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Considering that Fannie Mae and Freddie Mac have some awful default rates on so called “prime†mortgages, you can still say they were very very bad offenders. The simple fact that they went insolvent proves they were completely reckless. You really do have to be leveraged beyond insanity to go insolvent. Fannie’s common defense is that it didn’t initially get involved in subprime. They deflect from the real issue, which was the fact that they still backed way too many mortgages for overvalued homes and leveraged themselves to a point that was financial suicide.
I do not at all hold the GSEs or their congressional backers (who, yes were primarily Democrats) blameless at all. The GSE's were leveraged well over 100 to 1. It doesn't take much to go insolvent with a capital cushion like that.
I'm not trying to deflect the issue, just pointing out they were not central to the cause, as ZippyDDoodah is trying to claim.
I’m not trying to deflect the issue, just pointing out they were not central to the cause, as ZippyDDoodah is trying to claim.
Thanks for your citations, but the facts disagree with your conclusion that GSE's were not a major cause of the residential RE crash http://ur.lc/jkd . And unlike private mortgage providers, they never learned the hard lessons of the housing crash that private lenders learned (because taxpayers backstopped the GSE's) and kept on financing risky mortgages long after it became apparent that the bubble had popped. The GSE's waded in way too deep in high-risk mortgage activity fueling the bubble with taxpayer dollars. From the cited study:
Concluding Comments
This paper has evaluated the role that the GSEs, FHA, and CRA played in the financial crisis.
It has not, however, attempted an overall evaluation of any or all U.S. housing policies, nor has it
considered any policies for regulatory reform. The main conclusions are:
*I find the GSEs to have been a significant factor in expanding the mortgage crisis as a result
of their high volume of high-risk mortgage purchases and guarantees. Furthermore, I find
that the GSE housing goals for lending to lower-income households and in lower-income
regions were secondary to profits as a factor motivating the GSE investments in high-risk
mortgages.
It's not only that the GSE's bought and guaranteed high-risk loans, as a Govt sponsored Enterprise, they "set the bar" for banks and other lenders. Most definitely, they were "central" to the housing crisis. And the housing crisis was not "worldwide" as others have claimed. Overall, Latin America had no housing crash during this time period. Neither did Japan nor did the largest worldwide emerging economies: China, India, or Brazil. So let's cut the BS that "the whole world" had a housing crash at the same time we did here in the US. That's a demonstrable lie.
I have a question for Bob2356 - did you delete an entire post of yours because you decided that your claims (mostly against my assertions) were not defensible? Because one of your posts disappeared completely. The ultimate in backpeddling is to delete an entire post
tatupu70
2010 May 17, 10:18pm
Other quotes from your “sourceâ€:
“I find no evidence that CRA incentives played a significant role in expanding high-risk
lending during the housing bubbleâ€
In my judgment, factors other than housing policy played a more fundamental role in
creating the crisis. These factors include the global savings glut, a monetary policy that accommodated a major housing bubble, highly leveraged, risky, and lightly regulated bank investment portfolios, and an unconstrained OTC market for credit default swaps.â€
“Figure 2 shows that from 2003 to the end of 2006, the GSEs lost approximately 20
percentage points of new business market share. The FHA market share fell as well over this period, to an almost negligible volume. In contrast, the figure shows an increase of 20-plus percentage points in the market share of subprime lending based on data from Inside Mortgage Finance (IMF) and in the market share of high-risk lending based on a special tabulation by Ed Pinto (currently available only from 2002 to 2007).5 It thus appears that the subprime lending innovations over this period actively displaced GSE and FHA activity, leading to the declines in their market sharesâ€
“That the GSE housing goals are consistent with high-risk mortgage activity, however, does not imply that the housing goals caused the GSEs’ high-risk activity. Indeed, several factors lead me to the view that the housing goals were a distinctly secondary priority for GSE management compared to profits as a factor motivating their investments in high-risk mortgagesâ€
You really need to read your source material. It doesn’t say what you think it says….
Interesting paper. Everybody who is interested in the topic should read it.
You're missing his key qualifier though:
The GSEs were certainly not alone in creating or expanding the financial crisis. In my judgment, factors other than housing policy played a more fundamental role in creating the crisis.
It's kind of a narrow paper though. Didn't even mention rampant fraud or things close to it, CRE, or the rise of second mortgages and PMI underneath GSE loans being factors.
So let’s cut the BS that “the whole world†had a housing crash at the same time we did here in the US. That’s a demonstrable lie.
Hmmm... looks a lot like a strawman to me. I just pointed out that housing bubbles occurred in several countries at the same time, and many of the same factors were present there. Among those factors was not US housing policy.
And I also pointed out that their was a commercial real estate bubble in the US, with values going up by about the same percentage amount, again at the same time. So far you have refused to address how GSEs, or housing policy, or Dems are responsible for that, or if they're not how just by coincidence they occurred at the same time (along with foreign housing bubbles)
It’s not only that the GSE’s bought and guaranteed high-risk loans, as a Govt sponsored Enterprise, they “set the bar†for banks and other lenders.
Why would a losing business model at GSEs cause private companies to adopt losing business models? Some other poster pointed out how absurd this is. I suspect you will ignore my pointing it out as well.
I have a question for Bob2356 - did you delete an entire post of yours because you decided that your claims (mostly against my assertions) were not defensible? Because one of your posts disappeared completely. The ultimate in backpeddling is to delete an entire post
all my posts are still here. you haven't responded to anything though.
my good man, R does not equal conservative.
Liberalsim and/or Greed is/was/shall remain the problem.
That's a cop out. Where do you vote the the mythical perfect conservative. Anyway remind me how the liberals repealed glass stengle or allowed the investment banks to go to 40 to 1 leverage. Both parties are to blame.
Bap33
2010 May 18, 7:44am
bob,bob,bobbyboy, you prove my point in a most excellant way. In the beginning you correctly say that there is no true conservative to vote for, and in closing you say the two party system is to blame. Thank you.
To fix our troubles and survive, we all MUST vote conservative.
Â¥
2010 May 18, 8:47am
To fix our troubles and survive, we all MUST vote conservative.
Another round of the conservatism of 1995-2006 just might do the trick, LOL.
I'll be with the popcorn somewhere in Japan, BC, or perhaps China, if I can get back into the Mandarin.
You can continue to be what you really are - a racial bigot. But stop pretending you know anything about the current status of the financial markets - in your home town or the world at large. The breakdown of regulation is to blame, period for the inflated markets worldwide. Just like the breakdown of regulation is to blame period for the spill in the gulf. Or is that the fault of enviro’s? Those silly tree hugging hippies!
I think this is a remarkably insightful view into the leftist mind. Do tell Lori what I wrote which might conceivably qualify me as a "racial bigot"? This is the way the left argues. Ignore facts, hurl unsubtantiated smears. It's despicable as hell, but typical of how liberal Democrats operate
It’s kind of a narrow paper though. Didn’t even mention rampant fraud or things close to it, CRE,
What is "CRE"? If you meant CRA, it was definitely covered in the paper. Please clarify. The following:
I find the GSEs to have been a significant factor in expanding the mortgage crisis as a result of their high volume of high-risk mortgage purchases and guarantees.
is the money quote that sums up the conclusions of the paper pretty well.
Hmmm… looks a lot like a strawman to me. I just pointed out that housing bubbles occurred in several countries at the same time, and many of the same factors were present there
And I just pointed out that many other major economies in the world (China, Brazil, Japan, India etc.) had no such housing crisis during this time period. How is pointing out these obvious facts a "strawman" argument on my part? You don't seem to be arguing in good faith. Yes, most 'western' economies with similar economic policies experiencenced a housing bubble although some western economies like Germany didn't. No strawman, just pointing out the fallacy in the argument that "the whole world" or most all countries had the same problem. It's a lie..
And I also pointed out that their was a commercial real estate bubble in the US, with values going up by about the same percentage amount, again at the same time
I believe that commercial RE values went up at this same time, but I question that they went up by the "same percentage amount" as residential RE as you claim. Can you cite? because you've offered no evidence to support that assertion so far.
Why would a losing business model at GSEs cause private companies to adopt losing business models?
Because a) the GSE's were buying mortgages that met these loose lending standards which they lowered and b) because it wasn't a "losing" business model at the time
Any other questions?
What is “CRE�
Commercial real estate.
I believe that commercial RE values went up at this same time, but I question that they went up by the “same percentage amount†as residential RE as you claim. Can you cite?
This is very common knowledge. You can find plenty in 5 minutes with google.
Former Fed Chairman Alan Greenspan believe a bubble in commercial real estate has already popped. “Real estate prices generally are down 50%,â€
Are you content that it was just a coincidence that the CRE bubble happened at the same time, and was of the same magnitude as the housing bubble?
And I just pointed out that many other major economies in the world (China, Brazil, Japan, India etc.) had no such housing crisis during this time period.
China, Brazil, India do not sell their mortgage securities on the global capital market, like the US, UK, Spain, Ireland, and Australia. Other contries like Germany have very strict mortgage regulation. The US, UK, Spain, Ireland, Australia use to loosely regulated global capital markets to fund mortgage borrowing and have lax regulation (to say the least) of mortgage underwriting. That's what they all have in common, and it does not include US housing policy.
Are you content that it was just coincidence that these countries had housing bubbles at the same time as the US?
"I find the GSEs to have been a significant factor ".... I agree. It was significant. If you could somehow quantify it and say it was 10% or 20% to blame, that's "significant". The point is even by this author's estimation there were other factors that play a "more fundamental" role.
Any other questions?
Just those two.
The breakdown of regulation is to blame, period for the inflated markets worldwide.
Regulations breakdown? sure, but here are two GSE entities that didnt follow simple GAAP and utterly ignored Sarbanes Oxley. Publicly held banks had far better accounting practices and infact aheared to regulations. Because of their political ties and corruption, the GSE felt immune from all regulations.
Enron was a $500M accounting fruad, while Fannie Mae racked up $90B in accounting freud. It was the GAO which labeled the firm as a "culture of corruption". Even today, the former CEO has not been charged with criminal fraud, even if you apply SOX 404. Had this been a different public company we would have seen charges made long ago.
Â¥
2010 May 18, 4:01pm
Are you content that it was just a coincidence that the CRE bubble happened at the same time, and was of the same magnitude as the housing bubble?
Here's a better chart from our secret commissar embedded in the NYT:
http://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/
This argument is somewhat suspect tho. AFAICT, CRE was going up for different if parallel reasons as residential. The big similarity was Wall Street couldn't make CDOs fast enough to sell into the "global saving glut", and the general economy was getting around a trillion dollars a year of new money injected via home value appreciation -- we were caught in a general feedback loop of more home debt (via HELOC or new purchase) -> household "income" -> more household spending -> more employment & business activity -> higher housing valuations -> more home debt (repeat every year until the MInsky Moment was reached sometime in 2007).
From the chart above it's clear that CRE was following the larger (?) residential bubble action.
The economy of 2005-2007 was a lie. Flipping houses to each other was not wealth creation. The machine tore itself apart faster and with more violence than I expected, I can tell you that.
Federal Flow of Funds Report Table L.100 Households and Nonprofit Organizations
Outstanding Home mortgages, by year:
2001 $5.2T
2002 $5.8T
2003 $6.7T
2004 $7.6T
2005 $8.8T
2006 $9.8T
2007 $10.5T
2008 $10.4T
2009 $10.2T
$5.3T of new money pinging through the economy in just 6 years. That's $900B/yr. Doesn't seem like much, but $900B/yr / $45K per household is TWENTY MILLION jobs getting created or sustained by this debt issuance.
(nb: I need to develop my understanding of the velocity of money and perhaps actually attempt to model the US economy on a computer. Can't be that hard, right?)
nb: I need to develop my understanding of the velocity of money and perhaps actually attempt to model the US economy on a computer. Can’t be that hard, right?
When you get it done, I'm sure there is a Nobel waiting for you. Just have to get human behavior modeled too.
If you think 2005-2007 was a lie, the scary thought is what if the decade before that was a lie too, and the RE bubble was just the final blowout of a larger multi-decade credit bubble? I hope not, but when I read people like Steve Keen I have to wonder.
Â¥
2010 May 18, 4:57pm
nb: I need to develop my understanding of the velocity of money and perhaps actually attempt to model the US economy on a computer. Can’t be that hard, right?
When you get it done, I’m sure there is a Nobel waiting for you. Just have to get human behavior modeled too.
I was thinking if you just model a block, then a neighborhood, then a zip code, then a city, then repeat about 20,000 times you'd be done . . . 300 million people in ~115 million households can't be THAT hard to simulate ; ) Half the population live check to check so that makes it easier.
If you think 2005-2007 was a lie, the scary thought is what if the decade before that was a lie too, and the RE bubble was just the final blowout of a larger multi-decade credit bubble? I hope not, but when I read people like Steve Keen I have to wonder.
More than half of the FRN dollars we've created circulate outside the US. As long as that money has been exported and doesn't come back and take ownership of domestic wealth, we're OK, sorta. (Problem being exemplified by Chinas's $2T+ cashpile. That's quite a hostile sovereign wealth fund that's able to deploy anywhere in the dollar bloc and outbid us for access or ownership of productive assets, eg: this story if you have a strong stomach.)
This chart: http://research.stlouisfed.org/fred2/series/M3
does give one pause, though. 1995-2005 did feature the Chinese economy spinning up in a big way, however. They've really moved up the supply chain from cheap plastic crap to iPhones. AFAICT, everything I've bought since coming back to the US in 2000 has been Made in China (when I was in Japan in the 90s almost nothing of what I bought was Made In China).
International trade means our economy has been more interlinked with our trading partners. But the majority of the trade has been a Bad Trade, really, since it consists of the trade imbalance with China and OPEC, and they are gaming us. OPEC recycles our money into either USG debt or other assets, and China of course maintains their peg that is raping us monthly.
"I don't have any solution but I certainly admire the problem."
The overall question is where us 300M Americans are going to slot in into the global list of haves and have-nots. As I hope everyone knows now I think real estate is really key here which is why I like talking my somewhat idiomatic brand of economics on this site. I think/hope/pray that our present standard of living is largely if not entirely insulated by our still-inflated housing costs. Housing costs have gotten so high due to us being undertaxed, under-insured, and running a currency that needs to be depreciated 3X against the yuan. Adjusting these things will putatively lower our standard of living, but I fail to see why rents and land values won't adjust downwards to compensate.
Other than having lower land values completely gut what's left of our FIRE sector, of course. Welcome to Japan. I've seen this movie before.
Are you content that it was just a coincidence that the CRE bubble happened at the same time, and was of the same magnitude as the housing bubble?
No, I think you have a valid observation. Not to belittle your point too much, but residential RE projects compete for land and construction materials with commercial projects right? So a bubble in GSE driven residential prices would force up land and contruction material prices (and labor prices?) for commercial property as well, right? I'm a bit surprised to see the charts which suggest that CRE went up to the same degree as residential RE.. more here http://ur.lc/jmi
Regarding the link in my previous post, I found an interesting comment that I think is worth highlighting:
I don’t think commercial real estate was a bubble either, because you didn’t see the same kind of speculation or financial shenanigans. Nobody quit their landscaping job to “flip†office buildings. No “buy strip malls with no money down†seminars.
If you think 2005-2007 was a lie, the scary thought is what if the decade before that was a lie too, and the RE bubble was just the final blowout of a larger multi-decade credit bubble? I hope not, but when I read people like Steve Keen I have to wonder.
No doubt that a large part of the late 1990's economic growth came from a bubble (mostly tech) followed by a RE bubble. I think much of 2003-2007 was a bubble too, fueled by too-loose monetary policy and unintended consequences of govt guarantees. But since not all economic activity during those bubble periods were "lies", it's tough to gauge the potential downside
tatupu70
2010 May 19, 4:10am
No doubt that a large part of the late 1990’s economic growth came from a bubble (mostly tech) followed by a RE bubble. I think much of 2003-2007 was a bubble too, fueled by too-loose monetary policy and unintended consequences of govt guarantees. But since not all economic activity during those bubble periods were “liesâ€, it’s tough to gauge the potential downside
So you're ignoring the entire point of the paper you posted? Their conclusion was that the GSEs were motivated by the same thing as private banking-profits. Basically the GSEs contributed to the problem because they got caught up in the same short term profit mania as private industry--they didn't cause anything. They followed everyone else into the abyss...
Those who scream that deregulation caused this crisis usually completely ignore the fact that all of the major players in this crisis enjoy ridiculous subsidies. They get to borrow money below the market rate and they get the back stop of government safety for nothing.
What subsidies did Countrywide, IndyMac, or Wamu enjoy? I’m confused. It sounds like you are refering to some of the benefits of TARP which occured after the bubble/collapse. By definition, something that happened after the bubble/collapse couldn’t be a factor in it’s cause…
Are you serious? When you lower rates down to 1%, which they did in 2001-2003, every banker gets to borrow money at a cost well below market value. It's the mother of all subsidies. On top of that, they enjoy the privilege of not losing clientele as a result of bad banking through the subsidy of FDIC insurance, which gives them freedom to speculate as carelessly as they please. Are you really that dense that you don't realize the banking industry has been the most heavily subsidized industry since the advent of the Federal Reserve?
tatupu70
2010 May 19, 7:02am
Are you serious? When you lower rates down to 1%, which they did in 2001-2003, every banker gets to borrow money at a cost well below market value. It’s the mother of all subsidies. On top of that, they enjoy the privilege of not losing clientele as a result of bad banking through the subsidy of FDIC insurance, which gives them freedom to speculate as carelessly as they please. Are you really that dense that you don’t realize the banking industry has been the most heavily subsidized industry since the advent of the Federal Reserve?
OK Oak--help me out here. How exactly do you know what the "market rate" should have been in 2001-2003? Banks make money off the spread--were their spreads higher during that period? That's not a subsidy--it's their business.
And I don't even know where to start on FDIC insurance--you obviously don't understand it at all. That insurance is for the depositors--not the bank. Banks go under all the time these days. Does FDIC insurance help them at all? No. It doesn't make the owners (stockholders) whole--they still lose their entire investment. If they speculate and lose, then they go under.
Now--if you want to discuss the too large to fail banks--that's an entirely different issue. Let's not muddy up the waters by pretending they are all the same issue. Large banks should be broken up so they can fail and eliminate the moral hazard which now exists.
Are you serious? When you lower rates down to 1%, which they did in 2001-2003, every banker gets to borrow money at a cost well below market value. It’s the mother of all subsidies. On top of that, they enjoy the privilege of not losing clientele as a result of bad banking through the subsidy of FDIC insurance, which gives them freedom to speculate as carelessly as they please. Are you really that dense that you don’t realize the banking industry has been the most heavily subsidized industry since the advent of the Federal Reserve?
OK Oak–help me out here. How exactly do you know what the “market rate†should have been in 2001-2003? Banks make money off the spread–were their spreads higher during that period? That’s not a subsidy–it’s their business.
And I don’t even know where to start on FDIC insurance–you obviously don’t understand it at all. That insurance is for the depositors–not the bank. Banks go under all the time these days. Does FDIC insurance help them at all? No. It doesn’t make the owners (stockholders) whole–they still lose their entire investment. If they speculate and lose, then they go under.
Now–if you want to discuss the too large to fail banks–that’s an entirely different issue. Let’s not muddy up the waters by pretending they are all the same issue. Large banks should be broken up so they can fail and eliminate the moral hazard which now exists.
Rofl, I don't know the exact market rate. But based on the price response of every single asset class after lowering the rates to 1%, it's pretty safe to say, it was above 1%. Fast forward to today, I'm pretty sure the real market rate of interest is above 0%. And yes, it is a subsidy. Banks borrow that money and speculate with it. They enjoy that privilege that other companies don't. That's why every other company (like GE and GM) decided to create a financing arm.
As for FDIC, it's pretty clear you don't understand it at all. The application of FDIC insurace gives depositors no incentive to withdraw their money from a bad bank that is making stupid bets. It gives the banks a security net that they would not normally have because they don't run the risk of depositors shutting them down or reigning them in.
I agree with you about large banks needing to be broken up. But seriously, stop acting like the banks are not subsidized. When newly minted dollars are printed, banks are the first to get access to it and get to put it to work before inflation occurs. It's a corrupt system that gives them an unfair advantage (read subsidy) over other businesses.
Bap33
2010 May 19, 11:45am
The breakdown of regulation is to blame, period for the inflated markets worldwide.
It’s a common error in thinking that a complex, multifactorial system must have a single root cause. One thing that is perfectly clear is that the housing bubble and subsequent crash had many fathers:
Lack of regulation
Lack of enforcement
Greed
The ability to transfer risk to unsuspecting investors
Bubble mentality
CRA
Fannie & Freddie
Corruption
Etc, etc., etc. . .
This is obvious to anyone with an iota of critical thinking skills. .
This is one of the best posts you have ever taken the time to put up. Excellant.
tatupu70
2010 May 19, 12:38pm
Rofl, I don’t know the exact market rate. But based on the price response of every single asset class after lowering the rates to 1%, it’s pretty safe to say, it was above 1%. Fast forward to today, I’m pretty sure the real market rate of interest is above 0%. And yes, it is a subsidy. Banks borrow that money and speculate with it. They enjoy that privilege that other companies don’t. That’s why every other company (like GE and GM) decided to create a financing arm.
As for FDIC, it’s pretty clear you don’t understand it at all. The application of FDIC insurace gives depositors no incentive to withdraw their money from a bad bank that is making stupid bets. It gives the banks a security net that they would not normally have because they don’t run the risk of depositors shutting them down or reigning them in.
I agree with you about large banks needing to be broken up. But seriously, stop acting like the banks are not subsidized. When newly minted dollars are printed, banks are the first to get access to it and get to put it to work before inflation occurs. It’s a corrupt system that gives them an unfair advantage (read subsidy) over other businesses.
So what you are saying is that losing all of their money isn't enough of an incentive for the owners of a bank to properly regulate the risk of their investments? #1--I don't think most people follow a bank's investments closely enough to move their money based on the risk portfolio there. #2--I don't see how the threat of money leaving the bank is stronger than the threat of huge losses from their investments. Huge losses will put them out of business just the same. #3--finally, getting paid by FDIC is a pain in the arse and people do not want to be in a bank that may close as evidenced by the huge withdrawls during the last days of WAMU before it was taken over.
I understand what you are saying, but I disagree about your subsidy contention. It's a stretch IMO
Not to belittle your point too much, but residential RE projects compete for land and construction materials with commercial projects right? So a bubble in GSE driven residential prices would force up land and contruction material prices (and labor prices?) for commercial property as well, right? I’m a bit surprised to see the charts which suggest that CRE went up to the same degree as residential RE.. more here http://ur.lc/jmi
There is probably some validity to the idea the CRE bubble was in response to the housing bubble. I'm dubious though. I personally almost invested with a partner in 2004. Spent a lot of time educating myself on the RE economics and finance, going to seminars, talking to other investors. Having been smack in the middle of the dot com boom, it smelled a lot like a bubble to me and I didn't bite. Lots of new investors (including myself), many just chasing returns (though not capital gains, just alleged rates of return). And lots of easy, easy money. Lenders did not care if the sellers statements on CAP rate, cash flow, etc. were complete bullshit. Just took their huge fee, and as long as you were starting with 20-30% equity they gave you the loan. 20-30% clearly didn't cut it when values fell by 50% though.
When I watch that youtube video, I get pissed off too. I'm for good governance, and defending a government sponsored institution in the midst of an accounting scandal is not good governance. I particularly do not care for Rep. Waters. Corruption vs. good government are not partisan issues though, and above all else that's why I take issue with your statement "Both sides are not “equally†guilty in the leadup to the housing blowup."
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http://www.youtube.com/watch?v=_MGT_cSi7Rs
Both sides are not "equally" guilty in the leadup to the housing blowup.
#housing