Friday, October 03, 2008

How Government Stoked the Mania And Turned Good Renters Into Irresponsible Homeowners

Before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs -- from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.

~George Mason economist Russell Roberts
in today's WSJ


At 10/03/2008 10:19 AM, Blogger spencer said...

And to think that it was just two years ago that Russ Roberts was claiming that all the new homes just demonstrated that US living standards were higher than all the "bad" official data that massively overstated the inflation rate.

At 10/03/2008 1:20 PM, Blogger Arman said...

Long on meaningless rhetoric and short to absent of meaningful substance.
The wise consider the errors that they have made in order to learn from them. The economists ignore what they have said in order to try and sound profound.

At 10/03/2008 1:24 PM, Blogger bobble said...

for another viewpoint, here are some questions to ponder from Barry Ritholtz at The Big Picture. clik the link for the full article.

• 50% of subprime loans were made by mortgage service companies not subject to comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

• What was it about the CRA or GSEs that mandated fund managers load up [leveraged 30:1] on an investment product that was hard to value, thinly traded, and poorly understood

• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?

At 10/03/2008 1:32 PM, Blogger Arman said...

So the bailout is passed. Fools! This will do NOTHING to stabilize the economy. When the Fed STOPS monkeying with the interest rates, things can START to stabilize. With the current common idiocy, that will happen when they get to zero just as Japan did.

At 10/03/2008 3:13 PM, Anonymous Anonymous said...


Just an observation but your posts also seem to be long on "rhetoric and short to absent of meaningful substance".

Perhaps, you could substantiate your theories about monetary policy with something more credible than an implicit "because I say so". You have not, for example, provided anything to support your claims regarding Japan's economic problems or your theories about FED rates.

What you have presented is purely opinion and conjecture without any supporting evidence or data to support your claims.

QED A claim is not proven unless it is supported by credible data that can be verified or evaluated.

For example, you can tell us WHY you think X because of this data (link) and this data (link) so that we can evaluate the information and possibly come to the same conclusion. Just telling us what to think may work if you plan to write a bible but it is otherwise intellectually sloppy.

Bobble's post above provides a claim with supporting data that can be checked and verified.

At 10/03/2008 3:27 PM, Anonymous Anonymous said...


Good piece. Unfortunately, the author did not provide us with any clues as to where we go from here aside from designing regulations which will emerge once the dust settles.

Would very much like to know more about the present pressures with liquidity, mark-to-market, and capitalization requirements in the financial markets. This portion of the picture is more difficult to understand specifically with regard to what should be done and whether the present approach will work. Seem to be many more questions than answers from Treasury on the extent of the crisis.

At 10/03/2008 5:02 PM, Blogger bobble said...

qt, yes where to go from here?

theoretically the 'mark to market' problem is magically solved by the treasury buying MBS at above current market price. once those higher prices are paid, everyone can mark up their formerly worthless MBS to the new 'market price'. its a phoney market, but that's what will happen.

until the price of housing stops going down, nothing will really solve the problem. when will that happen? when the oversupply of homes has been absorbed. when people have jobs and finish paying down the debt they ran up over the last 7 years. basically, when prosperity returns. lol, reminds me of a joke. what did you hate more about the clinton years; the peace, or the prosperity? [and before you start throwing the libtard word at me, i never voted for clinton. i'm a republican, just not a neo-con]

providing the 'bail out' works, which i'm not convinced it will, it seems like we need to revive some regulations that served us well over the years but were repealed in recent years.

glass-steagall which kept commercial banks (fdic insured deposits) from getting into the kinds of speculative ventures that investment banks could do.

reinstate/tighten the leverage rules on all banks.

require that derivatives be traded on a regulated exchange.

prohibit excessive leverage in derivatives especially with regard to commercial banks and insurance companies.

regulate bond rating agencies, or change the structure so that the issuer is not the one paying for the rating.

and, ok ok, for all of you 'social engineering caused the whole thing' adherents; it didn't, but lets get rid of those bloated, politically corrupt, unnecessary, government intrusions into the private sector!

At 10/03/2008 7:38 PM, Blogger bobble said...

qt, for another view on "where do we go from here?", check this out

At 10/03/2008 10:31 PM, Anonymous Anonymous said...


I also have severe doubts about whether this latest "bailout" will go very far in solving the problems.

The measures you suggest seem to be quite reasonable and sensible to me with the exception of the Glass-Spiegel which has eased the present difficulties by permitting the purchase of Merrill Lynch by Bank of less bailout for the treasury. Bill Clinton's recent remarks are quite interesting on this subject.

At 10/06/2008 2:25 AM, Blogger Arman said...

What do you want? Do you really question the fact that this entire problem is simply a shortage of money? Where do you think money comes from? How do you think a system of circulating currency suddenly finds itself short of currency?
August 07, everything was fine. September 07 the Fed cuts their overnight rate, and suddenly some mortgages aren't going to be renewed. Do you really need verification of that story?? The more that the Fed tries to bolster the cash supply by Keynesian principles, the more short the money supply gets. Lower interest rates discourage lenders from lending. Higher interest rates encourage lenders to lend. Specifically, what part of my posts do you have trouble with? As I see it, the only problem I have is with narrow minded ignorance, that seems to be part and parcel of any economics education.


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