At CNBC’s GOP debate last night, Mitt Romney showed that he, like Michael Bloomberg, buys into the Big Lie of the financial crisis, one that’s unfortunately become conventional wisdom on the right: That the private sector only made hundreds of billions of dollars worth of toxic loans (and then made more than a hundred billion dollars worth of fake toxic loans because it couldn’t get enough toxic product) because the government made it.
Here’s Romney:
And the reason we have the housing crises we have is that the federal government played too heavy a role in our markets. The federal government came in with Fannie Mae and Freddie Mac, and Barney Frank and Chris Dodd told banks they had to give loans to people who couldn’t afford to pay them back.
This is flat false, as anyone who’s taken a cursory and intellectually half-honest look at the crisis knows. So how did the press cover it?
Pretty darn good, actually.
The Wall Street Journal quotes Romney in its piece and then all but says he’s empirically wrong (emphasis mine):
“Markets work. When you have government play its heavy hand, markets blow up and people get hurt,” Mr. Romney said, blaming Democrats for rules that he said force banks to make ill-advised loans.
Some conservative academics have said that Fannie Mae and Freddie Mac fueled the financial crisis because they had to meet federal quotas to finance low- and moderate-income homeowners.
But academic research has shown that those mandates didn’t spur the types of exotic lending at the heart of the subprime-loan crisis. Many of the worst mortgage lenders weren’t banks and weren’t subject to federal regulation.
The New York Times is even better, running a fact-check sidebar along with its main debate story, and it gives readers five full paragraphs on why these assertions are false. Here are three of them:
Several candidates made the argument at the debate that the government forced mortgage lenders to make bad loans. But in reality, most subprime loans were made by companies that were not subject to any kind of federal regulation.
Furthermore, there was no need to force anyone to make the loans. Financial companies jumped into the market. The major investment banks lined up to purchase subprime lenders, the major retail banks created subprime lending divisions, and a generation of upstart subprime lenders like Ameriquest and Countrywide were briefly celebrated as rising stars of American business.
No executive of a major mortgage company said at the time that the government was forcing them to make subprime loans. They said they did it because they thought they would make money. And even now, after the crash of the housing market, with all the temptation to point fingers, it is awfully hard to find a mortgage executive who echoes the argument of the Republican candidates.
And the Times debunks the “Fannie and Freddie Did It” meme to boot.
CNN issues a “false” ruling, though it perhaps relies too heavily on the Financial Crisis Inquiry Commission report’s finding.
The Washington Post, on the other hand, doesn’t report the whopper at all, even in a fact-check of candidates’ claims.
I can’t even criticize it for being he said-she said. It just ignores the falsehood.
At least the paper ran Barry Ritholtz’s good column on “What caused the financial crisis? The Big Lie goes viral” last week.
Mostly good work by the press here, I’m happy to say.
It just burns Ryan's commie/liberal britches to see the FACTS laid bare...
Yeah... The fact that the GSE's (as mandated by Congress) bought just shy of a HALF A TRILLION DOLLARS in subprime loans between 2004 and 2006 had nothing to do with the subprime crisis. Not a thing.
How could a mere HALF A TRILLION DOLLARS in the two years before the bubble burst cause anything? It had no effect at all.
Because the "professional journalists" say so...
Nothing to see here, people. Just another "Big Lie" about our benevolent "Big Brother" government...
And what is CNN doing relying "too heavily" on that official report of a commission charged with investigating the subprime crisis? SHHHHH! They should be going to alt.wallstreet.vampires.conspiracy.net for the REAL news!
And why do you think Ryan wants to tank the FCIC report? Because it clearly finds that the GSE's, while not the primary cause of the subprime crisis in its estimation, were a significant contributor to the crisis and because the report of the commission details all of the government's complicity in the mess. That's why.
#1 Posted by padikiller, CJR on Fri 11 Nov 2011 at 07:42 AM
padikiller you misunderstand what was going on.
Fannie and Freddie were buying the most senior tranches of some subprime CDOs. Those tranches had buyers lined up around the world and would have been easy to sell even if Fannie and Freddie didn't exist.
Take a look at the Magnetar trade and you can get an understanding of getting investors to take the junk and equity tranches was key to funding bad mortgages- the bulk of which were not to poor people, and from a dollar volume standpoint were concentrated in Upper Middle and Upper income.
Additional enabling was the result of Credit Default Swaps which allowed investors (once again not Fannie and Freddie) to buy lower rated tranches and think they were covered by insurance in the event of default. The lack of regulation requiring reserves against CDS is what allowed them to be so mispriced.
#2 Posted by bramsay, CJR on Fri 11 Nov 2011 at 10:23 AM
Look up the definiton of "agnotology"
#3 Posted by Jim , CJR on Fri 11 Nov 2011 at 11:01 AM
Time to toll the Reality Bell, again:
In 2001, HUD researchers warned of high foreclosure rates among subprime loans.
"Given the very high concentration of these loans in low-income and African American neighborhoods, the growth in subprime lending and resulting very high levels of foreclosure is a real cause for concern," an agency report said.
But by 2004, when HUD next revised the goals, Freddie and Fannie's purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.
That year, President Bush's HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more."
For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.
"That was a huge, huge mistake," said Patricia McCoy, who teaches securities law at the University of Connecticut. "That just pumped more capital into a very unregulated market that has turned out to be a disaster."
In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_2.html
Yeah.... Buying up more than a third of ALL the securitized subprime mortgages in the country in the three years immediately preceding the subprime crisis had no impact on anything...
Right....
You commies keep telling yourself this. It isn't going to change the reality, here.
#4 Posted by padikiller, CJR on Fri 11 Nov 2011 at 11:08 AM
Not like the "Federal National Mortgage Association" would have anything to do with the mortgage crisis.
No, it is the big lie that the agency in charge of mortgages would be somehow responsible for the crisis in mortgages. Only a fascist would say that making loans to poor people would result in loans not being paid back. This is precisely the kind of racist "logic" that the republican oppressors are pushing on us.
#5 Posted by mick, CJR on Fri 11 Nov 2011 at 11:51 AM
As soon as your start calling people 'commies' you lose the argument. Just because someone has a different viewpoint from you about this particular issue does not make them a 'commie.' You don't know what a communist is. You are simply a very angry person looking for a target for your free floating rage. I suggest take that hot energy and turn it into some intelligent action, instead of ignorant name calling. You are like half wild (+ nasty) kids in the playground.
#6 Posted by Miranda, CJR on Fri 11 Nov 2011 at 12:43 PM
Simple question, how many subprime securities did the GSE's make?
Yup, after 2005 they bought into the safer tranches of riskier loan product:
http://www.nytimes.com/2008/10/05/business/05fannie.html
Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.
"“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”
Then Mr. Mozilo offered everyone a breath mint."
as Countrywide threatened them with freezing them out of the market unless they bought riskier product:
http://www.nytimes.com/imagepages/2008/10/04/business/20081004_FANNIE_GRAPHIC.html
but how much of it did they make?
None?
Thanks for playing.
#7 Posted by Thimbles, CJR on Fri 11 Nov 2011 at 02:04 PM
padikiller,
why can't so many see that this is not a liberal/left thing? We - we the citizens - had to BAIL OUT the banks. Socialism for the banks and Wall Street. Yes, gov't, Fannie and Freddie are A LOT to blame. But they didn't force the banks to make or buy all those bad loans or leverage themselves so highly.
I hope they close down Fannie and Freddie. I put a lot of blame on Greenspan, Clinton, Summers, Frank, Bush, etc. But we have to demand that our politicians, on both sides, stop peddling this b.s. LIE about the banks and Wall Street.
#8 Posted by Citizen, CJR on Fri 11 Nov 2011 at 02:25 PM
It is absolutely TRUE "that Fannie Mae and Freddie Mac fueled the financial crisis...."
The recent financial crisis is the result of long trends in the democratization of lending and the socialization of credit risk. In short, the public sector's credit has increasingly supplanted the private sector's.
For example, mortgages with federal support of one kind or another, as a percentage of residential mortgages outstanding, rose from only 7.7 percent in 1970 to 18.8 percent in 1980, and then to 38.2 percent in 1989. (James Grant, "Money of the Mind: Borrowing & Lending in America from the Civil War to Mike Milken," 1994, p. 352.)
Today, "Together with the Federal Housing Administration, Fannie and Freddie guarantee 96.5% of all new home loans last quarter" (Nick Timiraos, WSJ, May 24, 2010.)
http://online.wsj.com/article/SB10001424052748704167704575258503544541716.html
That relatively recent increase — from 7.7% in 1970 to 96.5% in 2010 — is what I mean by the socialization of credit risk. Mortgage loan default risk has been effectively socialized; it belongs almost entirely to the government.
Those who believe FNMA & Freddie Mac are blameless should read pages 136–141 of the U.S. Senate's report on "Wall Street and the Financial Crisis":
http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf
which recounts how the two GSEs competed against each other in 2005 to buy WaMu's originations of option-pay, adjustable-rate mortgages — a competition eventually won by Freddie Mac because:
"The deciding factor was Freddie Mac’s offer to purchase 100% of WaMu’s conforming Option ARM mortgages which were among the bank’s most profitable loans." (page 138, The Levin-Coburn Report.)
The claim — made by Barry Ritholtz, Jeff Madrick & Frank Portnoy, Mike Konzcal, Paul Krugman, this blogger and others — that somehow a conspiracy of rightwingers is fabricating a "Big Lie" that purports to blame the GSEs for the financial crisis is itself a grossly strained, wildly oversimplified, uninformed reading of the historical record.
The GSEs are not responsible for the crimes committed by subprime lenders like Ameriquest, New Century, and Fremont. But from a more general & longer perspective, the GSEs were *the* means by which access to mortgage credit was democratized and the concomitant credit risk was socialized.
Got that?
#9 Posted by Thorstein, CJR on Fri 11 Nov 2011 at 03:05 PM
What makes you people think I'm exonerating the banks or supporting their bailouts?
The banks made stupid loans. Dumbass borrowers signed stupid loan agreements. And the federal government facilitated it all, then bailed out the idiots who made the loans and some of the idiots who took out the loans.
The taxpayers are on the hook for idiocy.
There is enough blame to go around for everyone - but to argue that the government didn't contribute to the subprime crisis is just silly.
Fannie and Freddie bought a THIRD of all the securitized subprime loans in the three years immediately preceding the subprime crisis. You can blither all you wish that this little slice of REALITY doesn't mean anything... But the reality isn't going anywhere. It is what it is.
As for my use of "commie"... If it keeps your panties unbunched, feel free to substitute the moniker of your choice for anyone who wants to use the force of law to snatch property from one class of people to dole out to another class...
"Liberal"... "Progressive"... "Whatever"...
A commie by any other name is still a commie.
#10 Posted by padikiller, CJR on Fri 11 Nov 2011 at 03:52 PM
And, like Thorstein, I'm not condoning or defending any criminal conduct, though criminal conduct, while it certainly occurred, did not create this mess.
But the problem we have IS the direct result government intervention into the market.
If the government hadn't directly backed HALF of the crappy mortgages written, then the private sector wouldn't have gone as nuts as it did in dealing in subprime lending.
Had private lenders written crappy loans to private borrowers before the market tanked, and if the government hadn't been in the middle of the mess, what would have happened?
The dumb people would be out money. Smart people would make money. And the market would move on.
But what happens with the government in the mix? SNAFU. The same thing that happens anytime you put the government into anything.
#11 Posted by padikiller, CJR on Fri 11 Nov 2011 at 04:45 PM
http://goo.gl/sC3xP
"The relative market share of Fannie Mae and Freddie Mac dropped fairly dramatically during the 2000s bubble, from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent at the height of the bubble in 2005 and 2006. Notably, this decline occurred contemporaneously with the unsupported rise in housing prices and the deterioration in underwriting standards that virtually all observers blame for the collapse of the housing markets.
Similarly, the market share of financial institutions for which CRA applied has been steadily declining since 1977, when CRA was passed. CRA-regulated institutions, primarily banks and thrifts, accounted for only 28 percent of all mortgages originated in 2006 (the height of the bubble), a significant decline from their share in the late 1990s and early 2000s. As with Fannie and Freddie, this market share drop occurred in lockstep with the rise of the housing bubble."
Oops. Cause and effect don't seem to be going your way. Unless you believe that tails wag dogs.
#12 Posted by padikantread, CJR on Fri 11 Nov 2011 at 05:09 PM
From the same article:
"In contrast, the market share of private mortgage securitization, a pillar of the “shadow banking system” that was not backed by the federal government and not regulated for safety and soundness in the way that Fannie, Freddie, and regulated banks and thrifts were, rose sharply and contemporaneously with the rise of the housing bubble. In 2002, the share of mortgages originated by private securitization was just over 10 percent of the total market. Over the next four years, this share grew rapidly, accounting for nearly 40 percent of all mortgage originations by 2006. As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006."
#13 Posted by padikantread, CJR on Fri 11 Nov 2011 at 05:12 PM
"The recent financial crisis is the result of long trends in the democratization of lending and the socialization of credit risk. In short, the public sector's credit has increasingly supplanted the private sector's."
Actually no, the GSE's were the market until Lewis Ranieri and company blew the doors open on mortgage securitization by lobbying for the Secondary Mortgage Market Enhancement Act of 1984
http://www.investopedia.com/terms/s/secondary-mortgage-market-enhancement-act.asp
And the Tax Reform Act of 1986
http://ftalphaville.ft.com/blog/2010/10/13/369061/taxing-times-for-mbs/
Read "All the Devils Are Here".
The problem for the market was that the GSE's had preferential borrowing costs because of the implicit bail out guarantee, so they dominated mortgage securities due to the lower interest overheads.
So Wall Street needed to find a way to beat the GSE's to a market. And they found that way by making securities in markets the GSE's were forbidden by charter to touch, subprime.
Read "All the Devils Are Here".
Now during the housing bubble, the GSE's were forced to withdraw and be conservative because the bushies were doing serious investigations into their practices and found legitimate irregularities. But those irregularities preceeded the bubble and forced Freddy and Fannie to retreat while wallstreet swallowed market share in the MBS market.
And what wall street did to swallow up market share, fees from investor cash, and winnings from derivative bets was to make bad, fraudulent products from bad dishonest brokers which they took to bad dishonest ratings agencies who gave their defective products high investment grade ratings.
There would not have been a crisis had wall street not put out high risk products that were rated low risk investments. There would not have been as much as a crisis had the wall street bonus culture not incentivized short term profit with long term risk. There would not have been as much as a crisis if the wall street derivative products had not incentivized failure. Those are the facts and no amount of pro-banker spin can put responsibility for those three conditions on the GSE's.
#14 Posted by Thimbles, CJR on Fri 11 Nov 2011 at 05:22 PM
Some commie makes my point: "As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006."
padikiller tols the Reality Bell: And THUS the government securitization went from 77 percent in 2003 to 46 percent in 2006, just before the bubble burst.
You commies can huff... And you commies can puff... But you can't blow hard enough to shove the nonsense that 46 % of the market share didn't contribute to the subprime crisis.
Nobody with any brains is going to believe this stupid claim.
The GSE's dumped nearly A HALF A TRILLION DOLLARS into subprime mortgages in the three years just before the subprime crisis. This is just the R E A L I T Y. It isn't going anywhere.
You can bitch. Moan. Gnash teeth. Click your heels together. Twitch your nose. Whatever.
The FACT of the matter is that any claim that this HALF A TRILLION DOLLAR subprime investment didn't contribute to the subprime crisis is poppycock.
#15 Posted by padikiller, CJR on Fri 11 Nov 2011 at 06:12 PM
"You commies can huff... And you commies can puff... But you can't blow hard enough to shove the nonsense that 46 % of the market share didn't contribute to the subprime crisis."
Total mortgage securitization. 46% of TOTAL mortgage securization. GSE's specialized in PRIME FIXED RATE SECURITIES. Guess what the other 54% were. Guess who issued them.
And, guess what, NOBODY forced your banker buddies to do it! The crisis is on your bloody hands, not the GSE's.
#16 Posted by Thimbles, CJR on Fri 11 Nov 2011 at 06:54 PM
Thimbles... I'm no fan of the bankers who wrote these loans.
Bush should have been impeached for bailing them out, as I have repeatedly written here. Obama should be impeached now for the same reason (and others). And any banker who committed any crime should be prosecuted.
But you can't dance around the FACT that the GSE's dumped a HALF A TRILLION DOLLARS into subprime mortgages in the three years immediately preceding the subprime crisis, dude.
It's just one of those undeniable, irrefutable, immutable fact-thingies.
And to argue that that HALF A TRILLION DOLLARS didn't contribute to the crisis is just stupid.
#17 Posted by padikiller, CJR on Fri 11 Nov 2011 at 07:04 PM
"And to argue that that HALF A TRILLION DOLLARS didn't contribute to the crisis is just stupid."
Years ago I remember people were buying pintos. Pintos were badly designed cars with defects that increased the likelihood that they would blow up over time.
If you want to hold the GSE's responsible for buying bad products as you would hold a consumer responsible for the design flaws of the new pinto, then yeah GSE's are responsible for buying bad product.
But they did not design the product and market the product as safe when it wasn't. And the motivation for buying the product came out of investor demand, market coersion ("we'll freeze you out"), and desire to recapture lost market share- not to satisfy government quotas which weren't satisfied by the types of risky purchases made to begin with.
Purchases with much lower default rates than the investors who were supposed to be smarter than some GSE bureaucrat.
http://www.nybooks.com/blogs/nyrblog/2011/jul/13/why-fannie-and-freddie-are-not-blame-crisis/
The fact is when you say a party is responsible, you imply that party is a cause. In that sense the GSE's were not responsible since the crisis would have occured with or without their 500 billion.
But the crisis would not have occured without wall street marketing defective products to investors with abandon while betting against their products' long term performance. When the instruments of wall street allowed them to separate their transactions from their own personal risk, they had the incentive to maximize transaction throughput and minimize requirements of transaction integrity. It was all part of making the process of the con more efficient.
Are GSE's responsible for that situation? Not at all.
#18 Posted by Thimbles, CJR on Fri 11 Nov 2011 at 07:41 PM
So the same theory of government mismanagement that Peter Schiff used to predict the whole crisis in the first place is beginning to catch on?
http://www.youtube.com/watch?v=2I0QN-FYkpw
http://www.youtube.com/watch?v=zM23TZxzOw8
Progress at last!
#19 Posted by RJ Miller, CJR on Fri 11 Nov 2011 at 08:11 PM
"The fact is when you say a party is responsible, you imply that party is a cause. In that sense the GSE's were not responsible since the crisis would have occured with or without their 500 billion."
To Thimbles: Exactly.
"And to argue that that HALF A TRILLION DOLLARS didn't contribute to the crisis is just stupid."
To padikiller: No one is arguing that the GSE didn't play a role in the crisis. They are a huge part of the secondary housing market.
But Bloomberg is suggesting that they were a primary cause - which is demonstrably false.
They don't originate loans - they buy them.
They didn't even start buying Alt A loans until late in the game.
And their market share of the secondary market dipped during the exact period of the crisis - even as Wall Street's share of the market spiked.
You can gnash, pout and snarl - and that won't change.
Hear that? that's your reality bell tolling...
#20 Posted by padikantread, CJR on Fri 11 Nov 2011 at 08:34 PM
The TARP losses are now estimated at $19 billion, while the GSE's are at $124 billion and counting. There's plenty of blame to go around, but the GSE's enabled the creation of he market in the first place by being the dumb money.
#21 Posted by JLD, CJR on Fri 11 Nov 2011 at 08:48 PM
Behold the Majestic Power of Government Regulation:
"The Securities and Exchange Commission said Friday that it had disciplined eight employees for their failure to detect the infamous Madoff Ponzi scheme, a major embarrassment for the agency.
SEC spokesman John Nester said the punishments ranged from pay reductions and suspensions to simple "counseling memos." No employees were fired."
Only 20 years after the SEC should have stopped Madoff, we get decisive action... Nobody fired... A few suspensions of a month or less... And a 6% pay cut (After 20 years of raises).
#22 Posted by padikiller, CJR on Fri 11 Nov 2011 at 08:48 PM
Sure the private lenders hopped all over the subprime market.
Who wouldn't if the government is backing the loans?
As JLD notes plainly, the GSE's losses outnumbered the bank's losses 5 to 1.
The subprime crisis was a direct and predictable result of governmental interference with the free market over the last 40 years.
#23 Posted by padikiller, CJR on Fri 11 Nov 2011 at 09:56 PM
Now you're grasping at straws, and it shows.
The reality bell tolls for thee
"Sure the private lenders hopped all over the subprime market."
We're all glad you agree that the private sector was all over the subprime market.
"Who wouldn't if the government is backing the loans?"
The GSEs didn't back subprime - people get subprime loans because their credit is too bad to get a loan backed by Freddie and Fannie. Subprime was always a market dominated by private firms.
-Double oops!
JLD can't count and neither can you. If you're talking pure losses, the Banks are way past the measly TARP losses. http://goo.gl/uTjg1
And if you're talking bailout costs, you need to count all the backdoor bailouts that Wall Street got (Goldman and the like getting 5 Billion out of AIG's hide right before it folds - something no bankruptcy judge would allow - Then the additional 12 billion that was given to AIG, and then went straight to Goldman).
Never mind the fact that Banks are now unloading their crap onto the GSEs so the taxpayer can eat the losses while the bankers point at Freddy and denounce the "bailout."
The subprime crisis was a direct result of corporate greed and money paying government to ignore corporate graft and bend the market so they could enrich themselves further. And it worked as planned until the economy melted down.
Now we get morons like Bloomberg or Romney telling everyone that too much regulation was the problem. That if only there were less restraint on corporate actions and money that things would be better.
Hah.
#24 Posted by padikantread, CJR on Fri 11 Nov 2011 at 10:47 PM
Some commie blithered: The GSEs didn't back subprime - people get subprime loans because their credit is too bad to get a loan backed by Freddie and Fannie. Subprime was always a market dominated by private firms.
padikiller tolls the Reality Bell once again: In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_2.html
#25 Posted by padikiller, CJR on Fri 11 Nov 2011 at 10:54 PM
Peter Schiff nails it in his debate with Epstein (what IS it with Columbia and these liberal professors?)
The montage of Schiff duking it out with and taking heat from the "2007 bubble will never burst Talking Head crowd" is too, too funny. I especially like Ben Stein's recommendation to buy Merrill Lynch at $75 a share... I bet that worked out real well for him. When you get Bank of America stock in trade, you KNOW you're in trouble!
The housing bubble came around when Bush did the borrow and spend thing and got the Fed to give away free money by cutting the interest rates to nothing. That's what financed the boom. That's what gave the banks free money to borrow and relend on subprime loans. That's what gave Joe Dumbass the incentive to apply to Bank of the Month's new Mortgage Subsidiary to get free money from the Gubmint to back a $500,000 mortgage on a townhouse.
And the GSE's were right there buying up a half a trillion dollars in securitized mortgages.
The problem wasn't that the mortgage outfits were unregulated. The problem was that Fannie and Freddie were dumping money into these outfits, buying up toxic debt in order to meet HUD's ridiculous "affordable housing" goals.
At some point these new commies will have to learn the lesson that the Old School commies learned (Lenin, Mao, and now even Castro).... Namely that government intervention never, never, never improves any economic process. PERIOD.
The only way the a government-run economy can function, is at gunpoint (as Hitler, Stalin and Kim Jong-Il figured out).
#26 Posted by padikiller, CJR on Fri 11 Nov 2011 at 11:30 PM
What a post full of fail.
"The housing bubble came around when Bush did the borrow and spend thing and got the Fed to give away free money by cutting the interest rates to nothing. That's what financed the boom. That's what gave the banks free money to borrow and relend on subprime loans."
Wrong. What Greenspan did was make the normal safe investment vehicles, such as US treasury bonds, worthless by keeping the interest rates low. That left a whole bunch of big investors which needed a safe place to invest while a decent rate of return looking at recently triple A rated securities. That's where the money came from.
"And the GSE's were right there buying up a half a trillion dollars in securitized mortgages."
According to other sources, the subprimey investments mentioned in your washington post article were a mix of Alt-A and subprime. For instance here see page 13 and look for the 500 billion.
http://www.cbo.gov/ftpdocs/108xx/doc10878/01-13-FannieFreddie.pdf
Early reporting used to bundle them as the same but they're not. The GSE's tried to drive the markets to higher quality loan origination standards by purchasing the high tranche high quality loans. But there was too much of that investor cash wanting any AAA place to go and so the attempt failed.
And the GSE's really started to see their market share slip by.
"The problem wasn't that the mortgage outfits were unregulated. The problem was that Fannie and Freddie were dumping money into these outfits, buying up toxic debt in order to meet HUD's ridiculous "affordable housing" goals."
Jesus, you don't give up. The HUD didn't force anyone to defraud investors or house buyers. The GSE's didn't force anyone to defraud either. In fact, your article details
"Banks typically back prime loans with customers' deposits. But subprime lenders often rely on money from Wall Street investors , who buy packages of loans as investments called mortgage-backed securities."
"HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower's ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans."
"For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market."
"Fannie and Freddie spokespeople say their partners had agreed not to sell them loans with several prohibited characteristics, including credit insurance, excessively high costs and prepayment penalties that lasted longer than three years. "
Stop making this crap up. It doesn't matter how much money Freddie and Fannie put into the subprime market. Had the banks issuing the securities been honest, had they made the loans based on solid appraisals of property and risk, had they not the incentive to bet on the failure of their securities, had they not coerced the ratings agencies into giving their junk AAA, etc... then Freddie Mac and Fannie Mae would have made money on their private label securities. Nobody forced these people to be crooks, but then again, no one forced them not to be either. Which is kinda' the problem.
#27 Posted by Thimbles, CJR on Sat 12 Nov 2011 at 04:25 AM
"As for my use of "commie"... If it keeps your panties unbunched, feel free to substitute the moniker of your choice for anyone who wants to use the force of law to snatch property from one class of people to dole out to another class...
"Liberal"... "Progressive"... "Whatever"...
A commie by any other name is still a commie."
First off, you're wrong again. Commies use the force of law to share property, not transfer it. Not that I care since I'm not a commie, but sloppy definitions lead to sloppy thinking.
Second, communism, as defined by Padi, is a proud American tradition.
http://digbysblog.blogspot.com/2011/11/welfare-kings.html
Just ask native Americans how they feel about the force of law taking someone's property and doleing it out to another class.
Lemme know if you libertarians ever get to righting that government imposed injustice. I'm sure they'd like their stuff back.
#28 Posted by Thimbles, CJR on Sat 12 Nov 2011 at 04:55 AM
Look at Thimbles dance!
TRUISM #1: The GSE's, from 2003 to 2006, bought nearly a HALF A TRILLION DOLLARS worth of securitized subprime mortgages.
TRUISM #2: This purchase represented more than a THIRD OF ALL SECURITIZED SUBPRIME MORTGAGES.
Now you commies can cry all day that the simple FACT that these governmental purchases of a THIRD OF ALL SECURITIZED MORTGAGES in the three years immediately preceding the subprime crisis didn't contribute to the crisis...
But nobody (with a few functioning neurons, anyway) is going to buy your nonsense.
#29 Posted by padikiller, CJR on Sat 12 Nov 2011 at 08:53 AM
And he dances again - "caused it" to "contributed to it."
Which was the point of pushing back against Bloomberg and Romney (and many other Wall Street defenders) when they suggest that the GSE started this mess.
The GSEs didn't get into subprime until 2003, when subprime was already well underway. i.e. they didn't START anything, they followed.
You're crying about a third of the subprime market, ignoring who held the other two thirds - y'know, guys like these: http://goo.gl/XjG9H
And you can keep waffling between "it's all the gubmint's fault" and "the GSEs contributed" but by now, no one's going to care.
#30 Posted by padikantread, CJR on Sat 12 Nov 2011 at 09:49 AM
@Thimbles: "JLD can't count and neither can you. If you're talking pure losses, the Banks are way past the measly TARP losses."
True, but those losses weren't offset by your tax dollars (i'm assuming you pay tax?). The GSE's were.
Big difference.
#31 Posted by JLD, CJR on Sat 12 Nov 2011 at 10:21 AM
Remarkable thing about this argument, to me, is that so few stop to consider the "why" of F&F's contribution to the mess.
The GSEs were both chartered with contradictory missions--or, in Fannie's case, the mission drifted to the point where it was contradictory. On the one hand, they were supposed to work "in step with HUD's goal of assuring quality housing for moderate and low-income families." This tended to pit F&F against the subprime sharks who were, through the '70s, niche players in both the mortgage and consumer finance industries. With their market power and implicit government backing, F&F curbed those players' abilities to grab market share.
On the other hand, F&F were both required to return the highest possible returns to private shareholders.
The tension between these two aspects of their mission is at the heart of what happened in the 2000s. On the one hand, F&F faced pressure from regulators, looking at traditional safety and soundness issues, F&F's commitment to low & moderate borrowers and--inevitably--corrupt inside-the-beltway stuff. On the other hand, by the late 1990s F&F had been eclipsed by, and were under tremendous lobbying pressure from, the 5-6 large banks that had developed their own gigantic secondary market for home loans--many of the most profitable ones being Alt-A and subprime.
Now the sharks were bigger than F&F. That changed the game completely. F&F could no longer put a lid on that market, and so as F&F's investors saw bigger returns elsewhere they wanted a piece of that action.
F&F were compelled by market pressures to buy the crappy loans they bought. The corruption of Franklin Raines and the other Fannie bigwigs was market-driven corruption, not regulatory corruption.
If Fannie had remained a government entity with a government mission--to get reasonable loans to moderate income people--then the whole subprime business model may never have dominated the market the way it did.
So it's true that F&F both contributed to the fiasco. The argument should be less about 'how much' and more about 'how come.'
#32 Posted by Edward Ericson Jr., CJR on Sat 12 Nov 2011 at 10:22 AM
@Thimbles: "JLD can't count and neither can you. If you're talking pure losses, the Banks are way past the measly TARP losses."
A) what do I have to do with this? Padikantreadwrotethat. Not the magnificent moi.
B) The point stands. I really didn't want to get into the "compare the bailout fund to the conservatorship" question because it was kind of dumb on it's face. It's like comparing a dad's net spending cash to his kid's allowance. Sure, after the mortgage, the tv bill, the credit card bill, and a bunch of other stuff, the dad gets to spend a couple of bucks on himself while the kid gets to spend 20 dollars a month, but where's the money coming from?
Are you going to try to claim the dad's worse with money than the kid based on that?
The whole system has been back stopped by the fed, treasury, AIG, and the GSE's. The banking system has been kept alive by bernanke's 0% loans with crap that's mark to dream world as collateral. The finance sector crashed the car and daddy taxpayer has been paying for the damages and every wall street firm gets to walk around with a similar to GSE implicit pledge without having a similar to GSE protective charter.
Comparing TARP to conservatorship isn't exactly illuminating and, were I a conservative, I'd be freaking out about these brokers with bulges in their big big pants walking around with implied government guarantees. If I hated the GSE's before, I'd really hate the whole of wall street now.
#33 Posted by Thimbles, CJR on Sat 12 Nov 2011 at 01:50 PM
To all those (Ryan Chittum, the New York Times, Thimbles, padikantread) who claim the government is made up of angels who couldn't possibly have had any responsibility for the financial crisis, let me add a further dose of reality to you. Fannie and Freddie were not part of Dodd-Frank. Yet, they are still losing billions every quarter, and have been for years, are still demanding bailouts, and pay their worthless POS executives bonuses.
Oh, and one other thing (and this may have been mentioned earlier). One of the jobs for Freddie and Fannie is to demand that lenders make certain loans, ie., subprime, not only to adhere to their own socialized housing agenda, but to threaten banks who don't make those loans by letting them know those bank loans won't be bought in order for them to become securitized assets. This isn't a new function; they've been doing this since the Clinton era. They're still doing it, which is one of the reasons why they can't get out of the red but still give bonuses to their worthless executives.
So the government played a huge role in the financial crisis, especially since the facts bear that out.
#34 Posted by SteveAR, CJR on Sat 12 Nov 2011 at 03:09 PM
This really isn't that hard to figure out.
The mortgage market was corrupted by GSEs buying up almost all housing mortgages. Lenders used to be careful to lend only to creditworthy people. But not with GSEs buying up all the mortgages! More loans means more profits and no risk with the government buying all the loans!
This article is liberal willful ignorance trying to hide government malfeasence.
#35 Posted by David Parsons, CJR on Sat 12 Nov 2011 at 03:32 PM
Man, that iOS5 battery drain is a killer. Wiped out a whole post. Where was I?
"So it's true that F&F both contributed to the fiasco. The argument should be less about 'how much' and more about 'how come.'"
Yes, I think you've got a good point there, but the discussion we're having here I believe is about a more important question 'in what way'.
And the reason why it's more important is because there are folks who are paid to kick sand up in the air so we can't see the real problem, so that we talk about every other issue than the real problem.
And the real problem is fraud. And the solution to ubiquitous fraud is strict rules and oversight.
If we let the paid people define the 'in what way' question unchallenged, then they will assert:
"The problem wasn't that the mortgage outfits were unregulated. The problem was that Fannie and Freddie were dumping money into these outfits, buying up toxic debt in order to meet HUD's ridiculous "affordable housing" goals."
And the 'solutions' to that fake problem will make things worse. That is what this fight is about, protecting crooks and their ability to make money of their crimes. These people know the truth, the numbers and the factual details of who's responsible are quite clear, but the truth is not helpful to them.
So they resort to bullshit.
"The only purpose of the exercise is to muddy the debate enough to allow conservatives to avoid coming to grips with ideologically inconvenient facts."
If we don't assert the truth, the public is going to buy into the bullshit for lack of alternatives. Therefore we've got to call them on the bullshit.
"To all those (Ryan Chittum, the New York Times, Thimbles, padikantread) who claim the government is made up of angels who couldn't possibly have had any responsibility for the financial crisis, let me add a further dose of reality to you. "
Don't. Nobody said the government has no responsibility for the crisis. They didn't regulate, they looked away from fraud, they encouraged dangerous loan products, and they kept the interest rates too low for too long.
When you put an Ayn Rand disciple in charge of the federal reserve and let him believe in his own hype for too long, disaster comes a galloping.
But Freddie and Fannie were not a cause of the crisis. The crisis would have happened with or without them. The crisis was caused by fraud and collapsed transaction standards, not by Barney effin' Frank.
And the numbers show this because contrary to this:
"Derp Derp! The mortgage market was corrupted by GSEs buying up almost all housing mortgages. Lenders used to be careful to lend only to creditworthy people. But not with GSEs buying up all the mortgages! Derp!"
The GSE's were down to 40% percent of all mortgage securities issued (including prime) during the period of folly leading to the crash. The rest were private label issued and had near no underwriting standards, which is why these loans have 4 to 6 times the default rate. Fact, reality bell, ding ding and all that.
The problem was unregulated fraud. Get over it.
#36 Posted by Thimbles, CJR on Sat 12 Nov 2011 at 04:36 PM
"The findings of the psychologist Daniel Kahneman, winner of a Nobel economics prize, are devastating to the beliefs that financial high-fliers entertain about themselves. He discovered that their apparent success is a cognitive illusion. For example, he studied the results achieved by 25 wealth advisers across eight years. He found that the consistency of their performance was zero. "The results resembled what you would expect from a dice-rolling contest, not a game of skill." Those who received the biggest bonuses had simply got lucky.
Such results have been widely replicated. They show that traders and fund managers throughout Wall Street receive their massive remuneration for doing no better than would a chimpanzee flipping a coin. When Kahneman tried to point this out, they blanked him. "The illusion of skill … is deeply ingrained in their culture."..
In a study published by the journal Psychology, Crime and Law, Belinda Board and Katarina Fritzon tested 39 senior managers and chief executives from leading British businesses. They compared the results to the same tests on patients at Broadmoor special hospital, where people who have been convicted of serious crimes are incarcerated. On certain indicators of psychopathy, the bosses's scores either matched or exceeded those of the patients. In fact, on these criteria, they beat even the subset of patients who had been diagnosed with psychopathic personality disorders.
The psychopathic traits on which the bosses scored so highly, Board and Fritzon point out, closely resemble the characteristics that companies look for. Those who have these traits often possess great skill in flattering and manipulating powerful people. Egocentricity, a strong sense of entitlement, a readiness to exploit others and a lack of empathy and conscience are also unlikely to damage their prospects in many corporations...
This is not to suggest that all executives are psychopaths. It is to suggest that the economy has been rewarding the wrong skills. As the bosses have shaken off the trade unions and captured both regulators and tax authorities, the distinction between the productive and rentier upper classes has broken down."
The Reality Bell is dinging.
#37 Posted by Thimbles, CJR on Sat 12 Nov 2011 at 05:05 PM
SteveAR,
"To all those (Ryan Chittum, the New York Times, Thimbles, padikantread) who claim the government is made up of angels who couldn't possibly have had any responsibility for the financial crisis, let me add a further dose of reality to you."
You desperately need a reality injection. No one is claiming the Govt is blameless in the subprime mess.
CJR's been slagging on the GSE since this whole mess exploded:http://goo.gl/ZU209
So, you're arguing with a viewpoint that exists only in your mind.
Corporate greed made this happen, while government entities let this happen.
And if you think the driving force behind GSE buying subprime securities was helping homeowners - there are some banksters who would like to sell you some equity CDOs.
The GSE arrived late to the party but joined in for the same reason Wall Street did - because there was money in it.
Wall Street invented CDOs, lobbied hard to make sure their derivatives weren't subject to regulation and created brokerage companies who weren't subject to Community Reinvestment regulations. Then they saturated the subprime market with their crap loans.
Nobody's saying the government is blameless Steve - just the opposite. The government could have done something, but they were too cash blinded or industry captured to do a damn thing. But the people writing the checks and offering the sweet jobs to regulators worked for Wall Street.
Now we get the worst of both worlds: A government that says we need to "Look Forward" (forget about all that crime in the past) and snake-oil apologists that want everyone to think that rules and enforcement made the economy go boom.
Utter bulls--t
#38 Posted by Jess83, CJR on Sat 12 Nov 2011 at 08:02 PM
The commies insist that the crisis came about through a lack of regulation and "corporate greed".
BS.
The crisis came about because the government was:
A. Directly tossing money (nearly HALF A TRILLION DOLLARS) into unregulated subprime securities and then stopped doing it.
B. Facilitating the crazy housing market by doling out money to drive speculative buying.
That's just how it is.
Did banks make stupid decisions? Sure. Did borrowers make stupid decisions? Sure.
But the government greased it all, all the way. Without the grease, it never would have happened.
And as for the "corporate greed" stupidity - had the market gone the other way - the way the Keynesians kept telling Peter Schiff it would in 2007 - and had the housing market kept increasing and had the financial companies failed to issue subprime mortgages... The very same commies who try to blame "corporate greed" for the subprime meltdown would instead now be banging drums and bitching at "Wall Street" for "affordable housing" or for "redlining".
#39 Posted by padikiller, CJR on Sun 13 Nov 2011 at 08:25 AM
"But the government greased it all, all the way. Without the grease, it never would have happened."
This is a lie.
"And as for the "corporate greed" stupidity - had the market gone the other way - the way the Keynesians kept telling Peter Schiff it would in 2007"
This is a lie. The Keynesians were on record talking about the house bubble from 2005, Dean Baker and Krugman for two. And, unlike the austrians and Peter Schiff, they have continued to be right about the depressed state of interest rates since.
In economics there are several schools of thought: one of them being Keynesian, which has existed in intellectual siberia since the 1970's; one of them is Austrian, which is what Ron Paul and Peter Schiff lose money on in their spare time (while dreaming of the return of the gold standard); one is modern money theory, which cares about things like the effect of fraud on markets, and the dominant one since the 1980's is neo-classical, which is the one you needed to write about if you wanted to be published. Milton Friedman, efficient markets, free trade always produces mutual goods, governments should use monetary tools to affect the economy etc.. comes out of this school and they failed horribly in the lead up and aftermath of the crisis.
Schiff was arguing with idiots, not Keynesian or MMT economists. When he does, he loses badly.
"The very same commies who try to blame "corporate greed" for the subprime meltdown would instead now be banging drums and bitching at "Wall Street" for "affordable housing" or for "redlining""
This is a lie. Those very same "commies" - consumer and housing activists - were on record since 2004 begging the government to do something about subprime loans and predatory lending. They got state regulators to look into it and the federal government's OCC asserted jurisdiction and shut the states down.
And because the federal regulators lived in "efficient markets" dreamland, they did nothing after they shut down state regulators.
Freddy and Fannie wasn't the problem. Subprime wasn't even the problem (there were good lenders who did subprime responsibly and didn't have the default rates of the corrupt banks).
The problem was unregulated fraud which put trillions of dollars into assets that collapsed In value, something which the neo-classicals said couldn't happen because there had never been a national collapse of the house market in the past (according to them, Bernanke specifically).
So please stop lying about it.
#40 Posted by Thimbles, CJR on Sun 13 Nov 2011 at 01:53 PM
'The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.' - Paul Krugman, 2002.
Krugman later did, in a 2005 column, warn of a housing bubble - but still favored keeping interest rates low, which helped the bubble grow. For those who think Krugman is infallible, he was also warning that Social Security was a Ponzi scheme back in 1995, but then trashing anyone who made the same observation in more recent years. Earlier than that, Krugman worked in the Reagan Administration in 1981-82, but years later, when Mr. Sulzberger started signing his paychecks, decided that Reagan had, in 1980, run a 'racist' campaign.
I find it depressing, though predictable, that writers on the left side of the political spectrum cannot ever, from the bottom of their hearts, find any policy, anywhere, which has those famous 'good intentions' and which nevertheless produces perverse outcomes. Chittum's rigidly dogmatic refusal to concede any significant role to Fannie Mae and Freddie Mac runs counter to my memory of the Sept. 2008 meltdown, which was kicked off by the announcement that Fannie Mae and Freddie Mac were to be put into a conservatorship as a result of mounting losses and inability to raise capital. The dominos then started to fall up and down capital markets. Please correct me if I'm wrong, but a timeline analysis of what happened in Sept. 2008 will, I believe indicate that the crisis started with Fannie Mae and Freddie Mac. News coverage noted the horrifyingly large proportion of mortgages backed by these two GSEs, but as the more glamorous private investment banks started falling, and the government intervened, the foces on Fannie Mae and Freddie Mac shifted. Only with the publication of the Morgenstern/Rosner book have the chattering classes been reminded of the role played by GSE's in the crisis, but apparently Chittum and some academics (who do not 'refute' the arguments by Romney and 'the right' in much convincing detail) have their ideology, and they are sticking to it no matter what.
There are no ambiguities in left-land, no trade-offs, no cases in which 'right-wing' policies produce, even inadvertantly, good outcomes, and leftist ones produce bad outcomes. This isn't the world most of us live in, and Chittum's 'Big Lie' rhetoric confirms the insecurity of his argument. Big economies are complicated things, but Chittum and others would have you believe they are as simple as are the arguments put forward by the GOP field. Now student debt is higher than all credit card debt put together, and is a big reason for those 'Occupy' protests in big cities. No doubt it is all the fault of 'the banks'. Why, the federal government is as innocent as can be - student loans are a compassionate policy, see.
#41 Posted by Mark Richard, CJR on Mon 14 Nov 2011 at 12:45 PM
Dead horse time probably, but
http://www.ritholtz.com/blog/2011/11/a-global-view-of-the-housing-bubble/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29
Asks Barry: "How did Europe and Asia and Canada all have a simultaneous housing boom as big if not bigger than that of the US?
"Were the Australians compelled to follow the CRA? Did Barney Frank influence the Belgians? Were the US GSEs effecting policy in the UK?
"Or might some other factors — like ultra-low rates, excess leverage, demand for junk AAA-rated paper, misaligned incentives, and/or derivatives have been at play?"
#42 Posted by Edward Ericson Jr., CJR on Mon 14 Nov 2011 at 03:58 PM
It's not hard to come up with contradictions with Paul Krugman, he's human and he's bringing his knowledge and analysis at the time to bear on problems at the time.
I mean, here's a piece from 1999 which is just wow..
"Perhaps the most seductive argument for Greenspan's intervention
in the market is the lesson that the past would seem to teach us:
Didn't America's bubble in the 1920s, and Japan's in the 1980s,
prepare the way for the economic crises that followed? Maybe--but it
turns out that in both cases the central banks raised rates in an
attempt to let the air out of markets, and thus may have helped
precipitate the very slumps they feared.
So what should Greenspan do? Probably what he does best--i.e.,
nothing--and deal with the bubbles if and when they burst. Oh, and I
wish he wouldn't worry so publicly: It makes me nervous when I
understand what he's saying."
Some good points, but on the whole the "do nothing until it all crashes" approach wasn't the best counsel. He's human.
However, let's think about the perception of finance in 1999. People honestly thought that American markets were stable, rule bound, well regulated, and transparent. They had years, near a decade under Clinton, of growth and crisises, like the S&L crisis, were quickly prosecuted, mitigated, and neutralized compared to those in other countries. People had institutional trust which evolved into the basis of removing the rules and regulators which insured that trust. Things were gearing up for a minsky moment while everyone, including Krugman in 1997, were talking up the power of the fed's chairman.
http://web.mit.edu/krugman/www/vulgar.html
"After all, the simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman's judgment--you may think that he should keep the economy on a looser rein--but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. "
Ouch. I'll bet he'd like to take that one back. So you see, here was the problem back then: people believed bubbles were created out of temporary and inadvertant market misperceptions. These misperceptions existed, but the math models seemed to indicate they would smooth out over time if the rational free market was allowed to work. Exchange between rational actors always moves towards an acceptable equilibrium, they claimed.
What they did not know at the time was the effect of intentional misperception on the market. Many of these people underestimated fraud to the extent that they presumed it not to exist. What they saw as a ripple that would smooth itself in a rational market turned out to be a tsunami of GIGO from a liars' market.
Now, let's apply this to Krugman's claim in 2002 that we needed a housing bubble to replace the stock bubble (and let's ignore the question of whether it was policy advocacy or policy analysis) In 2002 Krugman stated the need for a housing bubble. Did he state the need for no money down, no doc loans? Did he state the need for Adjustible Rate Mortgages? Did he state the need for the sale of mis-rated mortgage securities on the global investment market? For IED like teaser rate mortgage products? Greenspan ignored fraud, held interest rates low, and advocated for ARM's that tie a central banker's hands to low interest rates since every small increase in interest rates will lead lead to
#43 Posted by Thimbles, CJR on Mon 14 Nov 2011 at 04:36 PM
Got called away. Anyways,
" (and let's ignore the question of whether it was policy advocacy or policy analysis)"
In 2002 Krugman stated the need for a housing bubble. Did he state the need for no money down, no doc loans? Did he state the need for Adjustible Rate Mortgages? Did he state the need for the sale of mis-rated mortgage securities on the global investment market? For IED like teaser rate mortgage products? Greenspan ignored fraud, held interest rates low, and advocated for ARM's that tie a central banker's hands to low interest rates since every small increase in interest rates will lead lead to a large increase in housing defaults.
Krugman didn't predict this. He underestimated the stupidity of our elites. He believed they were better than children with matches, his bad. He's no doubt gotten older and wiser than the person he was in 1999 if not 2002.
And all that still doesn't change the fact that the crisis was caused by unregulated fraud perpetrated by wall street to enrich wall street and to maximize the bonuses it pays out.
"Please correct me if I'm wrong, but a timeline analysis of what happened in Sept. 2008 will, I believe indicate that the crisis started with Fannie Mae and Freddie Mac. News coverage noted the horrifyingly large proportion of mortgages backed by these two GSEs, but as the more glamorous private investment banks started falling, and the government intervened, the foces on Fannie Mae and Freddie Mac shifted."
I'm gonna' have to correct you. Bear stearns started the ball rolling in March 2008. Then it was AIG and Lehman Brothers in September. Hank did not want to piss on Lehmans to put out a fire, so that went belly up and broke the money market. After that, the world exclaimed together "Holy S***!" and the whole global finance system turtled. No credit to no one, which was very bad for leveraged institutions like Freddy, Fannie, Goldman Sach's, Citigroup....
That was when the investment banks converted their charters and went to the federal reserve window to borrow 0% money from the lender of last resort. Freelddy and Fannie? Someone decided it would be more convenient for the federal government to assume conservatorship since the banks were going to
dump their toxic assets on the taxpayer anywayswork with the government on resolving the temporary market distortion anyways, the government might as well use the GSE heavyweights to do so.I went through all this in 2008.. Didn't you?
#44 Posted by Thimbles, CJR on Mon 14 Nov 2011 at 05:48 PM
Two good taibbi posts. One on fraud that, according to some here, doesn't exist and a judge who's fighting regulator criminal collusion which, according to me and others, is too rare:
http://www.rollingstone.com/politics/blogs/taibblog/finally-a-judge-stands-up-to-wall-street-20111110
"The amazing thing about the wave of corruption that has overtaken the financial services industry is that most of it couldn’t happen without virtually every player at every level signing off on these deals. From the ratings agencies to the law firms to the accounting firms to the regulators to the bank executives themselves, everybody had to be on board in order for a lot of these fraud schemes to work.
Judges are a part of that picture, and too often, members of the bench sign off on dirty deals made between banks and regulators when the law says that such settlements must be “fair, reasonable, adequate and in the public interest.”"
And one on bank welfare vs our welfare via Mitt Romney:
http://www.rollingstone.com/politics/blogs/taibblog/why-mitt-romneys-entitlement-privatization-plan-is-crazy-20111108
"We’ve just witnessed an episode of industry-wide financial mismanagement that surely has no parallel in history. From Lehman Brothers to AIG to Goldman and Morgan Stanley (which in 2008 needed the unprecedented emergency granting of a commercial bank charter to avoid bankruptcy) to Citigroup (which needed a $25 billion bailout and $300 billion in federal guarantees to survive) to Bear Stearns (dead) and Merrill Lynch (dead) and so on, virtually every single one of America’s leading financial institutions from the last decade is either already out of business or functionally insolvent and living off government life support and cheap cash from the Fed.
Even leaving aside the fact that most of them are facing mass litigation for fraud, dishonest accounting, and/or systematic perjury (for robosigning financial documentation), they’ve all proven their complete and utter incompetence to do their ostensible jobs, i.e. the care and stewardship of money...
So the mere hint that these banks might be denied future bailouts caused a company as massive as Bank of America to be downgraded to just above junk status. That means, in other words, that without the implicit promise of government aid, Wall Street considers these banks to be junk or below-junk businesses. Evaluated purely on their own merits, without the implicit attachment to the taxpayer, these companies actually have negative trustworthiness.
And these are the people we want managing the nation’s Social Security accounts?"
Good question.
#45 Posted by Thimbles, CJR on Mon 14 Nov 2011 at 07:39 PM
"Only with the publication of the Morgenstern/Rosner book have the chattering classes been reminded of the role played by GSE's in the crisis"
Here's a good read with a fun link to an old Moody's report.
http://www.cepr.net/index.php/blogs/beat-the-press/george-will-spreads-some-lies-about-the-economic-crisis
#46 Posted by Thimbles, CJR on Mon 14 Nov 2011 at 09:37 PM
To Thimbles, thanks for an informative post. Based on your links, I still believe that left-wing commentators are low-balling the importance of the roles played by the GSE's. It becomes, at that level, very difficult to separate the 'private' lenders from the government and GSEs in this debacle. The meltdown did not happen overnight, but the crisis of Sept. 2008 was kicked off by Fannie Mae and Freddie Mac. Since economics and finance are still behavioral disciplines, I think this is significant. By the same token, the Wall Street crash of '29 didn't happen overnight, there were policies ticking away months earlier that caused it. It was an effect, rather than a cause.
As a proximate cause of '08, I think it is perfectly legitimate to note the pressures and incentives put on both GSEs and the big investment banks to make sub-prime loans, and I think Ryan is, as dpressingly usual, letting his left-wing ideology trump his journalistic instincts in calling it a 'big lie' that Fannie Mae and Freddie Mac were integral to the housing crisis, given the number of mortgages they held. And, as usual, he as a 'progressive' ends up excusing really greedy people like Raines and Johnson, while obsessing about Lloyd Blankfein and others.
#47 Posted by Mark Richard, CJR on Tue 15 Nov 2011 at 12:42 PM
Thimbles...
Can we change up to some source besides Matt Taibbi or former Enron advisor and 15 multi-millionaire Paul Krugman?
It seems to be "all Krugman, all the time" on the Thimbles Commie Hour..
And a pie-throwing, coffee- tossing lunatic Rolling Stone "journalist" isn't very persuasive to any reasonable person.
#48 Posted by padikiller, CJR on Tue 15 Nov 2011 at 02:27 PM
"To Thimbles, thanks for an informative post. Based on your links, I still believe that left-wing commentators are low-balling the importance of the roles played by the GSE's."
Of course you do. But since this is a discussion about facts and not religion you've got to do better than beliefs.
" It becomes, at that level, very difficult to separate the 'private' lenders from the government and GSEs in this debacle."
Yeah but that's the thing. It isn't difficult. One just has to ask the questions "who made the fraudulent securities" and "who rated them". When the answer to neither of those questions is "the GSE's" then you have a separation.
"The meltdown did not happen overnight, but the crisis of Sept. 2008 was kicked off by Fannie Mae and Freddie Mac. "
Is this one of those belief things? We went over the history. I lived through the history. If you want, you can watch the history on PBS
http://www.pbs.org/wgbh/pages/frontline/meltdown/
http://www.pbs.org/wgbh/pages/frontline/breakingthebank/
"As a proximate cause of '08, I think it is perfectly legitimate to note the pressures and incentives put on both GSEs and the big investment banks to make sub-prime loans"
Except the GSE's didn't. They made different low doc products and did so out of investor pressure over loss of market share and potential "profit", but they didn't make subprime nor did they make the low quality subprime which was impossible for borrowers to repay. They bought those products on the basis they were an investment. Didn't make them. Didn't set the standards for them. Didn't rate them.
"And, as usual, he as a 'progressive' ends up excusing really greedy people like Raines and Johnson, while obsessing about Lloyd Blankfein and others."
Except it was Lloyd Blankfein who did the margin calls on AIG, forcing the taxpayer bailout, so that Geithner and Paulson could insure that Goldman got paid out on their CDS's on the dollar. And it was Lloyd Blankfein who was in charge as Goldman was knowingly selling "shitty deals" like Timberwolf to investors.
Do you believe the sheep are resposible for the behavior of the wolves? And do you believe the wolves are innocent in their bloodshed?
Again, these beliefs you've set forth belong more in the religious sphere then the forum here.
#49 Posted by Thimbles, CJR on Tue 15 Nov 2011 at 04:03 PM
In order to "mix up my sources":
Paddy waddy whined, "And what is CNN doing relying "too heavily" on that official report of a commission charged with investigating the subprime crisis? SHHHHH! They should be going to alt.wallstreet.vampires.conspiracy.net for the REAL news!"
Fine.
http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html
"The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits...
By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt...
It calls credit-rating agencies “cogs in the wheel of financial destruction.”"
Is that better?
#50 Posted by Thimbles, CJR on Tue 15 Nov 2011 at 05:42 PM
Oh hey! Somehow my fcic link got trashed :(
The report:
http://fcic.law.stanford.edu/
The idiots who tried to trash the report from the inside:
http://rortybomb.wordpress.com/2011/07/14/the-fcic-investigation-wallison-on-the-gses-and-the-conservative-echo-chamber/
Gum scraped off the bottom of my shoe has more integrity than the members of the modern republican party.
#51 Posted by Thimbles, CJR on Tue 15 Nov 2011 at 06:00 PM
Thimbles quotes the Dead Tree Residue of Record: "The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits..
padikiller responds: The report does not state that the GSE's weren't "majpr culprits". What the report really says:
"We conclude that these two entities [Fannie and Freddie] contributed to the crisis, but were not a primary cause."
One can be a "major culprit" without being the "primary culprit".
More importantly, what the report says in general about the government's role in the crisis is clear - the sheer failure of existing regulation:
"Yet we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it.
To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not. In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse. And where regulators lacked authority, they could have sought it. Too often, they lacked the political will—in a political and ideological
environment that constrained it—as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee."
#52 Posted by padikiller, CJR on Tue 15 Nov 2011 at 06:27 PM
One can be a "major culprit" without being the "primary culprit".
By your logic, the person who walks alone on dangerous streets (contributing to the circumstances leading to his mugging) is a mugger (a culprit in his own mugging).
Derp Derp Derp.
"More importantly, what the report says in general about the government's role in the crisis is clear"
Hey goody! You're going to say something I think we can agree on.
"the sheer failure of existing regulation:"
Augh. That's not what the report says. You even quoted the sentence:
"Yet we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it."
Never put deregulatory market fundamentalist conservatives in charge of appointments and enforcement.
They will screw up the appointments (just look at the FCIC body) and they will refuse to enforce the laws they don't believe in.
And they will prevent other people from enforcing the law while at it, such as:
"[T]he Office of the Comptroller of the Currency, which regulates some banks, and the Office of Thrift Supervision, which oversees savings and loans, blocked states from curbing abuses because they were “caught up in turf wars.”"
However, the most important point is you've just admitted that the government failed (of course) and how it failed (oh really?).
It didn't force wall street to make predatory products. It didn't force the GSE's to buy predatory products. As I said "Nobody forced these people to be crooks, but then again, no one forced them not to be either. Which is kinda' the problem."
The crooked market existed because there was no enforced law against it. Not because GSE's bought some products from it, not because the government mandated it, but because there was unregulated fraud and nobody in power cared enough to do anything about it.
Now are we going to talk about solving that problem or are we going to yappity yap about the mythical "freddy mac and fannie mae, scourges of the secondary mortgage market" and other bedtime stories?
#53 Posted by Thimbles, CJR on Tue 15 Nov 2011 at 07:07 PM
The bottom line is that most conservatives admit that the Government did not originate sub-prime mortgages. Fannie and Freddie did not come up with ARMs, piggy backs, etc.
Yet, despite the fact that Wall Street, nor lenders like Countrywide were never coerced into making such loans, that somehow Fannie and Freddie's actions amounted to coercion.
Scratch that, I don't want to put words in the conservatives mouths, such as they do so often. So at the most, I suppose the conservatives suggest that by Fannie and Freddie acting as market participants and lending to sub-prime buyers that these actions made it possible for Wall Street and the likes of Countrywide, etc. to produce even more sub-prime mortgages.
The problem with this argument is that the only actors in this debacle who made it possible for Wall Street, Countrywide, Moody's, etc. to partake in this malfeasance were Wall Street, Countrywide, Moody's, etc. Any claim to the contrary is a lie.
#54 Posted by Rob, CJR on Mon 5 Mar 2012 at 06:41 PM