong.
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