Posted on 02/19/2009 4:29:12 PM PST by Ernest_at_the_Beach
In what way did the government force this? I'm not saying you are wrong, but you didn't explain how they forced it. If you mean the Community Reinvestment Act, I think that was wrong, but it is not the only cause of the mortgage mess.
Actually the regulations required all of this to happen.
The regulations weren't relaxed, banks and mortgage companies were forced to give loans to people who couldn't pay them back. The penalties were fines and jail terms.
Sounds like more regulations that did exactly what they were supposed to do.
True, but that is not the only cause of the mortgage mess. Higher and middle income borrowers have high default rates too.
Rates by Relative Income Zip Code1 [footnote 1. Source LoanPerformance. End footnote.]
Delinquency Rate as of August, 2008 [Footnote 2. For mortgages originated between January, 2006 and April, 2008. End footnote.]
Lower-Income Zip Code Subprime: 25.0. Alt-A: 16.1. Total: 21.5.
Middle-Income Zip Code Subprime: 21.3. Alt-A: 12.9. Total: 17.7.
Higher-Income Zip Code Subprime: 19.5. Alt-A: 10.9. Total: 14.5.
Here is a claim by FED governor Duke that the Community Reinvestment Act did not contribute to the mortgage crisis. It did have some effect, so I disagree with her that the CRA had no effect whatsoever.
...serious delinquency rates for subprime loans are high in all neighborhood-income categories, not only those in lower-income areas, as might be thought if the CRA were a contributing force to the subprime crisis.
Thats not free market capitalism anymore than income redistribution is free market capitalism. It's called corporate welfare and much as you would like to blame “greedy corporations” that makes as much sense as blaming welfare recipients for taking the money that government hands out to them. If the government sent you a check check every month you would cash it too.
The point is, banks were required to make under collateralized loan mortgages by the government. Can you blame them if they make a profit at it while they do it? Once they made the loan they immediately sold to to FANNIE MAE OR FREDI MAC, both quasi governmental bodies set up by congress, which then released securities based on those under collateralized loans.
Banks brokerages and others who ended up buying those securities were of course stupid to do so, but given that FANNIE MAE AND FREDI MAC are governmental entities, you can hardly blame them for believing that the federal government would not allow FANNI OR FREDI to fail. Yet this is exactly what happened. Congress apparently set them up to fail. Instead of bailing out FANNI AND FREDI which is what they should have done, they bailed out the banks instead, which is just their way of nationalizing the banks.
I can't believe normally intelligent people like yourself can't see through the lies and schemes of the socialists in congress. This whole debacle is nothing more than a calculated plan to seize the national economy via the banks and socialize the country via nationalization. It is not a failure of free markets or capitalism, it is a calculated plan hatched by socialists in congress. I have to give them credit, it is working much better than even they probably could have imagined. That is of course because people like you don't even understand who is to blame.
“If you mean the Community Reinvestment Act, I think that was wrong, but it is not the only cause of the mortgage mess.”
Yes. see 84
Yes, I saw that. I think the CRA is a bad law, but you are oversimplifying. See #83.
Some regulations are harmful (as in the CRA), but if you removed all regulations on investment banks, after stockholders pulled what money they had left in stocks, the resulting crash would make what we have seen so far look like a mild correction. I don’t want to throw the baby out with the bath water.
I want to nominate the author of that post as Chairman of the SEC ... first insightful analysis of the mess I have actually seen.
Whenever there is a serious default rate that comes all at once like it did earlier last year in urban areas due to the CRA it affects housing prices as a whole in those markets. Rents go down dramatically as new inventory is suddenly placed on the market. This causes a domino effect. Typically investors are the second tier to default due to the fact that rents can no longer cover their mortgage payments. This adds even more inventory to the market causing prices to tumble further. As equity levels fall below certain levels those stupid enough to finance with ARMs see their monthly payments rise. Those on the market for a home suddenly find that they can no longer qualify for a mortgage with 5% down but instead must have 20%. Even though housing prices may be dramatically lower they may find that they can no longer afford to purchase a house, which further depresses the market.
Do you see how CRA can cause enough distortions in the housing market, first driving home values up by artificially stimulating demand, then driving home values off a cliff when the dead beats default, that even middle income and upper income investors are forced to default? It caused the housing bubble in the first place, added and abetted by less than sophisticated investors who didn't understand that real estate prices where getting to unrealistic levels or why. It was always just a matter of time before it all came unraveled.
Interesting.
********************EXCERPT*************************
Tonight on The Kudlow Report (Thursday Night ):
A LOOK AT THE SEC & WALL STREET
*Marvin Pickholz, SEC Former Assistant Director of Enforcement, partner at Duane Morris
*Jim LaCamp, RBC Dain Rauscher Sr. VP, Portfolio Manager & Financial Advisor
*Vanessa Drucker, freelance financial reporter
Pickholz left the SEC in the early 1990 timeframe I believe...and was critical of the SEC's (recent) enforcement actions .
You and Barney Frank. Both of you blaming “less regulation” for this...
Thanks, interesting post.
I think something like that did happen. I think a sane reform of the CRA, based on what we have learned from this economic crisis, would be a good thing, but with the Dems in charge a so-called "reform" of anything would only make things worse. The question is, how much of a factor was the CRA?
My gut tells me that measures such as the CRA are fundamentally dangerous. For example, Carter's original CRA was not as harmful as Carter's 1993 CRA modifications and zealous enforcement. (ACORN should be cut off, but watch what Obama/Pelosi/Reid tries next.) I don't believe that is the only cause of this crisis though.
On the other hand, removing regulations can also be harmful. In 2004 the SEC loosened the leverage rules, allowing some firm to go from maximum debt-to-net-capital ratio of 12 to 1, to much higher ratios. Only 5 were allowed to do that. Who were they? Surprise, surprise. Do Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley sound familiar? And now Paulson and Geithner look like foxes guarding the henhouse.
This is an extremely complex phenomenon, but economic libertarians will argue if there were no regulations at all, the problem would solve itself, while socialists, etc. will argue that 100% of the problem is the free market. I think both are wrong to see it in such absolute terms.
Good and interesting point. SOX was supposed to prevent abuses and protect shareholders from corruption and fraud by CEOs / CFOs / CxOs (which was not the cause of this meltdown) but instead the law itself introduced horrendous distortions in free market and disincentivized a lot of companies to be in the US public / listed exchange market.
In the aftermath, many US and foreign companies withdrew from US listings, got merged or bought out into private sector or foreign exchanges and/or locations, resulting in capital outflow from our markets.
Not related to SOX, but the taxation of US companies foreign operations if money is transferred back to US HQs is another stupidity and keeps too much US corporate capital overseas, where it is deployed instead of the potential deployment in the States. Reducing Foreign Tax to 5% “holiday” a couple of years ago brought tremendous infusion of capital back to US and helped support the economy.
And what do you think the cause was?
This crisis is far more dangerous than mere bubbles because it affects entire financial system, not just an industry or a sector of the economy as the case was in more recent bubbles. But outright Enron-style fraudulent balance sheets (like off-balance liabilities and side-agreements) or inflated income statements, which is what SOX was supposedly designed to prevent, was not one of the causes.
Politicians and government bureaucrats who have either sponsored or have stood in the way of fixing the worst problems causing the bubble (such as GSEs Fannie and Freddie) would like to misdirect our attention from themselves and point fingers at "greedy" or "incompetent" CEOs or at "deregulation" or at Republican administrations, but it was their own legal and political actions and inactions (such as refusing restructuring and deleveraging of GSEe as advocated by Bush in 2001 and later, in 2005) and the moral hazard that they introduced that have been the primary reasons and "stimulus" behind this fiasco.
In other words, excess of politically motivated regulations of private markets and economy have led to this being significantly more than just a natural business cycle slowdown, not the "inadequate regulation" as the article claimed.
Sure ... but a fuse all by itself is pretty useless. The same fuse could have been left all by itself and wouldn't have done much damage when it got lit ... or even it just lit up a small fire cracker in a container, yeah, it would have rattled the container a bit but do no additional damage.
But if you attach a thermo-nuclear device at the end of that fuse ....
The SIZE of the bomb and the resulting damage has little to do with the fuse.
In 2004 the SEC loosened the leverage rules, allowing some firms to go from maximum debt-to-net-capital ratio of 12 to 1, to much higher ratios. Only 5 were allowed to do that. Who were they? Surprise, surprise. Do Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley sound familiar?
Sometimes it seemed to happen because of both over-regulation and lender corruption. Countrywide said it fudged appraisal values because government regulations required them to make loans they did not want to.
It's really hard to pinpoint what happened sometimes. For example: University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations.
But in many cases these banks and mortgage companies not subject to CRA, could pass the pain on to Fannie and Freddie, or bundle up mortgages to be passed on to investment banks. The investment banks were playing craps at higher odds than ever. Not good.
And then we have Barney Frank in 2003 saying that Fannie and Freddie were just fine. Obviously, he wanted to keep the money flowing, and damn the consequences.
In summary, I agree that part of the problem is overregulation to meet leftist ideological goals. And I believe part of the problem is failure to regulate, (Fannie and Freddie, and the SEC allowing investment banks to play craps with money entrusted to them) so I do not totally agree with #16.
Fannie and Freddie have been "regulated" even more so than private institutions - from the beginning of their existence they were not private enterprises, they were partially "privatized" later as GSEs. Their mandate was to make and facilitate loans, that was the extent of their "regulation" and last year they had more than half of all mortgages in US, many of them at lower standards than were practical for most normal banks loans, which made it easier to qualify for loans. Bush wanted to change the structure and "regulations" governing GSEs specifically because they became potentially huge liability which were (for all practical purposes) guaranteed by faith and credit of Federal Government (while at the same time being a piggy bank and slush fund for Democrats) yet could not get past Frank and Dodd who thought that kind of "regulation" was just fine. It wasn't lack of regulation in that case, it was too much of the wrong one, based on wrong policy and supported for decades for political reasons by Democrats.
Re 2004 SEC rule, it actually didn't affect "banks".
Do Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley sound familiar? - Yes, precisely because none of them was a commercial "bank", they were pure "investment banks" / brokerages unlike BoA, JP Morgan, Citi etc. which had brokerages merged with banks, and thus were regulated as banks, thus having lower leverage requirements ... Bear, Lehman are now gone, Merrill ingloriously fire-sold to BoA, and both Goldman Sachs and Morgan Stanley are now "banks" and have the same leverage requirements as other commercial banks (with or without brokerage component, e.g. Citi is slowly merging off their Smith Barney brokerage to Morgan Stanley).
Anyway, if one wants to argue that SEC (under William Donaldson, who BTW was a member of Obama's transition team) lowered leverage requirement because they wanted to incentivize investment banks to make more loans (otherwise they would hit the limit of how much they could lend without additional borrowing) then how could that be considered a "lack of regulation"? Again, it could be the regulation of the wrong kind - no surprise here! - promoting the lending process for the sake of broader home ownership, but it's a myth that the "regulation" failed, when in fact exactly opposite would be true - the regulating agency of the government made sure more loans would be available by encouraging and enabling institutions to make them. That's a failure of the same overall government policy or program, not failure of regulation of the institutions that faithfully followed and executed the policy, i.e. banks (commercial and investment) were "regulated" right into making more, lower quality loans and having to leverage themselves in the process.
Investment banks did exactly what regulators wanted them to do! Yes, leverage is very profitable on the way up, and it kills on the way down, as we saw with another crisis, brought on by LTCM failure in 1998, leveraged at about 100:1 at the time, with overall liability exposure of approximately $1T on $10B in assets. That regulators forgot about that in their zeal to increase home ownership by any means is not a "lack of regulation", "failure to regulate" or fault of the private companies that were "regulated" into it. Excess of regulations and ever-changing rules and laws, not the lack of them, was the most contributing factor in this fiasco. What could have been a manageable real estate bubble became a banking and financial system earthquake. And I am not even talking about CDS disaster which put the final nail in the coffin, but which is not regulated by SEC because it's considered "insurance", not a regular financial derivative.
BTW, not as well known, but in 2004 same SEC also allowed ProFund ETFs that, for the first time, used leverage. I am sure you may have seen some effects of that in the recent markets.
BTW, here is another, different argument on this subject that you may be interested in following (I didn't check validity of it, so would not care to argue it myself at this time): Robert Hansen's Blog: The 2004 Banking Leverage Rule Change
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