Krugman jumps the shart

[Politico]

He is off his rocker.

[Politico]

I'm sure it gets frustrating when the obvious solution to the recession is ignored by everyone.

The obvious solution being to prepare for an imaginary alien invasion, right?

I kid. So you really think the obvious solution is just more spending? How did that work out for Japan over the past twenty years?

More spending will just decrease confidence further as economic agents in the private sector tally up in their head how much more they will need to spend in taxes in the future to pay for all of the spending today. People did not do that in the 1930s/1940s, but they are certainly doing so today. The game has changed and Krugman is a smart man who should be realizing this by now.

[Politico]

Boiled down to the core, money is a tool to facilitate efficient trade among economic agents (money has other functions, of course, but let's just stick to the medium of exchange for now). The ONLY alternative is the barter system, which is grossly inefficient due to the requirement of double coincidence of wants (e.g., the musician who performs in a bar for food/drink. That same musician is not going to be able to pay his landlord for rent unless the landlord is also willing to accept "payment" for rent from the musician by playing music for him. See what kind of problems this would lead to? How it is impossible for a modern economy to run in this fashion? Or that even if money was abolished and the barter system was the law of the land, market forces would inevitably cause some item to emerge as the medium of exchange?)

With these two facts in mind, coupled with the fact you are an intelligent person, I have to ask: Do you now realize money itself is not a problem?

[Politico]

No one is saying we should do away with money, only that it is an example of a human institution that could be done away with if it were no longer useful. Your post is a great example of how it still is useful. But in the event of a massive overcontraction or oversupply of the money supply, individual currencies can and have been replaced with scrip, barter, or other currencies.

Absolutely. Hyperinflation completely distorts the two functions of prices, causing enormous inefficiencies, so it is no wonder that many people replace money with something else during bouts of hyperinflation (e.g., USD being used during hyperinflation in Zimbabwe).

So getting back to your original post now that we agree money itself is not a problem, let alone one of the problems: It seems to me you are trying to suggest that the problem of scarcity does not exist. Or, at the very least, scarcity is a concept that simply masquerades the fallibility of human institutions. Can you elaborate further?

I actually need to leave, but I will respond to your response when I get a chance...

[Politico]

From my vantage point, we are in an especially deep recession right now for a number of reasons but the top reason would have to be unnecessary government intervention in the economy. Policies should have never been put in place under Clinton, and continued under Bush, which promoted loose subprime lending. It is irrational for a bank to lend hundreds of thousands of dollars to somebody who could not possibly pay back their loan, especially if there is no down payment on the mortgage. We did not see this for much of American history until the 1990s when a push was created for high levels of sub-prime lending, which enabled exactly this kind of madness to take hold across much of the country. Couple that with the revolution in securitization, effectively creating an environment where those doing the lending did not have to take on the risk of the loan and everybody involved correctly bet that the government would "bail" most everybody out if things went especially sour, and it should not be a surprise that the housing bubble happened.

I think the best precautionary measure that can be done at this stage is installing stricter lending requirements nationwide with required down-payments of 5% being the absolute minimum for any mortgage (Both borrowers and lenders need to take on responsibility for mortgages, and such a down-payment requirement ensures this). That will pretty much ensure a housing bubble does not happen again. The government should not be involved in trying to push loans for people who cannot afford them. It does NOBODY a favor, and can cause a lot of distortions in the market.

With regards to the recovery, the best that can be done is to allow housing prices to clear (should be the top priority, although there are other things that also must be done). The banks and government have stopped house prices from reaching their low by holding back on the supply of houses to put on the market (A lot of foreclosures are being intentionally held back to attempt to keep the supply of houses for sale artificially low, which implies an artificially high price overall). It should not be a surprise that in such an environment most people are unwilling to buy a house. I mean, who wants to take out a mortgage on a house only to see their house depreciate in value thereafter? The market needs to clear, and then other things can be done to pave the road to recovery.

[Politico]

So your solution to what you say is a problem of government intervention is... more government intervention through a governmentally mandated minimum down payment?

In all honesty, I would propose dismantling Fannie and Freddie and ending sub-prime lending once and for all (ultimately, that market was created artificially by those two entities). If this were done, I suspect there would be no need for a mandated minimum down-payment (Indeed, the housing market would operate much like it used to and like it does in Canada, for example, where down-payments are a must in most every case. In the process, some poor people will not be able to afford to buy a house, but guess what: sub-prime lending does not allow them to be able to afford to buy a house either!). Unfortunately, this is probably not politically feasible. By being pragmatic, I support a mandated minimum down-payment on mortgage loans. It is possible to envision such an achievement in this political environment.

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Here is the thing: House prices are just going to keep going down, down, down until the market clears. All we are doing by artificially keeping the supply high is dragging out how long it takes to reach the inevitable end (Do you think all of these foreclosed homes they are holding back on are just going to magically disappear?). I think it would have been preferable to just let the market clear two years ago, so confidence would be restored by now at least and buyers would be confident to get back into the market. The market is NOT going to recover until prices hit their real low (i.e., until the market clears). Only then will all potential buyers be willing to take out mortgages once again, and so forth.

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No, it is weak because most people do not want to take out a mortgage only to see their house continue to depreciate in value. Once the market clears, we will have hit the bottom with regards to prices. Prices will start to rise as more and more buyers enter the market, including buyers from abroad who have significant USD holdings. We are just prolonging the process of getting to that point, and doing a lot of harm along the way (e.g., confidence is diminishing in other markets, fear is dominating every aspect of the economy so most firms are not hiring, etc.)

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Again, once the housing market clears, confidence will be restored. People will start buying houses again, and this restored confidence in the housing market will help restore confidence in every other realm of the economy. Hiring will increase shortly thereafter, especially if the deficit is brought down over time (the deficit is another reason most firms are not hiring: there is a lot of uncertainty as to what future taxation rates will be to help eliminate the deficit, so firms do not want to hire until there is more certainty in public finance...but this is a subject for another thread).

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Fannie and Freddie are not private institutions, nor have they ever been (they are government-sponsored enterprises). Go read up on the Community Reinvestment Act, most notably the legislative changes approved by the Clinton Administration which were continued under the Bush Administration. Then come back and tell me if you still feel this way.

[Politico]

I had to do a lot of edits, so hopefully you have not yet responded.

[Politico]

Well, we are done this exchange if you insist on being partisan instead of objective, and really believe:

A) The American economy is completely screwed and the Great Depression II is underway when the housing market finally clears (Once again, do you really think all of these foreclosed homes the banks are keeping off the market are just going to magically disappear? And do you think buyers do not know what banks are trying to do? It is not a matter of IF the housing market clears, but WHEN it clears, and the actions of the banks/government over the past three years has caused a prolonging of the inevitable. It has probably done more harm than good in the process. I suspect a short, sharp, shock three years ago would have been preferable to this madness, and the road to recovery would truly be underway by now)

B) That banks would have been giving out loans to people who could not possibly pay them back if not for government penalties for NOT giving out such loans (under the auspices of preventing so-called mortgage discrimination, which is nonsense. Banks are not going to discriminate based up on racial characteristics if a loan makes economic sense. They do not care what one looks like. They only care about getting paid their principal and interest, so of course they are not going to make loans to people who cannot pay them back unless some entity is throwing penalties at them for behaving like this. Furthermore, I would have to ask exactly how anybody is benefiting when banks are forced to give loans to people who could not possibly pay back the loan. That hurts everybody involved, and is supremely absurd yet still defended under the banner of "fairness." WHY?). Throw in agencies that assure government "bail outs" if things get a bit hairy in the CDO/MBS markets, and no wonder we have rampant moral hazard...

[Politico]

The basic problem was a worldwide explosion of financial "innovation", aided by globalization of capital, excessive lending and debt, too little regulation, and too much confidence in market prices for assets such as housing. We've seen it again and again and again from Japan to Southeast Asia to the US and Europe. Now we're seeing it in China, Israel, even Iraq-- all over the place.

What all of these nations have in common is agencies that assure government "bail outs" if things get a bit hairy in domestic CDO/MBS markets. That is the one common denominator, and it is no wonder we have rampant moral hazard in these locations.

Securitization and deregulation itself is not the problem. The problem is when you have government entities that tell private firms they are not at risk no matter how risky they behave. If politics stayed out of business and business stayed out of politics, we would not have this problem!

By the way, commercial real estate in the US did not take nearly as much of a hit as the housing market (And it obviously followed the start of the recession, as one would expect commercial real estate to do). You can post all of the links you want, but common sense will eventually lead you to the conclusion why banks were making lots of loans to people who could not possibly pay them back.

[Politico]

Well, we are done this exchange if you insist on being partisan instead of objective, and really believe:

A) The American economy is completely screwed and the Great Depression II is underway when the housing market finally clears (Once again, do you really think all of these foreclosed homes the banks are keeping off the market are just going to magically disappear? And do you think buyers do not know what banks are trying to do? It is not a matter of IF the housing market clears, but WHEN it clears, and the actions of the banks/government over the past three years is just a prolonging of the inevitable. It has probably done more harm than good in the process. I suspect a short, sharp, shock three years ago would have been preferable to this madness)

No, I believe that if you tried to immediately clear the market by kicking out government supports, the economy would go into Great Depression II. This is common sense, not partisanship. I guarantee if you ask 99% of experts in the housing market they will agree with me. Without government supports there would be no mortgage lending in the US, period. Housing sales would immediately collapse by more than half from their currently depressed level, making it even harder for the market to clear.

This is just not going to happen if the Fed simply ensures that the money supply does not contract. Put all of the foreclosed houses on the market right away, and let the market clear. I guarantee people will start buying houses again now that the price has hit the absolute low. There are so many dollars floating out there, especially abroad. People are just waiting for the price to reach the basement, which it is not going to do so long as we have policies that artificially keep the prices high thereby keeping buyers away from the market (Once again, what in the world makes you think people are going to take out mortgages if there is no assurance that the housing prices are not going to keep going down? People with savings and income do not want to just do that and pay a mortgage that does not equate with the value of the house). If some banks become severely distressed, ensure their survival with direct, zero-rate interest loans if that is what it takes. After the dust settles, break up these distressed banks.

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I never argued that banks never do anything wrong. I pointed out that they do not engage in discrimination. Their goal is to maximize their profit, not to discriminate. If a poor minority cannot afford to pay back a loan, who is being done a service when a bank is forced to make a loan to this poor minority via government regulation (i.e., threats of fines that outweigh the costs of giving a bad loan to said minority)?

Banks make mistakes and fail all of the time. It is perfectly natural. But all banks do not fail together at the same time unless the government has created an environment of perverse incentives and moral hazard. It is true even if some quarters are trying to push a radical agenda that says otherwise.

[Politico]

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.

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Correlation does not imply causation.

[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.

[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.

[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.

[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.

[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.

[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

[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.

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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?

[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?