What Conservatives Miss About The Financial Crisis

[Stonewall]

The Conservative mantra of the day blames the current financial crisis on the government’s over-regulation of an otherwise sound banking system. They want you to believe that the crisis stems from an intrusive government forcing lending standards lower by government fiat, namely the CRA. While the government is at fault here, the government's intervention in the banking system is only a small component of a much larger problem.

People think for a second. The entire sub-prime market is only 500 billion dollars. Every one of those mortgages could go into foreclosure, and you are looking at a something less than a 250 billion dollar loss. The real estate market has lost over 3 trillion in value or more than 10 times as much – and we have yet to see even 50% of the sub-prime mortgages default. If the Community Reinvestment Act was a fault, why is the housing crisis centered in the condo markets of Vegas, Phoenix, and Miami. It just doesn't make sense.

The housing crisis is a serious problem, but it is only a part of the larger problem which is debt, specifically consumer debt. In economic terms, investment debt is unpredictable because the impact really depends upon the success of the investment. Consumer debt on the other hand is very predictable. It pushes demand forward getting consumers to buy today what they would normally wait to buy. When we express future demand today, we pull revenue streams forward, thereby overstating present revenue.

When you look at housing, you will see that people bought houses in 2004, 2005, 2006 that they would normally have bought later, say 2008 or 2009. The builder in 2004, unfortunately, didn’t think that his revenue was overstated, and neither did the banker who started lending on looser and looser terms. To them, the boom would never end. So the builder, in turn leveraged his wealth, buying things from people who found themselves suddenly richer. Those people in turn leveraged their wealth, and so on and so forth, until the economy was brimming with imaginary wealth entirely built upon imaginary revenue.

The problem is that at some point there isn’t enough future demand to pull forward. We hit that point in 2007. Housing demand for 2007, 2008, and 2009 had been depleted, having largely been filled in 2004, 2005, and 2006. There was no cheaper capital to pull into the game of low interest rates. In fact, we were experience the opposite as interest rates on variable notes reset higher, forcing the housing crisis. Higher rates forced people to sell at the exact same time that demand was falling. This was the housing crisis.

In the net, the problem wasn’t the marginal poor person buying a house that he couldn’t afford. The problem was the near-rich person who bought the swimming pool for the house that he couldn’t afford. It was people spending imaginary wealth, borrowed based imaginary revenue streams. Having worked in banking for 20 years, I can assure you that the government didn’t force bankers to make bad loans any more than the zoo keepers force lions to eat red meat. The government simply lowered interest rates below the rate of inflation and stood back to watch economic gravity take hold.

The government is almost entirely responsible for this mess, but as conservatives lets at least blame the right people, and learn the right lesson. Failing to assign the blame for economic bubbles is the reason that so many politicians try to create them.

[Stonewall]

First, the sub-prime appeared first because that is where people have the fewest resources to hold the loan in good standing. It is the canary in the cold mine. It is part of a larger theme of borrow and spend. It was just a matter of time until other sectors showed the problems.

You are correct that the bundling of mortgages was part of the problem. It separated the risk from the underwriting. The person who sold the loan had very little responsibility for the loan or the consequences. From there we further separated the investor from the investment by creating CMOs which enable people to play the riskiest part of the riskiest market. Distant investors then bought these assets on the terms of the rating agencies. This is the kind of thing that ends-up in pensions and money markets.

Believe it or not, the GSEs didn't play a role in the sub-prime market. I think that their cut of is 620 or there abouts. It played a huge role in getting people near the 620 to play ARMs. There was no point getting a 30 year fixed mortgage when you figured your score would be above 620 enabling you to get GSE support in a refi. I have no doubt that mortgage brokers pushed people into ARMs thinking I can sell them a fixed loan in two years. This isn't the teaser rate which is a whole other problem.

I think that the Bible comes in handy in business. It says that you can't serve two masters, You can't serve both the shareholders and the public interest. You will love one and hate the other.

[Whitehorse (Robin Ray)]

Stonewall, you have a much better understanding of banking than do I. It's my understanding that banks had to have a certain percentage of loans of the risky variety. I have heard there is a snowball effect when loans are defaulted, & the downturn in the economy certainly shot the speculators.

Also, bundling mortgages into "instruments" & trading these around did not help the situation, as well as the drop in housing prices from over-inflated highs. The mismanagement & looting by guys like Raines seemed to be salt in the wounds.

[Stonewall]

Momma,

If you think that CRA was a problem show me a data point, or answer any of the 4 questions. I am happy to listen. I just keep hearing how it was a problem, but no one can give me a reason.

If the CRA was the problem, why is ground zero of this mess in the condo markets of Vegas and Miami?
2) If the CRA was the problem, why is that sub-prime loans were concentrated in lending organizations not covered by the CRA
3) If it is just poor lending standards enforced by Frank and his follow henchmen, why is the total loss in the real estate market more than 10 times the entire sub-prime mortage pool combined?
4) Did Frank actually force banks to make non-recourse loans to builders to put up McMansions a mile from my home? Who forced them to make loans to house flippers, and condo-sitters?

[Crazy Conservative Momma]

The Fed should be audited, in my humble opinion, especially because there is talk of the Fed actually regulating people's pay (I believe that's what I heard). They are very secretive and have an awful lot of power, and who knows what the heck they are up to. After they are audited, then action should be taken.

Interest rates ARE WAAAY too low. My husband and I have been talking of moving out of this state, and I told him that we need to do it in the next year before the interest rates start skyrocketing. THEN, our economy will REALLY be in shambles. As for the cause of the crisis, it was the government, and people buying homes they couldn't afford who were both rich and poor. When we bought our last home (in another state), the mortgage broker was helping us find all streams of income in order to be able to qualify for more money (we paid about 25 percent down). We were fine because we are very tight with our money on spending in other areas, but I could see where many people flat out lie and really truly are not able to pay the mortgage bills when they come due. Again, the CRA was a problem with this too. Plus, the debt of our country and our people is bad news...ugh...maybe I'll move to the Cayman Islands.

[Stonewall]

Joe, "I do think Auditing would serbe a useful purpose in exposing the Feds actions and bringing transparency to the American Taxpayer who is on the hook for the DFeds wreckless policies." You can correct me if I am wrong, but I think that the money that the Fed prints largely goes to buy US debt. Without the fed, our interest rates would be much higher. So I think the taxpayer is on the hook for the wreckless spending of Congress rather than the Fed.

It may seem like a small distinction, but the person on the hook for the Fed's idiotic behavior is the American saver. The person who is hit the hardest is the 85 year-old trying to make ends meet on CD interest. I have seen that and it isn't pretty. It does make one almost wonder where the AARP is?

[Mr. Right-of-Center]

Joe Simpson

It's an issue that is a little bit "inside baseball" if you know what I mean.

Yet, anyone with even a remotely serious interest in economics has to conclude something dangerously and purposely obscured is going on at the Federal Reserve.

[Joe Simpson]

This is somthing All people with in the Republican party shpuld be insisting on, but for some reason not all of the Republicans are making this a major issue, but it is critical to address it if any real economic recpvery is going to happen.

[Joe Simpson]

A Decocrat completely gutted the bill so it doesnt appear the Fed will be audited. The fed enables this endless spending by Washing town. I do think Auditing would serbe a useful purpose in exposing the Feds actions and bringing transparency to the American Taxpayer who is on the hook for the DFeds wreckless policies. I have mixed feelings about abolishing the entire thing all together, but I think we need some major reform in our monetary system. It is the poor and middle class that gets hit hardest with this inflation. Especially those on fixed incomes suffer.

[Mr. Right-of-Center]

Absolutely to the point: What is the Fed doing and what is it actually designed to be doing? An audit won't correct that problem. It might, however, serve as a useful starting point to examine the institution and begin to realign its purpose with something approaching financial stability...

That is probably too much to ask of political realities under either of the political parties...which is no reason to abandon the effort to bring more rational exposure and perhaps control to a very murky, secretive agency...

[Stonewall]

That isn't exactly my point. I agree that an audit is not going to fix things unless the purpose of the institution is identified. Whatever the purpose is, it is clearly not being served.