The Big Lie
1/12/11 07:45![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
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talkpolitics
Don't try to buy at the bottom and sell at the top. It can't be done except by liars. - Bernard Baruch
I put up a post a while ago called Land of Opportunism that outlined the recent devastation of the American economy, without compunction, by free market abuses. Although the post contained numerous references to back up my assertions, it was met by some with pure repudiation without supporting substantiation. The post was very link heavy and the references may have been prohibitively intricate and somewhat overwhelming.
Rather than relying on my own impressions, I concur with Barry Ritholtz, a leading economic journalist who published an article in the Washington Post that contradicted some popular claims about the causes of the economic crisis of 2008.
Ritholtz debunks several fallacies perpetrated by private enterprise regarding the cause of the economic meltdown of 2008.
- The credit crisis was caused by the housing bubble.
- Fannie Mae and Freddie Mac were the major contributors to the crisis.
- The Community Reinvestment Act of 1977 and an emphasis on minority housing were responsible for the majority of the housing defaults.
- The credit meltdown was a worldwide phenomenon. To say that it was caused entirely by the American housing market is ludicrous.
- Private investment firms were packaging subprime loans and selling them to Wall Street; not Fannie and Freddie. New home loans dropped to 37% for Fannie and Freddie in 2005 and 2006 when the bubble was forming.
- The per capita majority of foreclosures were happening in prime real estate areas of Nevada, California and Florida; not in CRA areas like Chicago and Detroit.
Despite anybody’s opinion of the Occupy Wall Street movement and how organized or focused their agenda may be, they are bringing enlightenment and awareness to the message that an insidious and unrepentant private sector is to blame for our economic mess. The government is just a convenient target.
(no subject)
Date: 1/12/11 14:17 (UTC)(no subject)
Date: 1/12/11 14:24 (UTC)Or tin foil.
(no subject)
Date: 1/12/11 17:05 (UTC)(no subject)
Date: 1/12/11 17:58 (UTC)Meanwhile, my great-grandpa on the other side was a bourgeois (master builder of iron safe boxes), and when the commies seized power, he suddenly disappeared.
Strange mixture of heritage I got here.
(no subject)
Date: 1/12/11 19:13 (UTC)(no subject)
Date: 1/12/11 14:59 (UTC)My personal empathy for OWS is driven specifically by these realities -- despite the fact that it may be mostly BS.
(no subject)
Date: 1/12/11 15:13 (UTC)Despite your opinion of the OWS movement itself, the idea that your are even forming this opinion means the OWS message is being effective at some level.
(no subject)
Date: 1/12/11 15:16 (UTC)(no subject)
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Date: 2/12/11 03:56 (UTC)(no subject)
Date: 2/12/11 05:15 (UTC)I would refer you to the testimony transcripts, as well as work like this (http://www.alaskapacific.edu/academics/Departments/businessadmin/BachelorDegrees/seniorprojects/Documents/12-9-08%20Barbara%20Johnson%20_Final_.pdf).
(no subject)
Date: 2/12/11 07:08 (UTC)There was data to indicate the bonds should have been rated lower, but then there was historical data indicating they were solid, I'll refer to the doc you linked to. Problem was, the historical data didn't apply any longer because things had changed.
1/2
Date: 1/12/11 15:15 (UTC)I read his blog, The Big Picture, regularly, and while he makes a coherent case, he misses some key thoughts:
The credit meltdown was a worldwide phenomenon. To say that it was caused entirely by the American housing market is ludicrous.
Yes, when the leading market locks up, other markets tend to follow suit. He notes correctly that housing prices increased worldwide and asks (http://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/) "How did U.S. regulations against redlining in inner cities also cause a boom in Spain, Ireland and Australia? How can we explain the boom occurring in countries that do not have a tax deduction for mortgage interest or government-sponsored enterprises? And why, after nearly a century of mortgage interest deduction in the United States, did it suddenly cause a crisis?" The answer is that each nation handles these situations differently, and the overarching goal of homeownership that was pushed by governments everywhere is the problem. We focus on the US because the prescription for homeownership in the US is easily understandable to those here.
It is not irrational to note that the US is a financial leader, and others will follow the lead. It's also not irrational to note that many of us who rightly blame the government entities for the crash are not doing enough to discuss interest rates (http://www.economist.com/node/3477796), myself included.
Private investment firms were packaging subprime loans and selling them to Wall Street; not Fannie and Freddie. New home loans dropped to 37% for Fannie and Freddie in 2005 and 2006 when the bubble was forming.
The bubble was forming long before 2005. The Economist piece I linked was talking bubble in 2004, and I have one friend who was talking about it in 2003.
As for Fannie and Freddie, they were up to 44% of all subprime business (http://www.nytimes.com/2008/10/05/business/05fannie.html?) as of 2003 while HUD was pushing affordable housing more and more. By 2007 they were down to 33% (up from a much lower bottom). That number can absolutely act as a signal, and when you combine all the factors together - low interest rates, HUD pushes for more affordable housing, CRA and CRA-competitive loans, the GSE intervention - that's a lot of triggers to go off in a domino effect.
Did Wall Street purchase some bad loans? Undoubtedly, in retrospect. Why wouldn't Wall Street invest in the same type of stuff the government was investing in?
Re: 1/2
Date: 1/12/11 21:47 (UTC)Although the US is a financial leader, it is not the world’s finances. To say a failure in the US automatically means a failure in the rest of the world is just not true. The US has had many recessions that were not necessarily reflected around the world.
Also, if that were true, how would you account for the rise of the Chinese economy? Shouldn’t China be especially impacted by the American downturn if your premise were true? It would make more sense that the transfer of equity from the US to China is more responsible for our economic mess than the housing market.
It's also not irrational to note that many of us who rightly blame the government entities for the crash are not doing enough to discuss interest rates (http://www.economist.com/node/3477796), myself included.
Interest rates are determined by the markets for the most part. The Fed will adjust interest rates artificially to level the economy. In Bush’s case it was done to artificially give the impression that the economy was in better shape than it actually was.
The bubble was forming long before 2005. The Economist piece I linked was talking bubble in 2004, and I have one friend who was talking about it in 2003.
A lot of people were talking about a lot of things for a long time. To cherry pick a random discussion from a prior time is nonsense. This is kind of like claiming that Nostradamus predicted the rise of Hitler in the Quatrains after the fact.
Why wouldn't Wall Street invest in the same type of stuff the government was investing in?
How was the government investing in loans? Fannie and Freddie were private sector corporations that were doing loans guaranteed by the government. Congress regulated the conditions of the guarantees, but did not underwrite them.
Re: 1/2
Date: 1/12/11 22:29 (UTC)Nor was this recession as bad, or even necessarily reflected, worldwide. This had a broader scope, for sure, but that markets followed each other isn't news.
Also, if that were true, how would you account for the rise of the Chinese economy? Shouldn’t China be especially impacted by the American downturn if your premise were true?
China's going through growth that is different from a first world/western current experience, and cannot be compared in like terms.
Interest rates are determined by the markets for the most part. The Fed will adjust interest rates artificially to level the economy. In Bush’s case it was done to artificially give the impression that the economy was in better shape than it actually was.
Your latter point is quite conspiratorial, and does not mesh at all with your former point.
To cherry pick a random discussion from a prior time is nonsense. This is kind of like claiming that Nostradamus predicted the rise of Hitler in the Quatrains after the fact.
Yet you did exactly that by choosing 2007. Why?
My point was that the bubble was a long time coming.
How was the government investing in loans? Fannie and Freddie were private sector corporations that were doing loans guaranteed by the government.
Fannie and Freddie are actually government-sponsored enterprises (http://en.wikipedia.org/wiki/Government-sponsored_enterprise) that operate under an implied idea that the government won't let them fail. They are not "private sector corporations" in the way we understand the difference between private and public.
2/2
Date: 1/12/11 15:15 (UTC)The problem with this spin is that it assumes that CRA loans only impacted CRA customers and banks. There are two problems with this:
1) The CRA (http://edocket.access.gpo.gov/2004/pdf/04-18863.pdf) was designed initially to be about minority lending, yes. It was later extended out to be more about getting loans to income groups "underserviced" by traditional lenders, and later, under Clinton's administration, threatened to carry over to traditional lenders (http://news.investors.com/Article/589858/201110311638/Housing-Crisis-Obama-Clinton-Subprime.htm) not subject to CRA regulations. Even if the Clinton HUD threats didn't materialize...
2) ...these other lenders would have to dive into the market to compete for these loans. What does this mean? More subprime loans. Suddenly, you have investor types who otherwise would not qualify for second loans getting them to flip later. You have people with good incomes getting no documentation loans (I'm one of them). You have people who really should not be getting loans receiving them all over, and not just CRA-specific lendees.
We're talking about a regulatory problem here. The regulations were heavy and poor here, and only worse elsewhere - it's no wonder it was a global crash.
they are bringing enlightenment and awareness to the message that an insidious and unrepentant private sector is to blame for our economic mess. The government is just a convenient target.
The government is more than a convenient target, it is the chief problem, and not just the US government, but any activist government in the world intervening in markets that they don't belong in. This idea that the government is merely a scapegoat for the evil bankers is not something that's really sustainable, and ignores the snowball effect and unintended consequences of the overregulated state.
Re: 2/2
Date: 1/12/11 18:54 (UTC)Aside from your contrived snowball-effect spin, you still haven’t explained how the CRA and minority access to loans caused the prime real estate areas of Nevada, Florida and California to lead the United States in the number of foreclosures. There is no anti-gravitational trickle up effect that I know of.
However, the market force has a strong influence on the weak minded. Apparently, there was a market push to opportunistically exploit the equity of the American homeowner as the private finance sector did with the “underserviced”. My ex fell for it and she got the house, which is now underwater, in our divorce. She also got the quarter million dollars of debt that went with it.
To claim this is the fault of the government is entirely beyond irresponsible. This is proof positive that allowing individuals to be their own gatekeepers just does not work. Hence the need for government and regulation is demonstrate. Your point shows that the private sector will consume itself to the point of self destruction.
Re: 2/2
Date: 1/12/11 19:42 (UTC)I feel that I explained that here: "Suddenly, you have investor types who otherwise would not qualify for second loans getting them to flip later. You have people with good incomes getting no documentation loans (I'm one of them). You have people who really should not be getting loans receiving them all over, and not just CRA-specific lendees." As noted elsewhere, it's not only poor people getting subprime loans, no, but the CRA rules and the CRA threats ensure that more poor people will be getting loans than there probably should be.
To claim this is the fault of the government is entirely beyond irresponsible.
If hanging all the blame on the government is irresponsible, I agree. To rightfully finger them as the chief culprit, I believe, is the only reasonable response.
This is proof positive that allowing individuals to be their own gatekeepers just does not work. Hence the need for government and regulation is demonstrate.
I don't see the proof in anything you've offered, to be honest, unless you believe that the private lenders would offer riskier loans than they were already strongarmed into. Considering that regulation was put in place because the lenders weren't lending enough...
Your point shows that the private sector will consume itself to the point of self destruction.
I don't see how that's the case at all. My point has been incredibly clear about what the private sector's role in this has been, and why they were coerced into acting as they did.
Re: 2/2
Date: 2/12/11 09:15 (UTC)Are you still beating this dead horse?
"Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?
The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."
It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did. " -http://prospect.org/article/did-liberals-cause-sub-prime-crisis
This narrative that banks were forced to make these loans against their better judgement is fiction.
Re: 2/2
Date: 2/12/11 12:36 (UTC)This assumes changes weren't made to the CRA both explicitly (in actual legislative changes) and implicitly (the Clinton administration in '94 for example). When an already bad regulation is functionally expanded to all lenders, the problem compounds itself.
" In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards.
I'm not seeing evidence at this time that they ever did.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it.
As I noted initially, the CRA was being used as a cudgel to get non-CRA lenders to act under CRA guidelines willingly, or they would be regulated under it. I linked you to this in my first set of comments. You spend 2 paragraphs talking about the CRA without even acknowledging this fact once.
This narrative that banks were forced to make these loans against their better judgement is fiction.
It's fiction to you because you refuse to accept that there were changes in the CRA system and that the CRA regulations were being held over the heads of non-CRA lenders. Until you stop ignoring that, it will continue to look like fiction.
Re: 2/2
Date: 2/12/11 12:48 (UTC)Why do you make shit up? 'Functionally expanded to all lenders' holy SHIT did you just pull that one out of your ass.
I'm not seeing evidence at this time that they ever did.
Most subprime loans were made by firms not subject to the CRA. How can I make this any clearer for you?
As I noted initially, the CRA was being used as a cudgel to get non-CRA lenders to act under CRA guidelines willingly, or they would be regulated under it. I linked you to this in my first set of comments. You spend 2 paragraphs talking about the CRA without even acknowledging this fact once.
You're not replying to me, you're replying to a text excerpt. I put quotes around the whole thing and linked to the entire article.
It's fiction to you because you refuse to accept that there were changes in the CRA system and that the CRA regulations were being held over the heads of non-CRA lenders. Until you stop ignoring that, it will continue to look like fiction.
You're so full of shit. I'll repeat it once again: Most subprime loans were made by firms not subject to the CRA.
Re: 2/2
Date: 2/12/11 12:51 (UTC)Clearly, you haven't read this entire exchange from the beginning.
You're not replying to me, you're replying to a text excerpt. I put quotes around the whole thing and linked to the entire article.
Fine, you spend 2 paragraphs quoting liberally from an article without acknowledging the fact I presented initially once.
Re: 2/2
Date: 2/12/11 21:03 (UTC)Most subprime loans were made by firms not subject to the CRA.
Re: 2/2
Date: 2/12/11 21:27 (UTC)Re: 2/2
Date: 2/12/11 21:35 (UTC)You can say that most subprime loans were made by those firms until you're blue in the face - until you recognize the power of the head of HUD saying "do this, or we will regulate you," you're not going to get it.
Re: 2/2
Date: 3/12/11 05:21 (UTC)Wow.
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Date: 5/12/11 23:57 (UTC)Re: 2/2
Date: 6/12/11 03:04 (UTC)(no subject)
Date: 1/12/11 18:37 (UTC)There's all sorts of ignorance on this issue and it doesn't matter how much you tell people what is what. They don't care. They have their drum, and they are going to beat it.
For instance, are "subprime" loans loans given out to "poor people"? No. They're any loan, on any property, for any lender, to any lendee that does not conform to agency standards for a standard mortgage. So when people were making 70k a year and buying 460,000 dollar homes, they were doing it on subprime loans, and they were middle-class, and they were not "poor people".
(no subject)
Date: 1/12/11 19:14 (UTC)