patrick.net

"The 2003-2005 period was just a typical bubble caused by FED's easy money policy. The real criminal fraud started in late 2006 through 2007 and 2008: "

This is an entirely wrong assertion. The Bush economy featured three phases: the boom, bubble, and bust.

Bush inherited the boom from the go-go Clinton days of "full-employment".

The boom got started in the SF Bay (dotcommers) and slowly spread outwards, eg. prices in LA were still depressed in the 1999-2000 timeframe even as SF was on fire.

Then the dot com fraud economy fell apart with 9/11 following. To prevent Bush Jr from following in his father's footsteps as a 1-term failure, it is true that Greenspan dropped rates to the floor and held them, 2002-2004.

This lowered borrowing cost did get the housing boom started, along with the Bush tax cuts, which also increased "affordability" and thus home prices, at least in areas where demand outstripped supply.

Booms are sustainable, bubbles are not. Rates are lower now than during the boom times of 2002-2003:

http://research.stlouisfed.org/fred2/series/MORTG/

so rates alone did not make houses unaffordable. What made houses unaffordable was the suicide lending that *temporarily* increased buying power. This was teaser-rate mortgages with pre-pay penalties, negative-amortization pay-option loans, and the availability of liar loans that allowed prime borrowers to self-underwrite their loans.

These suicide lending elements were the drivers of the bubble, along with the ratings agencies giving AAA ratings to CDOs of subprime tranches of loans that were destined to blow up once appreciation went away in 2006.

"The real criminal fraud started in late 2006 through 2007 and 2008"

LOL. Way to be a realist there, Reality. You apparently don't have the vaguest idea of what actually happened 2001-2007.

Government now has removed from the market the suicide lending innovations that were the prime causes of the bubble, yet your analysis is missing this element completely since you are an ideologue with an agenda who desires to whitewash the colossal industry malfeasance (with government collusion) that was operating 2002-2005 when the boom turned into a bubble.

Reality says

They used the regulatory powers that they had to help inflate the bubble:
1. by artificially lowering interest on the fiat money that they force people to take

Fed doesn't set mortgage rates.

Reality says

by encouraging people to buy into the bubble

That's somewhat debatable, but I will grant that the government was encouraging home ownership.

Reality says

3. by facilitating the securitization of toxic debts, both at the agency level for mortgages and at the deposit insurance level for deposits

What do you mean by facilitating? They let the free market do what it wanted.

Reality says

4. by restraining private industry standards boards from introducing higher accounting standards.

You've GOT to be kidding. You think private industry wanted higher accounting standards??? Please provide evidence if you have it.

Reality says

What other powers would you like to give them? They already legalize book cooking and fraud (e.g. restraining FASB).

Well, it would have been nice if they had actually used the powers they had during the early 2000s. And getting Glass Steagall back on the books would certainly have helped, don't you think?

Reality says

What makes anyone think the government officials have more clue about the state of the industry than the captains in the industry?

Captains in the industry?? Stop it. Please.

tatupu70 says

Probably they told themselves it couldn't happen--rationalized it so they could keep making $$$ without worrying.

you underestimate the venality of people making money.

Troy says

tatupu70 says

Probably they told themselves it couldn't happen--rationalized it so they could keep making $$$ without worrying.

you underestimate the venality of people making money.

“Nessuna soluzione . . . nessun problema!„

True enough--but didn't they realize they will be out of work at some point in the near future?

ten million in the bank at 5% pulls in $500,000/yr in interest.

who needs a job if you've got winnings off the table.

How many banks are paying 5% interest?

I was buying 5% t-bills in 2006 . . .

Troy says

What made houses unaffordable was the suicide lending that *temporarily* increased buying power. This was teaser-rate mortgages with pre-pay penalties, negative-amortization pay-option loans, and the availability of liar loans that allowed prime borrowers to self-underwrite their loans.

There is nothing particularly wrong with any of these practices if the lender is taking his own risk. Most of these options are still available in "Hard Money Lending" and at "Bank of Parents." It's all a matter of interest rate high enough to compensating for the risk (loan sharking) and having enough reserve provisions (lending from parents). What caused the bubble and bust was regulations making taxpayers into the patsy on the hook for losses.

Who do you think ordained the 3 Oligopolistic rating agencies? The government.

The 2006-07 window was significant, because that was the time when toxic loans were systematically transferred onto the backs of the TBTF institutions . . . even more importantly, the CDO's were multiplied multiple times through notional bets that the counter parties could not possibly pay up. The entire under water amount on all real estate in this country in 2008 did not amount to $16 trillion. The overwhelming majority of underwater homeowners were still paying back on schedule then, some even making extra principle payments. It was the leveraged short bets, a set of houses worth only $10million in total could have $100 million bets on them defaulting . . . that's what caused the financial crisis. If not for the government bailouts, the "winning" bets would not have received anything as the counterparty wouldn't have the money to pay up. Essentially here is analogus to what happened:

You and I each have $1mil, and we decide to bet $100 million on the next coin flip. Regardless how the coin lands, one of us will be bankrupt and bailed out by government and the other will be worth $101million as consequence. Remember, we only had $2mil between us to begin with! That was the criminal looting designed to take advantage of the regulatory power structure.

tatupu70 says

Fed doesn't set mortgage rates.

It sets caps interest rate on savings through setting overnight rate. The artificially low interest rate on savings was the reason why money flooded into the mortgage securitization.

What do you mean by facilitating? They let the free market do what it wanted.

Not in the field of money. The interest rate on savings is capped, and the deposits are insured, and the mortgages were securitized by government sponsored agencies. In other words, the government was giving out free money to companies that would shuffle savings to mortgage (i.e. banks) without much reduced risk than a free market would have.

You've GOT to be kidding. You think private industry wanted higher accounting standards??? Please provide evidence if you have it.

FASB proposed rules that were suppressed by the government.

Well, it would have been nice if they had actually used the powers they had during the early 2000s. And getting Glass Steagall back on the books would certainly have helped, don't you think?

It would have been nice if Stalin and Hitler had used their dictatorial powers for good. LOL

Bringing Glass-Steagall back is essentially shutting the door after the horse has already left the barn.

Captains in the industry?? Stop it. Please.

Why would the captains of the monopoly on violence be any better?

At least with private vendors, if you don't like them, you can shop elsewhere.

Reality says

It sets caps interest rate on savings through setting overnight rate. The artificially low interest rate on savings was the reason why money flooded into the mortgage securitization.

Wrong. You could have had savings rates 10X what they were and it wouldn't have mattered. Mortgage securitization paid exponentially higher returns while they lasted. The risk adjusted rates were not that high, of course, but nobody understood or, perhaps, cared.

Reality says

Not in the field of money. The interest rate on savings is capped, and the deposits are insured, and the mortgages were securitized by government sponsored agencies

Who caps savings rates? And I'm assuming you are referring to Freddie and Fannie with your last line there. It's been proven that they were very late to the game and were followers. The securitization was well under way before they decided to play.

Reality says

Bringing Glass-Steagall back is essentially shutting the door after the horse has already left the barn.

That why I said it would have been good to have had it on the books then. But, we need it now too. Who's to say this couldn't happen again? The Free Market got a taste of money--it will try again.

" What caused the bubble and bust was regulations making taxpayers into the patsy on the hook for losses."

More bullshit. There were no losses during the bubble. Again, you're totally and intentionally ignoring the obvious agency problem that exists in private enterprise -- the industry people making milions 2002-2006 didn't need to care what happened 2007-now.

Granted, the casino-like business environment was heightened by existing regulations like non-recourse loans that shifted risk from borrower to the system.

"The entire under water amount on all real estate in this country in 2008 did not amount to $16 trillion. The overwhelming majority of underwater homeowners were still paying back on schedule then"

2008 was just the culmination of unsustainable lending cycle. I was looking at the graphs of the IO and reset/recast schedules and could see the train coming, and was telling everyone to GTFO the market.

http://www.calculatedriskblog.com/2007/10/imf-mortgage-reset-chart.html

"At least with private vendors, if you don't like them, you can shop elsewhere."

aha aha ahah aha aha.

Oh man, there's nothing more entertaining that a right-wing ideologue in the morning.

"and the mortgages were securitized by government sponsored agencies"

No, the feature of the bubble times was the GSEs *losing* market share to private label issuers.

http://www.ritholtz.com/blog/2011/02/fannie-freddie-market-share/

Reality says

"That" meaning the job offerings available in the mortgage financing industry during the bubble. If even a $30-50/hr couldn't compete against "that," how could just about any manufacturing job. Those job openings were not 3-month only. They were year-round. The particular workers/staffers were still in college getting their BBA degrees; in other words, 19-20yr old kids without even a college degree! I

A straight story would be nice. It's 3 months a year, then full time not 3 months. It's B school students (B school is business school aka mba which is graduate level work), then it's 19-20 year olds without without a college degree. So you are saying these 19-20 year olds were abandoning your 100k a year job that may have been year round or may have been 3 months, whatever that mysterious job might have been, and walking in cold, with no back round or experience to the "mortgage financing industry" what ever that means and doing better than 100k out of the box. I stand by my first statement. BS. This doesn't wash. I would be willing to bet there were NO 19-20 year olds making 50+ per hour in the mortgage industry even at the peak. What were some of the job titles for these entry level jobs paying 50+ per hour?

Thanks again for the comments Troy/Bob.