patrick.net

tatupu70 says

theoakman says

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.

Nomograph says

lori.mitsuka says

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.

theoakman says

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

ZippyDDoodah says

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."