The Invisible Hand Thumbs Its Nose At Us ("Laissez-faire" Illusions In An Age Of Bailouts) (Reagan, Dodd)

[GregW]

The Republican propagandists cover ALL the bases. If only they could create an organization that would benefit ALL of us not just the 10th of 1% that fund these 'Institutes' and 'think' tanks.

FWIW - I think the big money specul;ators cuffed the "Invisible Hand" to the wall until their speculation made them billions before the crash. We now know where those billions came from. Our hard work and savings.

[saganista]

Originally Posted by grindlemeister

One side of the argument blames the repeal of Glass-Steagall as the primary cause of the crisis. (It's often argued that the act's repeal precipitated the crisis because there was no longer a wall separating commercial banking from the riskier environment of investment banking.)

Gramm-Leach-Bliley didn't cause the credit crisis either. You could make a better case that it caused the spate of rigged IPO's that plagued particulalry the NASDAQ in and around 2000, but when it comes to the credit crisis, it was one of many things that merely helped prepare the ground for the sort of farming that Wall Street would later decide to do.

[saganista]

Originally Posted by SarahSal

The fact is it was clearly to the lenders' financial advantage to make these bad loans...

Only once they had someone they could sell them to. If brokers and lenders had had no recourse to holding in their own portfolios all loans that failed to qualify for purchase by the GSE's, there would have been many fewer such loans written. But with interest rates depressed, institutional investors were pumping up demand in the secondary mortgage markets, and Wall Street's private-label securitization shops were willing to make huge profits by slicing and dicing any old thing at all into those markets for as long as they could get away with it.

Originally Posted by SarahSal

...and then even further to their advantage to bundle the loans and trade/sell/offer them up as viable securities.

Again, there is nothing wrong with securitization. Just as there is nothing wrong with a chainsaw. Improper use of either one, however, can lead to very serious consequences.

Originally Posted by SarahSal

And, as previously noted it wasn't just poorer folks who defaulted - many middle income folks did, too!

Correct. The classic case of credit market abuse occurred in subprime markets, but it was hardly the only one. Unscrupulous brokers were attaching high-cost, high-profit terms to everything they could, including the notes of borrowers who were actually qualified at prime.

Originally Posted by SarahSal

I think another critical change helped to precipitate this crisis - reducing and/or eliminating down payments from the lending equation.

No, 20% down payments are a crippling feature that denies credit to broad classes of people who are perfectly well able to carry it. Holding a mortgage and thereby owning a home isn't a privilege to be reserved for members of some exclusive club. Credit should be extended to those who can repay it.

Originally Posted by SarahSal

Thus, what kind of vested interest did these folks, either low income or middle class, have in retaining ownership when the going got rough?

Homes are more than impersonal investments. Why on earth would someone pack up and leave his home because it was in theory worth $50K less than what he paid for it? The people with actual problems post-2006 were those regularly compelled to move (e.g., military families), and those who had been suckered into signing adjustable notes that they couldn't possibly afford if interest rates rose.

[GregW]

There was a lot of deception and wishful thinking in those days. When we refinanced we were told we could afford to finance three times as much as we needed. We politely declined.

[saganista]

Originally Posted by cpg35223

Somehow or another, the mortgage and housing industry had cruised along decade after decade without this crisis emerging--and with very little government involvement to boot. But once the government started getting involved, suddenly the sleepy mortgage biz spun out of control. This should provide a clear lesson for those who don't reflexively blame the private sector for everything.

The Federal Home Loan Bank Board was created in 1932. The Federal Housing Administration was created in 1934. The Federal National Mortgage Association (Fannie Mae) was created in 1938.

The government has been directly involved for all those peaceful decades you recall. Problems didn't begin to emerge until unregulated private brokers began teaming up with private-label securitization shops to bypass government safeguards and poison the well of the secondary mortgage markets, thereby essentially freezing credit and threatening the status of economic activity across the globe. Lack and/or evasion of public sector protections is what put us where we were in 2008.

[GregW]

Sag - What created the problems with the Savings and Loan industry in the 70's? It seemed over whelmed with high interest rates. I grew up with 3% savings accounts and 5% mortgages. Of course a small house was 30 grand or so.

[saganista]

Originally Posted by cpg35223

I actually went through great pains to NOT single out the CRA earlier in this forum...

Your notions were taken on in the order in which you chose to present them. As was indicated. CRA came first, so your claims re that became the first to be exploded.

Originally Posted by cpg35223

...but rather cited the entire web of new Federal policy decisions begun in the mid-90s that were designed to boost home ownership rates.

Those have been exploded as well.

Originally Posted by cpg35223

As someone who operated in that industry for a long time, I saw the effects. I saw the crash coming when guys like you--the ones who were still blithely reading the Atlantic. Where exactly were you when all this was going on?

Another crystal ball gazer, or was it the tea leaves? People who claim to have foreseen the crash only undermine their own credibility. By late 2003 and increasingly in 2004, actual analyses in academic and professional journals began warning ever more strongly of a potential crisis being built up in expanding, unregulated mortgage underwriting into particularly subprime markets. Subprime was of course the major game in town, so it was hardly surprising to see activity there, but too much of this activity was going beyond service and into exploitation, all of it against a background of certainty with regard to eventual interest rate increases. No one could tell at the time when or where a crisis might emerge or what sort of shape it might take if and when it did. That's the nature of the future. Only those with hindsight can actually see things coming.

Originally Posted by cpg35223

In that sense, I can't imagine that you have anything useful to contribute to this thread.

I'm surprised to hear that. You'd done such a good job of imagining things up to this point.

Originally Posted by cpg35223

You weren't in the industry, you know squat about underwriting, and you're only interested in playing the role of political hack.

No, I have an interest as well simply in setting the record straight and in deflating the over-inflated.

[saganista]

Originally Posted by cpg35223

Oh, looky. An entire web site that states your argument is pretty much for the birds:

Oh, looky. Your "website" is actually the personal blog of some unemployed guy in Singapore. How impressed is anyone supposed to be with that? He claims to have a BA in Econ from Vanderbilt and an MBA from Yale. I recall that Bush had better paper than that, and look how HE turned out.

[saganista]

Originally Posted by cpg35223

This thread betrays an incredible lack of understanding about how all the different factors meshed together to create the perfect storm. I mean, where DO you get your information?

The relationship between interest rates and asset prices can be found in any introductory finance or macro economics text. Data for the federal funds target rate came from the Fed, and those for average 30-year mortgage rates from Freddie Mac.

Originally Posted by cpg35223

For example, you obsess over the bundling together of junk mortgages into investment instruments, yet you fail to understand that this issue simply didn't exist in the marketplace pre-1996.

I haven't uttered a word about securitization, except to note that it's a garden-variety business practice and has been for some 35-40 years. The deliberate bundling of known junk into the secondary markets meanwhile simply didn't exist in the marketplace pre-2002, when those newly ascendant private brokers and private-label securitizers teamed up to pull a fast one on laissez-faire regulators and admirers and enablers of cowboy capitalism.

Originally Posted by cpg35223

Underwriting went out the window because of the government's policy to force lowering of standards. And if you tell me otherwise, I'll know you're completely out of touch.

Do you mean to refer to encouragements to the financial industry to use its ingenuity and creativity to find ways to expand credit into traditionally underserved markets such as those that were doing so well by CRA lenders? As noted earlier, no policy, rule, law, or court decision ever forced anyone to lend money to anybody.

Originally Posted by cpg35223

The creation of junk bonds was a result of bad underwriting being forced on mortgage lenders, not vice versa.

Junk bonds are any instruments rated BB or below. Nothing wrong wth them either. Junk bond funds were a very viable investment in the early 90's once the sheen had worn off internationals.

Creation of badly underwritten high-cost mortages were meanwhile not forced onto anyone at all. Unscrupulous players knowingly wrote them quite on their own with the carrot of quick and easy profits dangling before their eyes. Loans written by CRA lenders were for instance about half as likely to contain high cost terms as similar loans written into similar communities by non-CRA lenders. An example of loading them up for failure.

Originally Posted by cpg35223

Again, I say that as someone who was there in the middle of it. I watched a lot of mid-sized mortgage companies sell their portfolios by the late 90s, companies that had been in the mortgage business for the better part of a century. Why? Because they no longer had control over their own underwriting, they had no faith in the sustainability of their new loans. So they sold them off in order to assure their future survival.

The people who took it hard through the late 1990's were the finance companies. Already beset by CRA, they were walloped by the Russian and Asian financial crises. Six of the top ten companies were wiped out in that brief time period. That helped create the vaccuum into which these ambitious private-sector brokers quickly expanded.

Meanwhile, deregulation is ever sold as a sure bet to increase competition. All it ever really does is increase concentration. If you didn't expect such a trend in the 1990's, well...

Originally Posted by cpg35223

Now, let me turn my attention to this incredible paragraph:

There is no such thing as a definable "common sense" component of home prices. This is an appeal to subjectivity in the absence of any objective standard to raise. Home prices are agreed to one-at-a-time, typically between two individuals -- a willing buyer and a willing seller. Their judgments matter, yours don't. One or the other of them will almost always be doing something you would have counseled against.

Actually, you couldn't have written a statement more at odds with reality if you tried.

Yet you won't disagree with a single word of it.

Originally Posted by cpg35223

Suddenly, when the National Homeownership Strategy was implemented, you began seeing appreciation levels in the double digits for most of a decade--even more so in many markets.

Not that suddenly. The strategy -- designed to reverse home ownership trends that had been declining since 1980 -- was initiated in 1995. Nothing unusual would happen in home prices until after the turn of the century.

Originally Posted by cpg35223

Look, I realize that you live in DC and are probably part of the vast parasitic Federal bureaucracy, which means you have no actual experience in the private sector. But it might be helpful if you actually knew what went into underwriting a mortgage before you began to yap about it on a message board. Your experience in the financial sector is apparently nil, and it's obvious that your arguments are nothing more than a lame attempt to rationalize bad policy. Learn something about banking and mortgages before you post again.

Argue facts. If you can.

[rock_chalk]

Originally Posted by grindlemeister

When critiquing my thesis, let's be more specific than merely using the term "government intervention." The bailouts were the result of the WRONG type of government intervention, e.g., legislation such as the Gramm–Leach–Bliley Act (1999) which enabled Wall Street to indulge itself like a heroin addict with speculation and leverages -- using bad loans as collateral -- assured that the government would come to its rescue when it needed a fix of liquidity. And why does the government do it? Because our government no longer represents the interests of the public, but rather it serves the interests of a financial sector whose lobbying power and influence knows no bounds. The casino of Wall Street was a party whose excesses came crashing down on the taxpayer. Look it, I don't like when someone freeloads off the system. Likewise -- and on a much bigger scale might I add -- it disgusts me to see high-ranking executives on Wall Street still receiving bonuses on the taxpayer's dime. And none of these scoundrels have been prosecuted for violating the Sarbanes–Oxley Act of 2002.

Your thesis is not that "The government is ALWAYS involved in the market." You never make much of an attempt to prove that; rather, you take it as a given and then go on to use it as a base for other arguments.