Professor Mark J. Perry's Blog for Economics and Finance
Politicians will bend to any new wind that blows through, but this past week of financial turmoil has shown there's a strong whiff in the air for the values of the greatest generation. This was the 20% generation. In the post-war years, young couples knew they'd somehow have to save 20% of the down payment on a home mortgage. That's thrift, an archaic word I think is still in most dictionaries.
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
5 Comments:
For things other than houses there was the Polish payment plan*: One payment, cash.
*That's what it was called in Milwaukee, WI in the fifties.
For years banks didn't offer 100% LTV. Then they did. Two sides to every transaction...
In Carpe World, its exclusively Blame the Borrower. At least you get it half right.
Anon.,
The borrower just reacted to an incentive.
It is not the borrower but the policy of extending credit by lowering borrowing standards at a time of historically low interest rates that created a housing bubble. Eventually, interest rates were going to go up and the sh** was going to hit the fan.
Had we stuck to the 20% rule, we would not be in this mess.
I blame the borrower AND the government. As mentioned above, the government provided the incentive by prodding the banks and promoting this "ownership society," unintended consequences by damned. Every president since Carter has had a hand in it, right up to the current one and his 'ownership society' policies.
Then, some of the borrowers who clearly weren't ready for such a great responsibility as homeownership fell for it.
Don't get me wrong, owning a home is a good step and a noble goal, and it's definitely on my list of things to do in the next few years. But I've done the responsible thing, and attempted to save that magical 20% (or more) before jumping into it.
Well Henninger's first line goes: "Responsibility! Accountability! Discipline! Oversight! Rules!"...
It seems that there were already people calling for that...
From Terry Jones of INVESTOR'S BUSINESS DAILY: Congress Pushed Fannie, Freddie In Wrong Direction During 1990s
It was October 1992, nearly 15 years before the housing meltdown and subprime crisis.
Republican Rep. Jim Leach of Iowa was on the floor of the House, talking about something that no one at the time seemed to care about: the potential danger that Fannie Mae (FNM) and Freddie Mac (FRE) posed to the economy.
In remarks later reported by the Washington Post, Leach warned that Fannie and Freddie were changing "from being agencies of the public at large to money machines for the stockholding few."
Leach's prescient comments went unheeded — indeed, Congress spent the next decade and a half avoiding the alarms going off around Fannie and Freddie. Until, that is, it was too late.
Led by top Democrats, including Rep. Barney Frank in the House and Sen. Chris Dodd in the Senate, Congress not only did nothing about the growing risks at Fannie and Freddie, it in essence doubled down on their risks.
The Democrat-led Congress of the early 1990s eased capital limits on the two mortgage lending giants, letting them use enormous leverage — 2.5% of assets at Fannie and Freddie, vs. 10% for banks — to expand lending to low-income, minority communities. (there's lots more)
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