A single piece of paper may just be one of the most surprising and illuminating documents of the whole banking crisis.
It’s a one-page research note from an economist at Deutsche Bank, and it outlines in the clearest terms the kind of solution many bankers are looking for. The basic message: We should forget trying to get a good deal for taxpayers because even trying will hurt.
“Ultimately, the taxpayer will be on the hook one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line,” the document says.
In other words, the paper says, if the government tries to save taxpayers money, many people will lose their jobs and the whole economy will suffer.
We’ve had financial bubbles and pops before but never have we managed to turn a small housing bubble into full-fledged depression. Who is in charge, anyway?
Don
Hopper, before we fix the problem it is imperative that we correctly identify the problem. To suggest this is a problem born of deregulation is bizarre and, if followed to its logical conclusion, guaranteed to prolong and deepen the problem instead of correcting it.
It was proper to let Lehman fail insofar as it was a private firm that made stupid decisions. That’s what the market does.
[2] [i]Hopper[/i],
Just to be absolutely clear, the root source of the problem was the Community Reinvestment Act (CRA), which was enacted into law in 1977. So, the list of suspects to whom you wish to assign blame is missing the chief initial suspect, one Mr. James Earl Carter. Perhaps you are too young to remember that sterling example of Christian [i]progressivism[/i]—if so, I will remind you that he was the occupant of the Oval Office prior to Mr. Reagan.
Although the Republican party shares some of the blame, of which there is sufficient to distribute, the Democrats, led especially by Congressman Frank and Senator Obama, resolutely refused to allow the last administration to tighten the regulation of the mortgage lending market, specifically that portion most dependent on the CRA (the sub-prime market, to remove all doubt), despite repeated requests from the White House and former Federal Reserve Board Chairman, Alan Greenspan.
It would better serve you were you to ensure that your tank is full of facts, and your brain engaged, prior to releasing the clutch on your public communications apparatus.
Blessings and regards,
Keith Toepfer
#4 blaming the CRA act is ridiculous. If it had been the case, why didn’t the economy tank earlier?
The CRA may have provided cover. But it was not the crucial element that led up to this disaster. As noted, the global pool of money wanted a reliable investment. Mortgages were it, rather than treasuries, providing the grand chain of incentives that led to our current situations. And then add credit swaps and other forms of trading that nobody understood.
This is simply blaming the poor. Fannie and Freddie were simply guilty of doing what everyone else was doing, and they weren’t the most egregious.
[5] [i]John Wilkins[/i],
Perhaps you should reread my comment. I neither stated nor implied that the CRA was the sole recipient of blame. My exact statement, which you apparently either could not be bothered to read, or cannot be bothered to understand, was [emphasis added]: [blockquote] …[b]the root source[/b] of the problem was the Community Reinvestment Act…. [/blockquote] Had there been no CRA, the antics of ACORN and similar agencies in coercing mortgage lenders to offer sub-prime mortgages to excessively risky borrowers would have required some other, but similar, vehicle, which latter did not exist. What is egregious is your ill-informed outrage at people responding to the stimuli which are placed in front of them by acting in their own self-interest. If one wants people to behave morally, then one must place them in situations in which the inducements to moral behavior are designed into the system, which was clearly not the case in the collapse of the housing market. Economics, after all, is not primarily about finance, it is about how people make choices.
Your and [i]Hopper[/i]’s ranting sound to my ear like those of people who believe that government regulation is the answer to all evils, when in fact it is, as often as not, the source of a significant proportion of them—perverse results which often accompany the conflation of unrelated, if not specifically mutually contradictory, objectives into a single “solution” which ends up solving nothing.
Blessings and regards,
Keith Toepfer
I think the “who is responsible” question does matter because I think most of the same idiots that got us into this mess are still running things. They didn’t have the smarts to prevent it or predict it, so how did they suddently get smart enough to fix it?
I also am extremely suspicious of the fix they are suggesting. “Mr. Jones, your house is on fire! Hand me your wallet and I will smother the fire with your money.” Things that make me go, hmmm.
[blockquote]#4 blaming the CRA act is ridiculous. If it had been the case, why didn’t the economy tank earlier?
The CRA may have provided cover. But it was not the crucial element that led up to this disaster. As noted, the global pool of money wanted a reliable investment. Mortgages were it, rather than treasuries, providing the grand chain of incentives that led to our current situations. [/blockquote]
You keep chasing your tail, John. Q: Why were mortgages “it” and not, say, stocks or corporate bonds? A: Because it was policy:
[i]In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of “innovative or flexible†lending practices to address credit needs of LMI borrowers and neighborhoods. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative†and “flexible.†In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards.
The effort to reduce mortgage lending standards was led by the Department of Housing and Urban Development through the 1994 National Homeownership Strategy, published at the request of President Clinton. Among other things, it called for “financing strategies, fueled by the creativity and resources of the private and public sectors, to help homeowners that lack cash to buy a home or to make the payments.†Once the standards were relaxed for low-income borrowers, it would seem impossible to deny these benefits to the prime market. Indeed, bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better-qualified borrowers. [/i]
Government distorted the market by requiring lenders to lower standards of lending to low- and moderate-income borrowers. once the standards were lowered for the non-credit-worthy, it was ridiculous not to lower them for others, too. The policy “worked:”
[i]Sure enough, according to data published by the Joint Center for Housing Studies of Harvard University, from 2001 through 2006, the share of all mortgage originations that were made up of conventional mortgages (that is, the 30-year fixed-rate mortgage that had always been the mainstay of the U.S. mortgage market) fell from 57.1 percent in 2001 to 33.1 percent in the fourth quarter of 2006. Correspondingly, sub-prime loans (those made to borrowers with blemished credit) rose from 7.2 percent to 18.8 percent, and Alt-A loans (those made to speculative buyers or without the usual underwriting standards) rose from 2.5 percent to 13.9 percent….
The problem is summed up succinctly by Stan Liebowitz of the University of Texas at Dallas:
From the current handwringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards–at the behest of community groups and “progressive” political forces.… For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage done by relaxed loan standards. [/i]
Then Fannie and Freddie were tasked with making a secondary market for all these junk mortgages, and we know the rest of the story.
Jefferson, your article – oddly – illuminates the main point: it began in 2001. Thats the time frame: 2001-2007. When Greenspan made investing in treasuries worthless.
in your little piece, the word “flexible” comes up several times – and the the author asserts (and does not prove) that this means that it was lowered. No. The CRA was meant to diminish redlining and approve of candidates who had little credit rating because they were in neighborhoods that didn’t have much investment. Did that mean sub-prime? No. There were other criteria (I know because I worked for South Shore Bank at the time – the model for CRA lending) that required loan officers get to know individuals rather than simply looking at credit scores. But the CRA never allowed people to grant NINAs. That was an invention of the Mortgage industry.
Lastly, Jefferson, the article lacks what it always lacks: numbers. I have no doubt that freddie and Fannie made poor choices. I don’t doubt that there is a political element to this. But blaming CRA (which was not, perhaps a great law. In fact, my bosses didn’t like it, and they were ghetto bankers) as the root cause is ridiculous. Perhaps it contributed to the perfect storm. But if there is one person responsible, it lies at the feet of Alan Greenspan, who believed that the market cures all ills, rather than also makes people sick.
Keith, some of your generalizations are perfectly sensible. Government regulation doesn’t solve everything. Personal virtue is important. I believe, however, in transparency and fairness, which has been quite lacking – and one reason nobody is lending to each other. The government has to force people just to open the books. As as our capitalist system depends on trust, when there is no trust, the system doesn’t work. There is a justifiable reason for the government to get involved in commerce when this happens.
But you ascribe outrage to me. What makes you think I’m outraged. I admit, you and Jefferson seem a lot more outraged at the poor than I am at Alan Greenspan. He had an ideology that… he’s recanted. All I’m saying is that the context in which people made choices from the bottom to the top didn’t encourage… ethical behavior. From my perspective, there was a demand for reliable investment from the global pool of money. They went to wall street. Wall street went to local banks. Local banks went to mortgage brokers. Mortgage brokers offered money to people who couldn’t pay it back – but got bonuses. Those people took the money.
Adding the CRA just complicates the better point you made: incentives work. Perhaps if the global pool had invested in treasuries, rather than in mortgages, the CRA would not have mattered.
Blaming the CRA is just cover for those who too easily excuse human fallenness in the powerful and the wealthy.