{cackle} Ladies and gentlemen, we have an “authority” with all the boldness necessary to letting you know what he would have done with other peoples’ money.

And…

“…and mortgage securitization freed up capital to make loans that approached a more optimal level of risk.”

…we really hope you’re enjoying the “more optimized level”.

All swim! Everyone in the pool!

… for the benefit of the real estate and construction industries. Follow the money, and this is where it leads.

Also, there is nothing inherently bad about sub-prime lending as long as the risk/reward analysis revolves around the borrower’s ability to pay (more risk, higher interest rate). This is really nothing new. What is new is that the analysis was shifted to favor the value of the underlying asset under the misguided belief that home prices would only go up and at an unreasonable clip. It’s no accident that the results of the aforementioned social engineering project fed into this misguided belief.

No. The government basically told Fannie to abandon reasonable lending practices. Casting aside the principles of sound risk/reward analysis to further a social engineering project is not “free” market enterprise.

Economist (and libertarian) Jeffry Miron said it best.

This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

I take your point, but, in fairness, the post you link to is entitled “Guess What’s Really Behind the Financial Crunch?,” so I, perhaps unfairly, imputed that view to you.

My main point is just that the meme that the “CRA/ACORN/miscellaneous government tinkering caused the crash” that is currently circulating on the right is just as silly as the “if only we hadn’t deregulated” meme on the left.

More importantly, though, (and this is not a response to anything in the post) it would be a shame if everyone was left with the impression that subprime lending was a bad idea from the beginning. It’s rather like blaming the dot-com crash on “investing in stocks;” it wildly overstates the problem. Somewhere between 20% down 30 year FRM with a 0.2% default rate, and 2/28 exploding ARM stated income loans with a 15% default rates, there is an equilibrium which, if given a chance, the market will find. It’s just not clear to me that government tinkering with higher-risk lending was on the wrong side of that equilibrium.

Doesn’t the “market” include the pool of subprime homebuyers who suddenly had the “freedom” to borrow that didn’t exist before because the government was holding Fannie Mae back? Didn’t the government tell Fannie to go wild and loan away — be “free” in a sense. And didn’t the best and brightest free market investors get such massive hard-ons for this subprime derivative junk that it blinded them to the inevitable collapse of not just their jobs and companies, but the entire institution of subprime lending?

Are we supposed to be impressed here because an “evil” free market egghead economist presaged all this?

This whole thing is a pretty lousy advertisement for the free market.

A communist friend of mine always tries to make sense of his economic world and I just don’t get it. Maybe I just don’t get this either.

1. Inflate real estate prices by creating more buyers.
2. Create high-yield, “safe” securities for retirement investment out of sub-prime (i.e., high-interest-rate) loans.

That these two purposes feed off each other in a vicious cycle was probably not considered at the time.

So what do the poor get for all of this (barring a bailout which I oppose)? Nothing. But at least the middle-class has a scapegoat for its anger as the 401ks disappear.

Sez who…and why?

mortgage securitization freed up capital to make loans that approached a more optimal level of risk

You mean the optimal level of risk that caused the crash?

Of course, when a bubble formed, we at some point crossed that optimal level.

Yep.

hmmm. well, let’s see. 10 september 1999 ….. references to “increasing pressure from the clinton administration to **expand**” blah blah blah “low and moderate income people” blah blah blah (otherwise known as “poor credit risks”).

wow. y’know, if that story had been dated 2008, am pretty sure we’d be seeing lots of agitator posts blaming this on palin. since it was the democrat *CLINTON*, rather than the republican palin, who quite clearly **initiated this disaster**, we’re left to draw our own conclusions. the web is full of youtube clips featuring DEMOCRAT pols defending F&F’s actions, and fighting all attempts to rein them in. but this, too, goes unnoted here. in fact, it’s almost as if clinton and the democrats intentionally caused and defended the DE-REGULATION that enabled the banks to shoot themselves in the ass. but, sadly, this too goes unsaid. assigning blame to non-republican politicians is so bourgeois, huh?

let’s see if this can break the “minus 50″ record.

Warren Buffestt has his ass in a sling.

Trust nothing he says.

Isn’t that Quakerism?

You’re right, you didn’t say it was the only reason, for that I apologize. But I feel that blaming the situation on the easing of credit requirements is like blaming the gun manufactures for bank robbers. Seems like it wasn’t the bad loans (and I really don’t know how many of the loans were to “minorities and low-income consumers”) as much as it was the bad risk assessment and risk taking by the institutions themselves.

It’s silly to pretend that Fannie and Freddie somehow invented the notion of lending to borrowers with less-than perfect credit. Subprime lending was an innovation of the private market enabled by securitization. By 1999, the subprime market was already growing rapidly among private lenders outside the confines of the GSEs.

Actually, whether or not the entirely invented the whole concept of subprime lending (which is a strawman, since that’s not the claim), it was the government that pushed the sub-prime market wide open for home mortgage lending. 1999? The Federal Reserve in 1992 released a study claiming that people in certain neighborhoods weren’t being approved for mortgages often enough. Though the study’s methodology was widely criticized, the Fed went ahead and released a manual for lenders downplaying traditional eligibility criteria and including such criterion as whether the applicants had participated in credit counseling programs. In 1995, the Community Reinvestment Act changed its rating system to force banks to lend to ‘underserved’ communities, with Fannie and Freddie leading the charge. The subprime market existed by 1999 largely because the government had been supporting it long before that.

Did private banks participate? Of course they did. The GSEs were buying many of those risky mortgages, lowering the risk for the private lenders. And the GSEs were effectively competing with the private lenders because the government allowed the GSEs much lower capital to back their loans than it required of private lenders (which was also destabilizing) and the GSEs got their money cheaper to start with, as their credit was based on the widely held belief that they would be bailed out if they took on too many bad loans. But there was spillover effect as private lenders took the GSEs’ lead in risky lending, as private firms wanted some of that business, too.

It may not be the whole story to say that the subprime crisis was the fault of the government, but it is an accurate assessment to say that the government was there are the start, encouraged the growth of those loans, and, in the end, is the biggest holder of those loans. The fingers pointing at government involvement in the lending market are pointing in the right direction.

http://www.heritage.org/Research/Regulation/bg276.cfm

Might be relevant, might not. If it isn’t, sorry. If it is, does it tell us anything useful?

~

Even if you think that the government was encouraging banks to make too many bad loans, certainly no one was forcing banks to make leveraged bets on the riskiest tranches of CDOs. Those bets, which are the proximate cause of the crisis, were simply plain old bad investments. It happens.

I’m not sure where in the post I wrote that this was the only cause of the meltdown.

No one is saying corporations didn’t make bad decisions, here. They did. And they, their investors, and their employees ought to be punished for it. That’s the way free markets work. I believe the saying goes, “capitalism without loss is like religion without hell.”

It’s possible to point out that government had a hand in setting off the bad loan chain reaction without saying that without government interference, we’d still be in the real estate boom right now.

But then, if the government now turns around and bails out the companies that should go belly up for making bad decisions, it’s only going to make the next crisis that much worse. And its previous bailouts of bad lenders, airlines, pension funds, and Chrysler only perpetuated the feeling that if you’re a big enough company, you don’t really need to worry about bad risks.

Warren Buffett commenting on derivatives.

Derivatives will do more harm to the world financial markets than terrorists could ever do with bombs and bullets. The billions of dollars will not halt the derivatives market from collapsing. The sooner it happens, the faster we will get back to sound investing and banking. I don’t think we will have another great depression like we had in the 30’s, but we really need to come to grips with the fact that this market correction is going happen no matter what. The 700 Bill might cushion the blow, but the eventual payout for the cushion will be more costly in the long run than if we just don’t do it all and drag out the correction time.

But while we Gen X-ers paying this shit off in the long run, Paulson, Bernanke, and Frank will be dead along with Keynes.

It’s silly to pretend that Fannie and Freddie somehow invented the notion of lending to borrowers with less-than perfect credit. Subprime lending was an innovation of the private market enabled by securitization. By 1999, the subprime market was already growing rapidly among private lenders outside the confines of the GSEs. And the thing is, it was a good innovation. Lending standards historically were far too tight, and mortgage securitization freed up capital to make loans that approached a more optimal level of risk. Of course, when a bubble formed, we at some point crossed that optimal level.

Even if you think that the government was encouraging banks to make too many bad loans, certainly no one was forcing banks to make leveraged bets on the riskiest tranches of CDOs. Those bets, which are the proximate cause of the crisis, were simply plain old bad investments. It happens.

Look, there’s plenty of blame to go around, and government subsidization of the housing market (mostly through the mortgage interest deduction) certainly worsened the housing bubble, which led to the mortgage-backed security bubble. But to just point at some particular government program (a pilot program!) which started ten years after subprime lending started its ascendancy, and say “Aha!” is simply not a persuasive argument. Every side of the debate needs to try to see around their own cognitive biases (Regulation cased the crisis! Regulation would have prevented the crisis!) and understand that a crisis like this is caused by the interaction of many forces, some private, some governmental, and some systematic.