Krugman jumps the shart

[Beet]

Krugman, is of course correct. The basic insight here is not so much that more spending would stimulate the economy, but rather that, on war footing, the political will would exist to organize human relations in such a way that what we wanted to get done got done. All modern economics can be traced back to the study of famines. It was discovered that famines exist not so much because of the lack of food, but because the political system failed to deliver food where it was needed.

Similarly, the problem today is not so much the lack of stuff or the ability to make stuff, (although that is becoming more and more of a problem as well, due to the rise of the third world) but the organization of what we have in a way such that people are working, being productive and able to enjoy the fruits of our economy. What we think of as scarcity is actually an invention of human institutions: money, debt, property, being the basis of it all. It is not that Jack and Jill cannot live in their house because the house is uninhabitable, it is because they owe a debt that they cannot pay, and so the bank will foreclose, and the house will become uninhabitable because no one else has the money to pay. Hence, Jack and Jill can live in a run-down apartment while the big, luxurious house sits empty. It is not that Bob the construction worker cannot build luxurious houses or that he does not want to, it is that there is no credit available for companies to hire him, and so on. So the problem is not the scarcity of houses, nor land, nor labor, nor technology. All of those exist in great abundance. The problem is human institutions. Under war footing, all human institutions are more clearly seen as what they are: fallible, and changeable by humans themselves.

[Beet]

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.

[Beet]

Oh, I thought I was clear in my original post.

It's not that scarcity doesn't exist, it's that modern recession and depressions don't have much to do with it, because they always involve production at sub-maximal levels. Output is what falls, not productive capacity. So ultimately, we are in a recession because we choose to be in one.

[Beet]

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

Having housing prices depress even further is not a solution because it would make those Americans who already have a mortgage, which is most middle class families, further underwater, reducing their wealth and propensity to spend. This would cause further contraction in the economy, further job loss, and would not support the housing market. The housing market is not weak due to prices. Prices have come down in some places 80% are sales are still lower than they were in 2006. The reason is because of the lack of available jobs and wage growth. Ask any housing expert and they will tell you the reason for weak housing sales is poor job growth and poor household formation (related).

As for the economic crisis it was caused by too much faith in free markets. Subprime lending was mainly done by the private sector, not governmentally mandated. The vast majority of subprime lending was not related to any government push. The vast majority of it happened in the 2000s, not in the 1990s. In the 1990s the housing market was strong and stable with very low default rates. The problematic loans you see today were originated in 2004, 2005, 2006, and 2007, with the worst year being 2006. The worst years coincided with a surge in private sector lending pushing out Fannie Mae and Freddie Mac.

[Beet]

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.

Subprime lending ended in 2007. Since subprime lending occurred in the private sector, it evaporated as soon as the private sector could not longer support it. Since 2008, there has not been subprime lending or housing securitization in the United States to any significant degree.

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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.[/quote]

The lower prices go, the more households go underwater. The more households go underwater, the more of them default on their loans and stop spending. The more that happens, the more the banks are weakened further. The more that happens, the weaker the economy goes, the less job creation there is, the less household formation, and the less demand for housing. In that situation, no one would be able to take out a mortgage without government support because the mortgage market simply wouldn't exist. Housing prices would become artificially depressed because the economy would be in a depression, with unemployment at upwards of 20%. The market may "clear" but only in the ashes of the economy and the broken dreams of hundreds of millions of people.

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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.)[/quote]

Kicking the legs out of the housing market so it 'clears' would result in the cycle I described above-- a downward cycle into depression. It would in no way cause prices to start to rise or for more buyers to enter the market. Everything you describe -- confidence, hiring, fear -- would be far worse under the immediate liquidation of the market you propose. Not only that but it would wipe out trillions of dollars from American households' balance sheets.

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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).
[/quote]

Again, any attempt at immediate clearing of the housing market by price suppression would throw the economy into a deep depression and wipe out the net worth of American households. It would not restore confidence, it would devastate every other realm of the economy, and we would go back to losing half a million jobs a month-- at best. The deficit would skyrocket because of collapsing tax revenues and even with austerity measures, the US would likely be repeatedly downgraded. Basically an utter nightmare of every level imaginable.

One further thing, the problems in the US economy of overdebtedness are not only related to the housing market. Over-indebtedness infested every sector of the economy in the 2000's, from credit cards to student loans to car loans to pensions and everything in between. Everything was securitized. The problem was over-financialization, and blindness to the risks of over-financialization due to a misguided faith that the free market was operating and could never set a wrong or irrational price for anything. Even if the housing market were magically fixed overnight, the US economy's deep structural problems would not be fixed until we see a reduced level of debt, a reduced trade deficit and increased invention, innovation and investment here at home.

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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.
[/quote]

Fannie and Freddie were not the originators of subprime. Companies like Countrywide and New Century and Golden State financial and arms of the major banks dominated subprime. Fannie and Freddie actually had strong lending standards in the early 2000s and much lower default rates, however after 2004 they caved into pressure for "market share". And yes, these companies were private institutions beholden to shareholders whose leadership was under pressure to increase short term profits. It was corporate welfare. As for the Communication Reinvestment Act, CRA was instituted in 1995, a full decade before the most problematic loans started to appear. Only a tiny proportion of subprime loans were under CRA.

The fundamental problem was irrational faith in a housing boom undergirded by blindness to the extent that the market could produce irrational prices, and over-confidence in models created by banks. The government has been supporting the housing market since 1935 and there was never a crisis until over-financialization and Wall Street tried to get involved.

[Beet]

The Bank of International Settlements concludes,

"Contrary to some media commentary, there is no evidence that the Community Reinvestment Act was
responsible for encouraging the subprime lending boom and subsequent housing bust. This Act only applies to
depositories, and did not cover most of the important subprime lenders. Depositories showed a lesser tendency
to write subprime loans than lenders not subject to the Act (Yellen 2008)."

http://www.bis.org/publ/work259.pdf?noframes=1

Sheila Bair, the Republican chairwoman of the FDIC, said:

"Only about one-in-four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending (2004-2006). The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.

You've heard the line of attack: The government told banks they had to make loans to people who were bad credit risks, and who could not afford to repay, just to prove that they were making loans to low- and moderate-income people.

Let me ask you: where in the CRA does it say: make loans to people who can't afford to repay? No-where! And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth ... pure and simple."

http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html

The idea that the CRA or Fannie or Freddie were responsible for the bust is absurd on face. Because Commercial real estate also had a bust, and commercial real estate had nothing to do with any of those! Further, Ireland, Australia, Canada, Spain, the UK, all experienced unprecedented housing bubbles (some of which are not fully deflated even now) at the same time. Are you going to say these are somehow unrelated? Absurd.

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.

[Beet]

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.

Basically, I do not think you could even achieve your stated goal of having the market clear immediately by kicking out government supports and liquidating prices, because buying would collapse faster than you could cut prices, and banks would continue to keep REO off the market . Consumer confidence would collapse further, and the banking system would go bust again.

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Are you seriously arguing that the banks never do anything wrong and are completely innocent here? Did you even read a word I wrote? Have you been in a complete coma in the past 10 years? To be completely honest, your complete lunacy and stupidity bother me far more than the content of your opinions. You really seem like you've been brainwashed by some external source. You seem deeply misinformed.

[Beet]

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.

Your common sense is complete lunacy. The history of banks making bad loans goes all the way back to the Tulip bubble of the 17th century. Banks are human, humans make mistakes, hence banks make mistakes. That's particularly when they are greedy.

You first said it was CRA and Fannie and Freddie, now you're changing your tune to moral hazard. Moral hazard is a problem, but the government has been involved in the housing market in many countries for many decades, however it was not until the last decade that a huge problem occurred in many countries at once. It was also the decade of the most excessive capitalism and unregulated markets. It's not hard to add two and two together.

Anyway, why did the Soviet Union never have a housing bubble and loan defaults? By your logic, since the Soviet Union owned all the housing, the ultimate government intervention, they ought to have had the biggest bubble. And I am not defending the Soviet Union, only illustrating how insane your logic is.

[Beet]

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.

Now you're talking about a massive government intervention to bail out the banks once your plan inevitably destroys them. 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.

Even with that said, I'm not sure your plan could work, but it's better than withdrawing all government support from the housing market. A big problem right now is that a lot of the troubled housing can't be foreclosed on because of paperwork delays. Also, driving down the price of housing below the current level would put many households further underwater, probably much more than today. You would need housing prices to drop to well below the historical average to order to 'clear' the market- possibly 50% lower. You're also betting on the Chinese to come in and massively buy up US housing, which is really risky not to mention politically problematic. And even then who knows if there'll be enough buyers?

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You tried to argue that banks could not possibly make a bad loan unless it was ordered to do so by the government. Probably one of the most absurd arguments I've ever seen on this board, and with opebo around that's saying something.

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Then you're wrong about that, too.

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No regulation is forcing banks to make any loan that can't be repaid.

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Banks have failed together in every financial bubble since the beginning of time- without the help of the government. The nature of the financial system is that confidence is intertwined. That's what a 'panic' is. Your argument is like saying companies never fail together in a free market. That's what a 'recession' is. You seem to be ignorant of the basic terms of economics that even a high schooler could understand.

[Beet]

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?

[Beet]

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.

[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.

[Beet]

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

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.

[Beet]

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.

[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.

[/quote]

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.

[Beet]

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.

[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/

[Beet]

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.

[Beet]

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.