It was a government failure. But they blame free enterprise and “deregulation,” and use it as an excuse for more disastrous government policies.
49 thoughts on “The Great Recession Wasn’t A Market Failure”
Comments are closed.
It was a government failure. But they blame free enterprise and “deregulation,” and use it as an excuse for more disastrous government policies.
Comments are closed.
This article is utter bullshit. Using their numbering scheme for the six points of “government failure”:
1) Article says and the outsourcing of risk assessment by regulators to government-sanctioned rating agencies incentivized (not merely “allowed”) – or, shorter, “deregulation incentivized.”
2) So Fannie and Freddie were leveraging houses in Spain, Ireland and the UK?
3) Fannie and Freddie don’t “compel” the origination of any loans. They buy the loans after origination.
4) Continental Illinois and the thrifts weren’t “bailed out.” They were liquidated, the shareholders wiped out and management fired if not jailed (Charles Keating). Shareholders do control risk – they hold the most risky portion of any firm’s capital, since they get paid last (if at all) in the event of a failure. Borrowers, who get paid first, have less control of risk.
5) How in the hell is a depositor supposed to monitor the risk of their bank’s lending? Loans are and have always been by law confidential. The depositor has no way to know what loans are being written.
6) Reducing fed funds rates did add fuel to the fire. (I guess being right 16% of the time is better odds than a stopped clock.) Need I point out who approved those rates?
Even if you blame the Subprime mess on the gub’ment, you have to lay blame on the borrowers too.
Where I live the subprime goofs were committed by well educated people who over borrowed to buy huge houses TOO expensive for them. I read and saw and heard story after story of people losing half million dollar houses, and bigger, bought on subprime loans, when the purchasers businesses went belly up for lack of customers. Was that really the guy the libs had in mind when they wanted to expand the ‘merican dream? And this isn’t Miami, Chicago, LA or NYC, half a mil is a pretty good sized house in central NC still.
Personally, I feel less sorry for the guy who could have very easily bought a really nice, bigger house, upgrading from his 2500 sqft original house, but he bought a friggin’ castle instead, thinking the next refi was just 3 years away so he could really afford the castle. By the stories here, he’s and his working spouse are college educated, self-employed and should be a better planners than some high-school drop out framing carpenter, buying his first double wide.
The carpenter, who by coincidence, worked for the half-million dollar house guy. Some of the carpenters weathered this by doing whatever to meet that $600 a month payment. His boss wasn’t really able to do that.
Fannie and Freddie don’t “compel” the origination of any loans. They buy the loans after origination.
So creating a market for bad loans doesn’t compel / encourage bad loans? Have you ever had an economics class? If not you might want to look into it. If you already have, find out if it is too late to get your money back.
“Compel” is not the same as “encourage.” More to the point, Fannie and Freddie were very late to the subprime market, and didn’t start buying in any volume until 2004. The private and unregulated market was roaring along by then.
2004 was the year Bush’s HUD pushed Fannie to increase their exposure to subprimes. See here.
The fact that there were morons in the marketplace shouldn’t be news to anyone. But incentivizing moronic behavior gets one more moronic behavior. It does not matter where, precisely, the subsidization occurs. Morons can only see the lower price (and lower restrictions, and ludicrous down payment, which are all fungible into ‘lower effective opportunity cost of ownership’ aka price.)
Zero down loans are pernicious – they’re an encouragement to take a risk with other people’s money.
If one insists on having a mortgage aid program, do it directly by helping one “get to” a reasonable down payment. And IRA-like housing account, a matching program to help initial equity build faster – anything where a significant slice of the subsidy ends up being ‘your money.’
People tend not to walk away from anything they’ve put 20% down on – even when they do end up underwater at a full 20+% market dip. They’ve got skin in the game, they can recognize and evaluate the chances of merket recovery, etc. A flipper, on the other hand, has no sane reason to stick around.
I am beginning to think that the destruction of the middle class and general increase in income disparity (Gini coefficient) is similarly due to a failure of government – government interference in the labor market. The general variance in productivity between people is actually quite small (generally speaking and excepting a few genius outliers probably less than five times) much smaller than variance in current incomes. Hence the disparity of current income is probably largely due to governmental distortion and interference in the market place – the government creating artificial monopolies that private individuals can exploit. This is a win win for the government as it can then impose wealth redistribution to compensate for these government imposed monopolies, all roads leading to bigger government.
Nassim Taleb (black swan) made the comment that democrats like big government while republicans like big business (of the too big to fail kind). I would further respectively add big unions, big religions and big families to the mix. Big anything else leads to big government. Both republicans and democrats like creating institutions that are too big to fail, governments find large institutions so much easier to regulate, tax and control. However the adaptability and future prosperity of the country comes from small business, the mammals – governments really do not like mammals (the middle class). For the US to recover its innovative and entrepreneurial mojo and thereby its middle class, equality and economy, the era of big government, business, unions, etc., will need to be brought to an end. There currently seems little hope of that happening, and so the sun is setting upon the US empire.
Rand, I suppose for the first post on this thread, that person is entitled to their opinion, but I have regarded your Web site and the conversation taking place as family oriented.
A person can express disagreement with your point of view with a little bit more temperate language, and a little bit more respect that people come here with different points of view.
Paul Milenkovic – so being called a “State fellator” is “family-oriented” and respectful?
“Compel” is not the same as “encourage.”
You not only have no idea how economics work but evidently no idea how basic human nature works either.
More to the point, Fannie and Freddie were very late to the subprime market
Fannie/Freddie wasn’t the only way in which the US federal gov’t encouraged, or more correctly MANDATED, subprime lending.
Government never mandated subprime lending. The word “subprime” means “more risky.” That’s why it’s not “prime” lending. No government program mandated risky lending.
“No government program mandated risky lending.”
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 REQUIRED Fannie and Freddie to underwrite a percentage of “affordable housing” loans.
“More to the point, Fannie and Freddie were very late to the subprime market, and didn’t start buying in any volume until 2004.”
So 20 to 30% of the ’03 market wasn’t “any volume”? They started buying in ’00. What was the market then?
You keep writing like the history of this started in ’04. Carter started it and Clinton changed it significantly but you don’t mention that. Didn’t the Bush administration try to reign them in in ’03? We had Franklin Raines and Dodd and Frank and their lobbyists doing their best to stop those efforts, the one exception being Oxley.
Rand:
I don’t get what Comment 8 is even talking about — I have done a word search on the article you linked to and I can’t find the vulger expression that is used by Comment 8 to justify crude language in a “you started it” sense.
I really like it that your Web site attracts comments from all points of view — I would hate to see comments moderated or whatever that your fine Internet salon become an echo chamber.
I guess I will wrap up my concern by paraphrasing a joke that I had read. Mrs Wealthy is put on the board of a school for wayward boys, not that she is to participate in the school but because of her checkbook. But Mrs. Wealthy gets the idea that she has to volunteer, and after spending a couple weeks at the school, she remarks to the school president, “You have a fine school here, but I think it could be improved were you to admit a higher class of boy . . .”
Rand, you have a fine set commenters representing diverse viewpoints, but your Web page could improve if you encouraged participation by a higher class of representatives of the liberal/progressive view point.
“Even if you blame the Subprime mess on the gub’ment, you have to lay blame on the borrowers too.”
Borrowers are always going to go for the best deal they can get. Lenders have the ultimate say over whether or not they will lend — unless it’s gub’ment policy to *make* them lend to satisfy some arbitrary whim. And the government *can* (and does) make them lend.
When I clicked on the “comments” link, I expected Chris Gerrib to be the first commenter, Jim having seemingly departed for more fertile grounds. CG’s response was predictable, and is utter B.S.
Paul Milenkovic – you don’t read the comment threats here much – that’s commentor Leland’s favorite term of indearment for me.
Bill Maron – if Fannie is 20% of the market, somebody else is 80%. And obviously the Bush administration didn’t try to rein in Fannie if they increased their purchases in 2004 – the year Bush won re-election. The history of subprime started in 2000 and expanded greatly thereafter under Bush.
MfK – sorry, the government does not make private lenders lend to anybody.
MfK – sorry, the government does not make private lenders lend to anybody.
Sorry, but that is utter BS.
“Bill Maron – if Fannie is 20% of the market, somebody else is 80%. And obviously the Bush administration didn’t try to rein in Fannie if they increased their purchases in 2004 – ”
That would be a large number of some bodies. As in Gulliver vs. the Lilliputians.
Amazing! Because he wasn’t successful, he didn’t try. Good luck with logic like that.
MfK – sorry, the government does not make private lenders lend to anybody.
The Community Reinvestment Act did just that.
Amazing the CRA caused housing bubbles in the UK, Spain and Ireland too?
Gosh…
I wonder what percentage of bad loans are actually due to the CRA? Less than 20% you say Google?? And they weren’t lending to Brits under the CRA either?
Gosh again…
Merry Christmas all, I’m having a few days off so I thought I’d see if you’d got sane here.
Seems not…
Markets that operate on human expectation can have little natural damping, so to speak. It does not necessarily take much of an active forcing function (like governmental interference in one country…) to make them unstable. Of particular concern is when governments directly mitigate the consequences of long term crashes, thereby reducing the precise market signals that would otherwise serve to damp the system and prevent bubbles.
It is not like a great many people did not know the financial crash was coming, but even with a long term investment strategy, one must still ride the bubble – especially the upside. And if the government helps pay for the crash (because it is too big to fail), then the long term ROI for that market is going to be elevated above other markets – further encouraging over investment, expectation and volatility in that particular market (at everyone else’s expense).
Markets that operate on human expectation can have little natural damping, so to speak. It does not necessarily take much of an active forcing function (like governmental interference in one country…) to make them unstable.
Markets naturally are unstable. They change just from traders entering and leaving the market, or making large trades. The thing here is that instability is not bad in itself. Among other things, it makes for a more responsive market and frequently correlates with uncertainty in the market.
Pete – It does not necessarily take much of an active forcing function (like governmental interference in one country…) to make them unstable. How – sympathetic magic? I mean, if ever there was a solely domestic market, it would have to be housing.
MfK – By what mechanism does CRA force banks to make bad loans? All CRA says is that you can only turn down a loan for financial (as opposed to, for example, racial) reasons.
All CRA says is that you can only turn down a loan for financial (as opposed to, for example, racial) reasons.
I know you work in banking and consider yourself well-informed, but that is total sewage (and I believe you’re fully aware of it). A bank can be sued for not lending enough to specific geographical areas. And the CRA, as it has been interpreted in past cases (aka precedent), is used by the suing entity. If you don’t think banks are aware of this, and alter their behavior accordingly, you are most definitely uninformed.
Chris,
If that were true, why would they bother passing the law? The equal housing opportunity act already demanded that…
Hey Curt, did you ask Mr Google about the relative performance of loans in areas heavy in CRA loans versus, say, those in White, Middle Class Areas of Miami or Las Vegas…
Likewise, again, were the banks in the UK and Ireland that were lending money like drunken sailors doing so because they were worried about being sued under the CRA?
Have you heard of Credit Default Swaps? Do you understand what they were and how they were sold? Do you understand who bought them or why? Do you comprehend where the money was actually being made in the mortgage catastrophe and why banks didn’t care who or what they were lending nor to whom?
Thought not.
But as the Google Fu is weak in these ones, here’s a nice report by some economists about the impact of the CRA on the recent crisis:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136
Two quotes leap out at me:
“The CRA emphasizes that banking institutions fulfill their CRA obligations within the framework of safe and sound operation. CRA performance evaluations have become more quantitative since 1995, when regulatory changes were enacted that stress actual performance rather than documented efforts to serve a community’s credit needs.”
and…
“The current crisis is rooted in the poor performance of mortgage loans made between 2005 and 2007. If the CRA did indeed spur the recent expansion of the subprime mortgage market and subsequent turmoil, it would be reasonable to assume that some change in the enforcement regime in 2004 or 2005 triggered a relaxation of underwriting standards by CRA-covered lenders for loans originated in the past few years. However, the CRA rules and enforcement process have not changed substantively since 1995.2/ This fact weakens the potential link between the CRA and the current mortgage crisis.”
David – the CRA was passed in 1977… it was revised in 1995 to strengthen the position for banks to lend only on financial criteria (see above) – the bulk of the loans that fragged the banks and economies in the US, UK, Ireland and others happened in 2005ish time frame…
Now, I’ll take an argument that the Bush Tax cuts with lax interest policy post the collapse of the dot com bubble coupled to the explosion of the Mortgage Bond Market and the creation of Credit Default Swaps created a perfect storm – where poor monetary policy trying to keep the economy going post 9-11 basically allowed banks to play roulette with other peoples money AND insure themselves again the risk.
If you don’t think banks are aware of this, and alter their behavior accordingly, you are most definitely uninformed.
If he does indeed work in the banking industry and makes the claims he is making he isn’t uninformed, he is a liar.
Hey Curt, did you ask Mr Google about the relative performance of loans in areas heavy in CRA loans
What in the bloody-hell-that-is-your-mind do you mean by “CRA loans”?
Loans made because of the requirements of the 1977 Community Re-investment Act.
What in the bloody-hell-is-your-mind did you think I meant?
But Curt, just so I’m clear, here’s the conclusion of the article I linked to, which was the first of many when I googled “CRA impact on recession”…
“Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.”
Loans made because of the requirements of the 1977 Community Re-investment Act.
And from Chris:
All CRA says is that you can only turn down a loan for financial (as opposed to, for example, racial) reasons.
These aren’t the droids you’re looking for, move along.
Curt – no, you can’t sue a bank for not lending unless you can show that they were turning down loans for non-financial reasons.
Equal Housing Act did not ban red-lining, which was the practice of not lending to certain areas.
you can’t sue a bank for not lending unless you can show that they were turning down loans for non-financial reasons.
False. Just ask Jesse Jackson. Or an ACORN lawyer.
A big problem with the courts in the US is that you can sue over practically anything without having evidence to support your case, imposing legal expenses on the defense, with far too few liabilities for frivolous prosecution. The very threat of a lawsuit can be enough to gain concessions from a defendant they would never make in a sane world.
So, anyway, how did the CRA frag the British Mortgage Market?
I’m all ears.
Plus I’m struggling to work out how an act passed in 1977 led to an explosion of really really really really really bad loans in 2005 when most of the original loans made under the act would have been pretty much paid off…
Another thought – how come it took almost 30 years for the banks to be “forced” to lend all this money under the CRA terms when they hadn’t been making such bad loans prior to 2000-2005…
I guess it was that damn liberal president in the White House forcing the banks to make bad business decisions…
Ooo… here’s a Business Week article from 2008 which doesn’t seem to think the CRA had anything to do with the problem…
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinvestment_act_had_nothing_to_do_with_subprime_crisis.html
Interestingly, apart from mostly right leaning blogs talking about a 1994 suit that Obama was part of against Citibank in Chicago, I’m struggling to find too many actual documented cases of lawsuits being brought against banks under the CRA…
Especially not during the time period when the bulk of the really bad and according to the data, mostly unregulated (i.e. OUTSIDE the scope of the CRA) loans that caused the problems…
I’m struggling to find too many actual documented cases of lawsuits being brought against banks under the CRA…
It’s the threat dipshit.
I guess it was that damn liberal president in the White House forcing the banks to make bad business decisions…
He wasn’t that liberal.
Curt – I am amazed at how CEOs of businesses are heroic, stand-up types, yet a mere threat causes them to immediately capitulate. Seems contradictory to me.
Curt – do you seriously believe that major international banks are so terrified of Jesse Jackson and the CRA that they would quite intentionally put themselves into a huge risk of over exposure?
So why, given this fear and risk caused by the government forcing them to loan all this risky money did they compound the problem on their own by lending more than 8 times the amount in non-CRA regulated loans.
I mean, that would be criminally stupid behaviour unless they thought that they could make more money at it… in which case the whole CRA thing is a red herring…
Unless you think that the CEOs of these banks are such incompetent idiots that they’d compound bad policy with bad business decisions…
And Curt, that “threat” still doesn’t explain how the CRA and US government policy brought down Northern Rock in the UK…
I think (for any large corporate CEO) a mere whisper that Jesse Jackson wants an audience is enough to initiate investigations into hiring (or lending) practices, and depending on the outcome, would alter behavior.
CEOs of businesses are heroic, stand-up types
If you have a list of people you’re baiting with that, let me assure you I am not on it.
So, you’re seriously telling me that Jamie Dimon or Dick Fuld would have worried about a meeting or issue with Jesse Jackson being upset with them? After the very public way they behaved all the way through late 2007 and early 2008?
Good grief, I want some of what ever it is you’re taking!
Besides, it *still* doesn’t explain how this fear of ACORN or Jackson brought down the British and Irish economies…
Good grief, I want some of what ever it is you’re taking!
Ditto.
So no actual arguments then except the poor widdle CEOs were scared?
“Merry Christmas all, I’m having a few days off so I thought I’d see if you’d got sane here.
Seems not…”
I think the word ‘peckerwood’ fits you to a T.