There’s an interesting difference between the financial troubles of today and the Savings and Loan debacle of the late 1980s. In the latter case, the MSM (except for the WSJ editorial page, natch), quickly decided to blame deregulation and not, in any substantial way, the “moral hazard” of federal deposit insurance, which was a prerequisite to the crisis. Given the monopoly power the MSM had in those days, the “deregulation is solely to blame” theory quickly took hold, and helped lead to a backlash against Reagan-era deregulation.
Today there are certainly plenty of voices, within and without the MSM, who want to solely blame “deregulation,” or at least “lack of regulation,” for the debacle. But given blogs, YouTube, talk radio, and other non-MSM means of communication, a counter-narrative has formed, blaming the situation on government–the Community Reinvestment Act, Fannie and Freddie, Federal Reserve pump-priming, and so on.
Many of those who are pushing the latter theories, especially when primarily blaming the GSEs and the CRA, are being as simplistic as those blaming “deregulation.” For example, say what you will about the GSEs and the CRA, my first encounter with the housing bubble was when I lost a house I bid on (by $1,000) to a woman who showed no objective evidence of being able to responsibly manage her money, or to afford the house in question. She apparently had saved virtually no money for a deposit ($1,000), put no money down on her mortgage because she had none, received all her closing costs built into the loan, and received a loan for $580,000, co-signed by her father as a second occupant, with whom she had rather tense relations (all told to us later by the seller, who was her friend) and did not currently live with. The loan was too big for Fannie and Freddie, and I’m pretty sure that no one was holding a CRA gun to the lender’s head. I thought at the time, “who in their right mind would lend this person all this money, with negative collateral (a loan for more than the sale price)”?
In any event, I think there is plenty of blame to go around, and both the government (and especially the Fed) and short-sighted market actors (who believed that housing prices couldn’t decline nationwide, because they handn’t since the ’30s–I think they had Greenspan himself as an authority for that one) come out looking pretty badly.
But I think it’s interesting that while markets and deregulation shouldered almost all the blame in the 1980s, the government is going to get at least some of its share of the blame this time, thanks to the “new media.”
Dilan Esper says:
You are making into a media bias issue something that is almost certainly not media bias.
The S&L crisis was blamed on the regulatory climate because it involved S&L’s who were simply violating their (moral if not legal) responsibilities to their depositors, which is the classic object of regulation.
The current crisis is far more complicated, with all sorts of causal elements at play. Thus, there’s a lot more discussion about what the possible causes are, with no specific focus on regulation.
Actually, the better contrast is with Enron. The internet was going strong when Enron went down, and yet blame was pretty quickly (and accurately) fixed on the accounting shenanigans and Enron’s cozy relationships with the government.
It’s not media bias. It’s the complexity of the scandal.
(I would also note a lesser, but still important factor is the fact that this is a Presidental election year. Thus, there’s a huge amount of money and ideology pushing theories that fix the blame totally on each political party. That is a powerful impetus to get conflicting narratives some play (even if one or more are BS).)
October 1, 2008, 7:24 pmBMGF says:
the government is going to get at least some of its share of the blame this time, thanks to the “new media.”
Problem is, the “new media” is likely to be forcibly phased out, starting January 20. Certainly if Obama wins, and maybe even if McCain wins.
October 1, 2008, 7:25 pmAsher says:
Feel free to delete this off-topic post, but this is pretty remarkable and one of you ought to do a post on it. Tonight CBS will air this clip from the neverending Couric/Palin interview. Particularly note the italicized part:
Couric Why, in your view, is Roe v. Wade a bad decision?
Sarah Palin: I think it should be a states issue not a federal government-mandated, mandating yes or no on such an important issue. I’m, in that sense, a federalist, where I believe that states should have more say in the laws of their lands and individual areas. Now, foundationally, also, though, it’s no secret that I’m pro-life that I believe in a culture of life is very important for this country. Personally that’s what I would like to see, um, further embraced by America.
Couric: Do you think there’s an inherent right to privacy in the Constitution?
Palin: I do. Yeah, I do.
Couric: The cornerstone of Roe v. Wade.
Palin: I do. And I believe that individual states can best handle what the people within the different constituencies in the 50 states would like to see their will ushered in an issue like that.
Couric: What other Supreme Court decisions do you disagree with?
Palin: Well, let’s see. There’s, of course in the great history of America there have been rulings, that’s never going to be absolute consensus by every American. And there are those issues, again, like Roe v. Wade, where I believe are best held on a state level and addressed there. So you know, going through the history of America, there would be others but …
Couric: Can you think of any?
Palin: Well, I could think of … any again, that could be best dealt with on a more local level. Maybe I would take issue with. But, you know, as mayor, and then as governor and even as a vice president, if I’m so privileged to serve, wouldn’t be in a position of changing those things but in supporting the law of the land as it reads today.
Since she’s actually derided Obama’s position on Boumediene on the campaign trail, you’d think that she could name it.
October 1, 2008, 7:29 pmElliot123 says:
“It’s not media bias. It’s the complexity of the scandal.”
Perhaps it’s simply media ignorance? I have yet to hear any reporter ask someone exactly what deregulation caused the current problem. We have lots of people complaining about deregulation (Obama), and I’d love to know if they have any particular regulation in mind. Perhaps Couric could ask Obama to list the regulations that were dropped and caused the problem?
October 1, 2008, 8:17 pmJestak says:
Of course, one thing about the MSM’s position about the S&L crisis is that they were correct to focus on deregulation, not moral hazard. Larry White’s book on the S&L crisis makes this pretty clear.
October 1, 2008, 8:19 pmSmokey says:
Right, Asher, that was completely off topic. Can you explain why you’d pull such a stunt?
October 1, 2008, 8:20 pmDavidBernstein says:
The S&L crisis was caused by deregulation, but deregulation in the shadow of the moral hazard created by deposit insurance. If memory serves, the S&L’s were all charged the same rate for FDIC insurance regardless of the risks they were taking. S&L’s could take very large risks, offer high interest, and the depositors didn’t care about the risk, because their money was insured. So, yes, it was foolish to deregulate the S&Ls, but mainly because of other foolish regulations. It wasn’t the free market run amok, as many argued at the time, but a partly deregulated market that distorted incentives to the detriment of taxpayers.
And, if memory serves, some tax measures passed in the mid to late 80s disrupted commercial real estate markets to S&L’s disadvantage. I followed the S&L coverage pretty closely at the time, and was amazed at how rarely the issue of moral hazard (even in lay terms) was ever raised.
October 1, 2008, 8:34 pmRPT says:
Any thread that depends upon the completely useless (for those of us who deal in the non-academic world) concept of the “MSM” is subject to hijack at any time. Any Alaskan public official (who is also a commercial fisherwoman) who previously railed against the pro-Exxon/anti-Alaska decision of the USSC in Exxon v. Baker before she forgot about it merits further comment.
Notwithstanding the foregoing, the questions about the current crisis are worthy of detailed answers. Who has them?
October 1, 2008, 9:23 pmUthaw says:
I lost a house I bid on to someone who put down a larger amount of earnest money than me, but offered a lower total purchase price. Oh well, go figure. I put that one down to “dumb seller”.
October 1, 2008, 9:47 pmrmd says:
. . . while markets and deregulation shouldered almost all the blame in the 1980s, the government is going to get at least some of its share of the blame this time . . .
Blaming deregulation is blaming the government.
October 1, 2008, 9:59 pmTatil says:
David,
FDIC is assumed to be good and desirable, so I am not surprised that the people did not blame FDIC. If FDIC was designed not to charge premiums based on risk, then the banks should have been regulated in a more stringent fashion. Yes, moral hazard and deregulation had to exist at the same time for the crisis to happen, but -theoretically- the banks could be properly regulated to combat the moral hazard. Therefore, it makes sense to put the primary blame on deregulation. Besides, basing premiums on risk is also a form of regulation. I don’t see that much of a bias.
October 1, 2008, 10:29 pmRSF677 says:
“Actually, the better contrast is with Enron. The internet was going strong when Enron went down, and yet blame was pretty quickly (and accurately) fixed on the accounting shenanigans and Enron’s cozy relationships with the government.”
Enron’s relationship with the government is relevant how?
“The S&L crisis was blamed on the regulatory climate because it involved S&L’s who were simply violating their (moral if not legal) responsibilities to their depositors, which is the classic object of regulation.”
This means what? They followed the letter of the law but not the spirit of it? I’m pretty sure very few follow the spirit of the law unless the rules are principles based.
October 1, 2008, 11:20 pmElmer says:
Perhaps we needed more class bias. Maxine Waters was (and perhaps is) proud of 100% loans, because she thought they helped the poor. Had such loans been confined to the poor, our current troubles would be mild. Instead, banks were fair. All Americans had the right to borrow too much for a house, not just the poor.
“I’d rather be ignored by selfish people than helped by stupid ones.” Emo Philips
Of course, big things like this crisis or WWI have a tangled web of causes. Had the risk of those mortgages been better confined, the problems would have been adressed long ago. Foreign capital inflows were needed to keep the interest rates low. Still, Barney Frank and friends certainly share some blame, so the notion that they are coming to our rescue seems a case of Munchausen by proxy.
October 1, 2008, 11:48 pmDavidBernstein says:
Right, the way the FDIC charged for its insurance was indeed a form of regulation. Making the S&L problem a product of both bad regulation AND deregulation coexisting. But the blame fell on the deregulation part. I’d have been reasonably satisfied at the time if the sources I was reading and seeing would have bothered to point out that the problem was partially deregulating the S&L’s while preserving a regulatory system set up for the pre-deregulation era. The problem, in other words, was just like the Fannie/Freddie problem, socializing risk, privatizing gain. Whatever that is, it ain’t the free market.
October 2, 2008, 12:03 amSmokey says:
Even the libs will enjoy the great music in this explanation of how the subprime mess happened!
October 2, 2008, 12:03 amPsalm91 says:
Elmer:
Were the default rates for CRA loans higher or lower than non-CRA loans? How many CRA loans are part of the recent loan default problems? How many of the buyers were qualified but were previously excluded from the market by redlining practices? Do you have any idea about what you are complaining?
October 2, 2008, 12:04 amPaul Allen says:
Psalmn,
The latest CRA tabulation is roughly ten years old and done as part of a study with the purpose of green-lighting MBS for subprime loans.
October 2, 2008, 12:47 amD Palmer says:
Your story, while not representative of the norm, is not unusual and illustrates why I am not happy with multiple parts of the bailout.
Assuming the woman defaulted (which seems likely) she is example #1 of why I am not in favor of judges being given the authority to change mortgage terms. Allowing her to keep the home would be rewarding deliberately reckless actions.
Similarly, any mortgage securities purchased by the government as part of the bailout plan should be carefully scrutinized to understand the individual loans that make up the pool. When loans such as this are identified, the originating bank should be forced to buy them from the government at par (face value).
There is no magic to residential underwriting. One does not need to rely on credit scores to determine good or bad risks. If fact, the over reliance on such metrics is simple laziness and a contributor to this whole mess.
Once upon a time borrowers were required to borrow LESS than the purchase price and have documented incomes actually capable of supporting the proposed loan. Hopefully that is where we are going to again.
October 2, 2008, 12:47 amPaul Allen says:
David:
You ought to consider the accounting rules as a regulatory failure too. Far from being “dergulation” the SEC and FASB are government bodies, albeit the last one is a public-private partnership.
October 2, 2008, 12:49 amElmer says:
Psalm91:
No, but I’m trying to learn.
My understanding is relatively few. If redlining was occurring, forcing some to meet artificially high standards, that group would have an abnormally low default rate when the alleged redlining was practiced. I don’t think that was the case in the 90s.
Who cares, and not that many, which was my point. Lending standards were relaxed for everyone. In my younger days, say, half an hour ago, I thought that the CRA type stuff was the impetus for relaxing those standards. Now, 20 minutes into the Bloggingheads where Yves Smith is describing irrational behavior in the credit markets over the past few years, I have the maturity to blame the fashion industry.
Large numbers of people sometimes feel compelled to do stupid things. In 1973, the fashion industry satisfied this normal human need by producing tragic clothing and hairstyles. I’d long thought that my own relatives, a fairly staid bunch, had avoidied this, but reunion pictures tell a different and disturbing tale. Yet this produced little lasting damage. Since that time, creeping regulation has confined the use of terrible fashion to the young, except for footwear, so that when people had to do something really stupid, they were pushed into a more consequential activity.
October 2, 2008, 12:49 amElmer says:
I may have been hasty in blaming the fashion industry. Whoever has made and enforced the rule that I am too old to wear really baggy pants is responsible for this crisis.
October 2, 2008, 12:56 amD Palmer says:
Psalm 91,
CRA loan probably do have a somewhat higher default rate (although I do not know this for a fact) since CRA brownie points are one of the reason banks institute programs targeted at first time buyers and low income buyers. But I do not believe that these loans make up a significant share of defaulted loans.
Personally I think the CMBS market and the excesses of Fannie and Freddie were the largest contributors to the price bubble and subsequent correction.
Commercial Mortgage Backed Securities allowed banks and other mortgage lenders to sell off loans rather than retain them on their books as was done 15-20 years ago. Once off the books, a default had no impact on earnings, so the bank could afford to take bigger risks knowing that they could off load the risk to investors.
This encouraged banks to introduce ever more creative loans, No Doc (also called “Alt A” a misnomer if there ever was one), “Option Loans” and various no money down programs. The easy availability of mortgages drove up demand and with it housing prices.
With Fannie and Freddie’s troubles and the collapse of the CMBS market, housing prices will drop to more reasonable levels. Some people will be hurt by the loss of the little equity that they had, but in the end housing will be more affordable for all, which is a good thing.
October 2, 2008, 1:05 amAndy Freeman says:
> Once off the books, a default had no impact on earnings, so the bank could afford to take bigger risks knowing that they could off load the risk to investors.
You’re ignoring one detail – the mortage pools were divided into multiple financial instruments with varying degrees of risk. Some had less risk than the pool as a whole while others had more. (Taken as a whole and properly weighted, the sum had the same risk, but the folks doing the dividing took a cut, so this process did reduce the total projected return.)
Regardless, the folks who bought these instruments clearly believed that they were being adequately compensated for the risk that they were taking. Were they lied to? Or did they ignore certain factors? (If they knew that a significant number of the loans were no-money-down in a fast rising market, the possibility of a bursting bubble and its consequences aren’t unforseeable.)
I’d guess that the vast majority got the relevant disclosures and ignored them. That being the case, they get to argue “we were too dumb to understand what we were doing, so save us”.
October 2, 2008, 3:18 amJerome Cole says:
Low compared to what? Capital flows are largely determined by interest rates and risk adjusted rates of return. Capitol flows towards places with relatively high interest rates and rates of return. The fact that the United States has had large capital inflows (and the corresponding trade deficits!) for so long is due to that the fact investors usually get a better deal here than in other countries. In other words, they get higher returns.
October 2, 2008, 6:06 amJerome Cole says:
BTW what is happening in the United States appears to be happening all over the world. It happened to Japan in the 1990s, real estate prices are crashing here in China and the banks are largely insolvent (The Chinese government is cooking their books, buying bad debt, and engaging in all kinds of bad behavior to cover up illegal behavior and protect the integrity of the financial system.) Real estate values in Western Europe are just as inflated as in the US and Asia. I imagine it will be difficult for the Europeans to avoid a crisis similar to ones in the US and China. It seems GSEs, speculators, mortgage fraud, etc. can’t entirely explain what is going on. Would anyone with some expertise in economics care to comment about what is going on?
October 2, 2008, 6:13 amr.friedman says:
Moral hazard of deposit insurance? Are you saying that depositors in S&Ls should have been monitoring their banks’ investments and withdrawing funds when they seemed improvident? Excuse me, the reason I put money in the bank is for safekeeping until I need it, I’m not supposed to have to monitor them. And how do you propose I get the information on their loans? Could you possibly be saying that the presence of insurance meant that the S&L’s officers didn’t have to worry about regretting having lost their depositors money? Oh the wringing of hands and gnashing of teeth!!!!!!!!!!!!!
October 2, 2008, 7:15 amHouston Lawyer says:
With regard to the S&Ls, whichever S&L offered the highest return received $100,000 inflows from investors all over the country. No such depositors cared what type of reckless investing management was up to, since their funds were not at risk. So management had unlimited opportunities to raise capital for whatever schemes they thought had the highest possible reward.
This sounds a lot like what happened with Fannie Mae and Freddie Mac. Sure, we’ll keep buying this stuff because the federal govt is backing it all up anyway.
October 2, 2008, 9:40 amA.C. says:
What ever happened to simply not being an idiot? The government can’t monitor everyone’s behavior all the time. I don’t count on police protection every minute of the day to prevent people from ransacking my apartment. I have a big deadbolt, which I use regularly, and I actually know my neighbors and trust them not to make trouble.
Which is to say that most protection, even in a society with functional regulation, comes from people looking out for their own interests and a culture that encourages good behavior.
Toss those things overboard and no regulatory regime can do much good.
People without the common sense to limit their borrowing are stupid. People who encourage them, to the point that such behavior seems normal, are aiding and abetting stupidity. In the example presented above, what was the woman’s father thinking? Sounds like her financial idiocy may have been inherited.
Lots of people couldn’t afford to buy houses during the bubble. I couldn’t. So I rented a perfectly nice apartment, for a lot less than a mortgage payment would have been. I plan to buy a place when the prices come down some more, so I really hope we don’t see frantic efforts to prop them back up.
As for all the clever folks who made a lot of money creating securities based on this stuff… smart people being stupid are even more irritating than stupid people being stupid. Perhaps they should have been spanked more as children, or otherwise had their personal limitations brought home to them. I mean, good grief, what were they thinking? Or what were they putting up their noses?
October 2, 2008, 9:49 ammossypete says:
The CRA and associated lending to low income borrowers in formerly red lined neighborhoods is a red herring/shiny object distracting you from the real problem – the credit default swaps.
If the treasury bought up the 2 million or so distressed mortgages it’s estimated that would cost $ 300-350 billion (at face value… given the properties have some value the net cost would be way less ) There are an estimated 62 trillion dollars in credit default swaps written to cover various debt instruments including these mortages.
CDS’s are are unregulated courtesy of Gramm Leach Bliley in 1999 (so quit yer whining). Unlike insurance companies that are regulated and required to have sufficient assets to pay off their liabilities, the investment banks and insurance companies that sold CDS’s have no idea of the risk and nowhere near the assets to cover the potential payouts.
October 2, 2008, 12:32 pmDiverDan says:
This poster, like most (if not all) of the MSM, displays a real ignorance of the history of the S&L crisis in the late 80′s. And blaming “Reagan era” deregulation was at least partly a result of media bias. Yes, deregulation was at fault in vastly increasing the huge scope of the S&L problem, but the genesis of the problem lay in the economic problems of the 70′s, the huge inflation and resulting runup of interest rates in the Ford and Carter Years. So few people care to remember that the regulation of the S&L industry meant that it was essentially dead by 1978 – you had an industry built on borrowing short term (i.e., passbook savings accounts paying a return that was fixed by government fiat at a maximum of 5.25%) in order to lend long term (30 year fixed rate mortgages). When double digit inflation of the Carter years drove passbook depositors away from S&Ls into money market accounts sold by the Securities industry which were paying 18-20%, the S&Ls were faced with a huge liquidity crisis — no source of funds to keep holding their portfolio of 30 year fixed rate residential mortgages. Selling those mortgages to Fannie or Freddie or Ginnie Mae in 1979 or 1980 would have meant instant death to all S&Ls, as their portfolios of 30 year residential mortgages paying 5-6% (the ONLY investments S&Ls were authorized to make) were only worth pennies on the dollar in an environment of 18-20% interst rates. The only alternative to deregulating the S&L industry in 1980 was killing the whole industry. That was politically unacceptable. So, before Reagan was ever sworn into office, Congress deregulated the S&L industry, and told this insolvent industry to grow out of its death spiral by making riskier loans; to make it easier, Congress increased the deposit insurance limit from $10,000 to $100,000, and let S&Ls fund their old portfolios of 30 year mortgages (at 5-6%) by selling new 20% CDs. Yes, Reagan accelerated the death of S&Ls, but primarily by tax reform in 1985, which made the tax driven real estate deals of the early 80′s economically impossible- with no more 5 and 6 to 1 write-off deals, the uneconomic apartment and retail deals started caving by late 1985, and the S&Ls which were artificially propped up by Congress in the early 80s began to fail. The dam broke, and, viola, an S&L collapse that cost taxpayers $135 Billion. But please stop blaming “Reagan Era Deregulation” – the S&L industry was dead by 1978, killed by inflation and high interest rates, but Congress refused to kill it off, and drove up the cost of the funeral at least tenfold.
October 2, 2008, 12:33 pmEdmund Unneland says:
Perhaps I misremember, but what significant deregulation has there been in corporate governance or in finance since the 1999 repeal of Glass-Stegall. Sarbanes-Oxley came in 2002, for instance.
October 2, 2008, 1:07 pmDuncan Frissell says:
Google “Regulation Q” to see what Banks and S&Ls were restricted by in the 1970s and before.
The unsustainability of interest controls when market rates were almost 20% should be obvious.
The real culprit was the computer that made money market funds possible.
The Internet is probably one of the many villains in our current mess because it allowed easy shopping for extremely lax mortgages offered by brokers with only a casual connection to the finance industry.
October 2, 2008, 3:44 pmc.gray says:
/sigh
The people pushing “regulatory failure” as the storyline have most of the same problems as the people pushing
“minority lending” as the root cause. Their explanation fails to explain why the biggest and earliest failures were banks in England and and the GREs. Neither were particularly influenced by the CRA nor can their failure’s be traced back to something rotten in the CDS market.
The truth is, reckless lenders worldwide came to believe real estate prices never went down, so loans collateralized by real estate were risk free, even when made out as a no-doc teaser-rate ARM at 120% of appraised value to a borrower named “Phoney, Ima” who lists her occupation as “Condo Flipper” and her current residence as “General Delivery”. Then real estate prices went down (worldwide), default rates soared, and foreclosure went from a 2 point haircut for the lender to a 40 or even 50 point bloodbath.
You _might_ be able to convince me that the CDS market contributed a bit to lender recklessness, or that “Ima Phoney” got her loan because she listed her race as “Calibnasian” and a bank officer approved the loan because he thought it would boost some CRA-imposed quota for minority borrowers. But the root problem is that a collection of financial geniuses rated the likelihood of Ima repaying her loan in full and on time at 98%+, and neither the CDS market or the CRA is responsible for THAT. That was “madness of crowds” in action…the 21st century equivalent of the Tulip Mania or the South Seas bubble.
October 2, 2008, 3:47 pmGene Vilensky says:
Yes, the S&L crisis was at least to a not insignificant extent caused by the change in the tax code. In 1981, the tax code was changed to allow depreciation in assets (e.g. real estate) to be deducted from taxes. This led to a boom in commercial and residential real estate. In particular, the deregulation you discussed had to do with S&L’s being able to invest in said real estate. The Tax Reform Act of 1986 eliminated this tax “loophole” thereby causing a flood of real estate onto the market (since after 1981, all sorts of people started buying property and renting it out, which was now profitable because they could write-off the depreciation of the property off their taxes). This caused a collapse in the commercial real estate market, which certainly led to the collapse of the S&L’s. Perhaps the tax lawyers here can provide more details, but this is my understanding of the situation (which was explained to me by a banking industry economist who seems pretty politically neutral).
October 2, 2008, 4:55 pmmossypeter says:
c.gray
I agree with you wholeheartedly as to the root cause of the problem, but if this was only about the mortgages it would not be quite the global meltdown it may yet end up being, and the wonderful bailout plan would be much smaller, targeted towards the actual homeowners and more likely to work
October 2, 2008, 5:00 pmGene Vilensky says:
You’re right, the failure of the GSE’s did not have to do directly with minority lending. It did have to do with a general push to make housing more “affordable”. Unfortunately, this affordability was only on paper. While it decreased mortgage costs of housing, it led to the increase in housing prices, which we now recognize was a bubble. While the actual amount paid by people was probably less than it would have been (though that’s debatable given the study by the Fed showing that most of the Fannie and Freddie implicit debt guarantee actually was funnelled into profits… but let’s even take the premise on its face), home prices rose. When the bubble burst, some ended up upside down on their mortgage, thereby defaulting.
Basically, in 1992, I believe, the GSE’s were tasked with buying more loans from people who did not traditionally qualify under the 20% down 30 year rule that was typical for FM^2. By 2000, and increasingly in 2003-2004 after the accounting scandals, the two entities were forced to take an even larger stake of the low-quality loan market. For example, as a result of the accounting scandal at the two firms, Congressional leaders (Barney Frank, Chuck Schumer, and Chris Dodd are the most complicit in this aspect) forced the GSE’s to take on these loans, essentially in exchange for looking the other way on their accounting problems. Remember, this is after Sarbanes-Oxley and there’s no reason why Franklin Raines should not have gone to jail.
Some people, e.g. Paul Ryan, the administration, even Greenspan warned about the two entities taking on this excessive risk, but any attempts at regulating them (which is really gov’t self-regulation) was defeated by the GSE’s patrons in Congress (Bob Bennett, Chris Dodd, Chuck Schmer, and Barney Frank). This was mostly a Democratic-led effort, but did include the important complicity of the Republican Bob Bennett (then-Banking Cmte Chairman), who was the #2 recipient of FM^2 money in Congress and whose son was an executive there.
So no, it’s not minority lending per se that led to this. It was a push to make housing more affordable, however, that did. And to a great extent, this latter goal, did have the goal of increased minority lending in mind (e.g. Bush and Clinton and even Angelo Mozillo were going around making speeches how great it was that now Hispanics could get cheap mortgages). The fact that private market players did engage in such ludicrous practices as David describes _was_ in fact caused by the lenders being able to securitize the loans cheaply, often through FM^2 and sell off the risk to investors. There are, of course, others who engaged in silly securitization. But their complicity in the crisis was encouraged by the fact that FM^2 led to artificially inflated housing prices.
October 2, 2008, 5:09 pmc.gray says:
Cheap securitization allows people to spread risk, which is actually a good thing in a healthy market.
The problem was that after various economic models were produced by “experts” that “proved” securitization, coupled with new factors in the real estate market, could ELIMINATE risk, large numbers of traders, with MBAs from Harvard and Wharton, were stupid enough to swallow this snake oil and order it up by the crate.
And it always WAS snake oil. Lots of people have known it all along. The phrase “toxic waste” to describe this kind of paper isn’t a recent invention, it originated in the ’80s among the boiler room callers paid to push the same sort of exactly the same sort of high risk mortgage-backed tranches out onto gullible small investors using highly deceptive sales pitches. Buyers all wound up using the paper as fishwrap and bird cage liner when real estate prices crashed across the Southwest after the oil bust.
Nobody bailed them out, either. They had to sue Charles Keating &his ilk for fraud, and got back a couple pennies on the dollar minus attorney’s fees….when they got back anything at all.
October 2, 2008, 6:06 pmD Palmer says:
R Friedman, the moral hazard was not on your part as the depositor, it would be on the bank’s part.
Deposits represent a liability to the bank, it’s not their money. They have to weigh the risk of losing that money when they make investment and loan decisions. Deposit insurance allows the bank to make riskier decisions by shifting some of the risk that they will lose the depositors money to the government.
Increasing FDIC insurance is good for you as a depositor, but it allows the bank to increase it’s risk taking. That is the moral hazard.
October 3, 2008, 12:16 amFinancial Crisis Notes « Wacki’s blog says:
[...] Peter Wallison – WSJ op ed (who presciently warned of the danger posed by these policies back in 2005) Does the Financial Crisis Discredit Libertarianism: Narrative and Counter-Narrative on the Current Financial Troubles: [...]
November 18, 2009, 12:44 am