Very Few Innocents in Housing Market Collapse
I am not an economist; I confess that I sometimes have the wicked and unworthy thought that economists aren’t really economists either.
For example, I once heard one of the best and most brilliant of them, Larry Summers, interviewed on the BBC shortly before the economic crisis became unavoidably obvious. The drift of what he had to say was this: he thought there probably would be a recession, but it was possible that there wouldn’t be. If there was one, it might be shallow or it might be deep, or somewhere in between the two; and the same applied to its possible length or brevity.
Nice work, I thought, if you can get it, but then I had a more charitable thought: a man, other than an out-an-out monster, ought to be judged by his best rather than his worst. And I assumed that the BBC interview was not among Professor Summers’ finest moments.
Be that as it may, few of us have any hesitation about expressing an opinion about economic matters in the way that all of us (save, perhaps, for dialectical materialists of the old school) hesitate to express an opinion about particle physics. So when I read that President Obama had a plan to relieve distressed homebuyers, I thought it not unreasonable to add my own mite.
The president is above all a politician rather than an economic theorist, and he is constrained to do not what is right in theory but what he thinks will get him reelected in practice. He has to estimate whether coming to the relief of embarrassed homebuyers (and banks) will gratify more people than it will irritate. In this instance, we can only hope the expedience is in accord with prudence.
There are, apparently, seven million households in America that are behind in their mortgage payments, and 11 million households in which the amount of the mortgage loan is greater than the value of the house against which the mortgage is secured. (Of course, if property prices fall further, there will many be more such households.)
Clearly there is a lot of potential for economic disruption here, to say nothing of human suffering. And clearly the situation is a complex one; there is no painless way out of it, any more than there is a way to square the circle. Economic wisdom and just deserts do not always tend in the same direction.
However complex a situation, though, nothing is gained by sentimentality, and Mr. David Stevens, of the Federal Housing Administration, was sentimental. He said that the government was developing “a program for responsible homeowners who through no fault of their own find themselves in a situation of negative equity.”
Very few innocents? Oh, I don’t know. I’m one. I took out a mortgage on a tiny house in the poorer section of town because it was all I could afford. For 30 years I made the payments in full and on time. I finally paid off the loan with no help from anyone. It wasn’t easy. Now that I can no longer work I find that able-bodied youngsters who want to live in houses twice the size of mine without working to pay for them expect me to pay all over again. Why, for God’s sake? I fully consider myself an innocent victim. I should have spent more that I could afford so I could scream and rant and demand a bailout, too.
I’m with you. We scrimped along in 2BR apartments with 3 kids until we had the 20% down payment for our first house. I say let them ALL, even the two or three innocents in the affair, go on the streets!
And don’t give ‘em a penny’s handout while they’re there, but let them learn to produce value for value received!
William Graham Sumner described you as the forgotten man. You are the one expected to pay the bills to support the so-called poor and dispossessed. There are no limits to your wealth. It is impossible to bleed you dry. You somehow owe these unfortunates and have no right to complain. Keep it up and you will be thrown into a prison cell. Down with the capitalist scum!
I was surrounded by them in suburbia. They cashed out the equity to buy bigger and bigger houses with every conceivable upgrade: pebble tec pools with waterfalls and grottos, elaborate outdoor grills, granite, wine rooms, media rooms with screens and reclining seats. Then they decided to take out home equities for the big screens, surround sounds and Pottery Barn furnishings. All the while, the sane among us, sat scratching our heads thinking, “How the hell are they affording all this?”
They weren’t.
Only in Foxcuckooland, where the sky is forever red-state mournin’ red in honour of Ronald XXXX, could one find a M. de Dalrymple capable of confusin’ noble savages with helpless victims.
With a hey! and a ho! and a hey-nonny-oh! / Sweet puppies love the spring . . . .
Happy days.
Hey AKA incoherent, try some coffee before typing your incomprehensible blather.
“Helpless victims, or irresponsible home buyers? Greedy banks, or forced by the government to make sub-prime loans?”
Why on earth are such relatively intelligent people as even you, wanting it to be one or the other? It’s both as a general rule.
But I don’t see any homeowners with the political clout to avoid their losses, unlike banks–who should be made to take a haircut to the principle of their bad and bubble inflated loans. A cut to the extent of roughly half of the bubble.
Are you laboring under the impression that banks aren’t losing a lot of money?
Why do you think banks should be the only parties who suffer in this fiasco?
Why are you deluded into thinking they are losing what they should?
Why are you deluded into thinking I feel that only the banks shoudl suffer?
Did you even read the entire post I made? Nevermind, I can tell you didn’t.
You are a troll I won’t feed further.
Yeah, the banks are (kinda) losing money. At least the taxpayers and investors are. The banks are holding out their hands and having them filled with bailouts, while sitting on the cash by not making loans, perpetuating the “crisis”. All the while, the CEOs are cahing in on HUGE salaries and exhorbitant bonuses. I for one, can’t seem to wrap my head around a company CEO making millions, collecting gigantic bonuses, resting on golden parachute retirements, even RAISING their salaries, while the company is falling apart around them. Where are the shareholders? How can these CEOs keep their jobs when they have clearly demonstrated a proficiency in incompetance? And I don’t want to hear the line that these huge monetary incentives are necessary to keep qualified people in the management of these companies. The current batch are clearly NOT qualified or competant. There are thousands of junior executives already in these corporations that certainly coudn’t do a worse job. How about firing those who have made the bad decisions and moving the hungry juniors up the ladder? How about personal responsibility for the CEOs who destroyed their companies? How about holding people accountable for loans THEY took out?
So each and every bank is getting a handout, all 10, 15 thousand banks across the US are getting these handouts?
Why don’t you quit the class warrior nonsense and start trying to make sense.
What do you want to bet that the bulk of the unfortunate homeowners, crooked mortgage brokers, housing inspectors and dishonest bankers were and are Obama supporters?
Does 90 to 95% of them sound mathematically reasonable?
Think executive homes, 35 foot yachts, two Lexus cars, two SUVS, 6 foot wide high definition televisions, closets full of expensive clothes, riding lawn mowers and gated communities.
And that just considers the illegal Hispanics in our country.
Should a married couple that are both high school teachers with each drawing over $100,000 annual retirement income be having a hard time paying their bills now? Would the Obama-Biden stickers still pasted on their new SUVs provide any clues?
Do you have to be a cynical old bastard in order to be a real economist?
Probably.
Those $100K retirement high school teachers should be in prison for the devastation wrought on generations of American children with their John Dewey relativism, PC and MC indoctrinations. NOT left at large to embezzle the Bwaney Fwank mortgage system.
Lets revue the TOXIC DEBT mountain in a non PC non RACIST way shall we you know by just talking the TRUTH. Well the for a start the DEMS by LAW forced Financial Institutions to lend money via SUB PRIME mortgages to feckless people (mainly Blacks) who were incapable of or had no intention of ever keeping up payments. Then when the housing bubble burst and all those SUB PRIME mortgages (mainly Black) became unsustainable the Government now with a Black Lying Mohammedan BOGUS POTUS, who was involved in the creating the LAW forcing sub prime mortgages on Financial Institutions in the first place, used Tax Payers money(paid mainly by whites)to support and bail out the mortgage defaulters (mainly Blacks). While ignoring those who saw their property values slump but kept on paying (mainly Whites).
Is there anything else you need to know.
Oh yes I forgot “its all Bush, Whitey and the REPS fault” LOL
Dear Dr. Dalrymple,
Your article is excellent, but I have a minor quibble about the above. There’s a serious misconception at the base of most persons’ disdain for economics and its practitioners. Economists are exactly that: economists. What they aren’t is scientists.
Economics is not a “law-like” science. Its predictive powers, while greater than zero, can never embrace the element of time, as the “hard” sciences do. Economists can study trends, incentive structures, and the patterns of history, but due to human variability and the utter impossibility of designing and repeating experiments, they will remain forever incapable of saying when a particular trend will peak or reverse; how great the effect of a particular change in incentives will be; or what aspects of a historical pattern will be repeated, and which ones won’t, when some historically important influence recurs.
For that reason, economists have become very well known for qualifiying their predictions. President Harry Truman once asked a friend, “Do you know any one-handed economists?” The friend was startled, and inquired about Truman’s reasons. Truman replied, “All the economists around here are always saying, ‘on the one hand,’ and ‘on the other hand.’”
It remains the case that, if you were to assemble all the world’s economists and lay them end-to-end, no two would point in the same direction. Yet somehow, we soldier on.
The basic Principle of Economics is this ; Things are as they appear until they change.
Other than this there is no foundation for the discipline of Economics.
The problem with the sub prime mess is quite simple: by removing glass stegall restrictions in 1999, congress and President Clinton laid Bare the credit markets to manipulation by the banking system. In this was the error, without these restrictions the banking and savings and loans industry issued credit bundles to each other, fueled by ever expanding credit pools, that fueled ever rising home prices. It was a game of Musical chairs, and when corruption reached a tipping point, the music stopped.
The flip side is how many people on this website received a course in High School to balance a checkbook…? How many people received any education at all in high School how to manage their credit..?
Its no wonder the US is financially illiterate.
It might be nice – even preferable – if the housing market problems were an economics issue. If that were the case we might look back at what went awry, analyze it and work on a correction.
But that’s not possible.
The reason it’s not possible is that the housing market collapse had the same root cause as the health care crisis: government meddling in areas where it has no authority.
Where would health care prices be without Medicare, Medicaid, HMOs and federally-subsidized insurance – plans which ALL work to destroy the natural commodity economics of a free health care market? They would be directly in line with all OTHER commodity necessities, which – though they are also regulated and have seen similarly explosive levels of innovation – remain relatively affordable to the vast majority of Americans. Why do other commodity prices remain under control? Because we don’t abuse insurance to pay for them.
So it is with housing. Where would prices there be without CRA (and all its similarly ill-conceived federal mandates), the Taxpayer-leveraging GSEs and the unaccountable Fed’s interest rate manipulation? They would be right where the free market sets them. Those with the means to buy in would do so and those withOUT those means would be barred from inflating the market – by the market’s own natural checks and balances.
Government will never, ever succeed in replacing the natural operation of a free market. And our Socialist Lite® version of putting the economy under the “enlightened” control of a “compassionate” government has produced exactly what every other socialist structure has produced: decline. It is in fact only the robustness of what’s left of our free market that keeps this nation alive economically at all.
Fixing these problems is not a question of economics; it’s a question of sound, limited government. And we will not achieve that sort of government as long as we keep electing and re-electing Socialists and Marxists to run it.
There is no question that the root cause and by far the most significant factor in creating this mess has been the government. Normal market checks and balances would have prevented these abuses if the government hadn’t attempted all of this foolish social engineering and had not agreed to backstop all of these questionable lending practices and buying decisions. But the great “wealth spreaders” are apparently not into “blame spreading”.
And people are just too blind to see the the undeniable cause and affect. So many believe that the lenders, securitizers and loan securities purchasers did all of this diabolically and on purpose and would have done so anyway even if there were no Barney Frank or Freddie Mac or Fannie Mae to protect their downside? Can one of who defends the government in this matter explain how that could be? And if you just expected the private sector to ignore the “opportunities” provided by the idiotic policies and heavy handed commands of the government then you need a lesson in the real world.
And it is also ironic that the progressive believers cannot see that the government’s own reaction to this problem has been to further hurt the common man. Bailing out the banks with taxpayer money and allowing toxic real estate to hang over the economy like the sword of Damocles has done exactly nothing for the taxpayer. There was no grass roots level solution ever considered. How about allowing any home owner who is unemployed or underemployed to reduce mortgage interest payments to the fair market rental value of the house? You have to live somewhere and this would keep most underwater owners in the house, making payments and avoiding default. Let the debt holder split the loss of underpaid interest with the government. The bank bailout funds would have covered this easily for years – and then some. Debt holders could relax even though taking a slight haircut. The market would recover much sooner.
But it is never about doing the right thing is it? The whole thing stinks and as in the old Italian saying, “the fish stinks from the head”.
I’m an innocent. In 2000, my wife and I refused well paying (combined $750,000+ annually) professional job offers in California based in large part on what buying a house there would cost. We believed houses in California cost too much, which would lower our standard of living compared to Texas. We stayed in our reasonably priced, very low appreciation house in Texas. Now, 10 years later, we’re being told our taxes will go up to help pay for those who bought/invested in the California houses we refused. At the same time, no one is offering to make up our stock losses on investments made with money we saved by not buying in California. I think the government should either make up my stock losses or pay me additional “lost” house appreciation.
Sorry, I have no sympathy for those who foolishly overpaid for houses (and continue to do so to this day in California).
Mr Porretto makes some good points about the big innaccuracies in most economists’ predictions. They are not scientists. Plus they are for the most part ideologues whose interpretation of business and economic matters is slanted to accomodate their political beliefs. This makes them worse than weather forecasters and more like witch doctors. And that bias is why most of them should not even be called economists. Most are mostly shills for one Party or the other.
Regarding the “few innocents” Dr. Dalrymple refers to, the “irresponsible” home owners that borrowed too much are in my opinion the least evil. If the leaders in Washington decide to guarantee every mortgage written regardless of its value, who is Jane Doe to object. I mean these are the Congresspeople on the House Banking Committee, the officials at the Federal Reserve bank, The Secretaries of the Treasury, HUD, and the so-called “regulators” on the SEC.They wear suits and ties and flaunt IVY League diplomas and graduate degrees! They are the ones in their wisdom who gave “the people” a blank check.
Plus, we all know that the disability rolls, unemployment, welfare, food stamp programs, etc. are all paying zillions of dollars to many recipients that should not qualify. Such unjust systems tempt everyman to become a thief.
The demagogues in Washington and their cronies on Wall Street are just spreading their corrupt practices down the line to average, formerly honest, citizens. It’s all about that “redistribution” mantra that Obama favors, except this is trickle-down-immorality.
The only possible solution is for all of us to agree to save up enough to live for a year and then leave our jobs, pay in no taxes, and apply for aid as victims. The government would have to print even more money, America would be broke, and the Chinese could take us over and manage things better?
Actually, that’s exactly what has been happening: As more and more people become tempted to simply take advantage of the hundreds of different hand-outs available, less and less people are paying into the IRS tax combine. (Just suckers stay in that losing game). The deficits and taxes will keep going up until the REAL CRISIS comes along–the final one we will not recover from.
Of course the banks were wrong. Also, the home buyers!! If you cannot figure that a couple working at Mc Donalds cannot afford a $300,000 house, then you get what you deserve!
“through no fault of their own”???
I do not understand a lot about real estate and financing, but I do know if I can afford to pay what I am asked!!!
There is no innocence in this debacle. Bankers wanted to sell/finance no matter the buyer, and buyers who knew they could not afford these properties, wanted something for nothing…again.
An innocent victim would be someone who could afford the house, except that he/she/they had no contingency plans for two years of unemployment. When you have people who get laid off and then can’t find a job (or a job that pays well enough to pay the mortgage) for two years, combined with a down market that leaves even someone with a 20% down payment underwater, you have a person who did everything right and got screwed by everyone else. Rare, but it surely happened.
I fall into the category of people who have negative equity.
I don’t think I’m guilty of anything more than buying at the wrong time – I bought my house in June 2006, pretty much at the top of the market. I bought a house that I could afford to make the payments on, put down a decent down payment, and took out a fixed-rate mortgage.
At the same time, I don’t see why I need a government program. I can’t sell or refinance my house without bringing the bank a check, but as long as I don’t sell it doesn’t really change anything. It means I can’t easily get up and move, but that’s the risk of buying a house.
If it was just a matter of negative equity, there wouldn’t be a reason for a government program – people just need to either wait for housing prices to go up or for their principal to go down. You don’t actually realize a loss unless you sell.
You’re exactly right. This has happened before. Back in 1986, my wife and I bought our first home at what turned out to be the peak of the market. The price was $79,000 and the loan was at 9% – quite good for the times. The bottom fell out of the local market the next year. I was in the Air Force at the time and when I came up for reassignment in 1989, our home was worth $10 less than what we owned on it. That $10K may not sound like much to some people but it represented several months income for us. To avoid having to move, I volunteered for a remote assignment with a guaranteed follow-on back to the local area. It was rough being away from my family for a year and I was in a nasty place (Aleutian Islands) but in the end, it was worth it. I returned to the local area in 1991 and the market turned around the next year. We sold the house in 1993 for substancially more than our purchase price. Of course, we bought our house as a place to live and raise our family, not as a lifestyle statement or an ATM. It was a basic 3 BR home that was almost 20 years old when we moved in – nothing fancy.
If we’d tried to sell our home in 1989, we would’ve suffered a large economic hit. I can sympathize with people being upside down in their mortgages. The best advice is what you stated – wait it out and hope the market turns around. Some places are so overbuilt that the prices may never recover but that’s one of the risks of home ownership.
Our current home is much nicer than what we had then but it’s paid for. Given the economic uncertainty, that’s a comfortable feeling.
You both have the right attitude. If you bought the home to live in and it theoretically doubled or tripled in value but is now worth no more than you paid for it or even less, why should you care?
But if you bought with the expectation that the house would go up in value 20% a year forever and borrowed money on it accordingly, then you are deservedly SOL – but should get some public assistance. I am willing to contribute my tax dollars to buy you a clean, fresh refrigerator box to live in.
In fact in 1993 I was in the USAF, got transferred, and it took me 16 months after I had moved to sell my house, and in the end I got for $10K less than I paid for it. So there went something over $30K out the window. Fortunately I had saved the money for a down payment for a place at my new assignment and bought a much nicer house there, for far less money. And I just paid it off. So it is worth “only” maybe 1.7 times what I paid for it – if I even could sell it, which is doubtful. If it was worth less than I paid for it, why would I care?
However – in those circumstances we do have a right to turn to the local officials and demand a reduction in property taxes. BUT it seems that all they can do is whine that the property taxes are not going UP as fast as they were for years and how they cannot make ends meet as a result. TOUGH! You had it good for years, so now fire some people, close some schools and firehouses, cut salaries. There is no reason why government should not suffer along with everyone else.
@Goy:
“The reason it’s not possible is that the housing market collapse had the same root cause as the health care crisis: government meddling in areas where it has no authority.”
Thank you!! This is the problem most of the time with most things. The government invariably meddles where it shouldn’t. The Founders knew what they were talking about with the 10th amendment; please be informed and keep your representatives informed. Hold their feet to the fire. We’ve had decades of government meddling which we’ll have to undo. Keep up the fight.
Look, those who bit off more than they can chew certainly deserve whatever comes their way, including home foreclosure.
I won a home (in the US) that is way more modest than what I could actually afford.Simple, but nice. Why? Because anyone who is responsible knows that ones financial situation can change on a dime. Therefore, the question becomes, how much house can one afford even IF the worse happens? It is the answer to this question which should guide any prospective homeowner.
True to form, many irresponsible homeowners decided to become ‘house poor’, tying up everything in their monthly payments, barely leaving a cushion for emergencies. Others didn’t even have a pot to piss in to begin with, yet they bought anyway. Why? Because Fannie & Freddie said they could!Stupid is as stupid does.
Therefore, aside from the few who really could not have forseen their circumstances, yet acted otherwise responsibly, all others should pay the piper. I couldn’t care less if they land in the streets due to either their devil may care attitudes, or their abject sense of entitlement!
Look, those who bit off more than they can chew certainly deserve whatever comes their way, including home foreclosure.
I own a home (in the US) that is way more modest than what I could actually afford.Simple, but nice. Why? Because anyone who is responsible knows that ones financial situation can change on a dime. Therefore, the question becomes, how much house can one afford even IF the worse happens? It is the answer to this question which should guide any prospective homeowner.
True to form, many irresponsible homeowners decided to become ‘house poor’, tying up everything in their monthly payments, barely leaving a cushion for emergencies. Others didn’t even have a pot to piss in to begin with, yet they bought anyway. Why? Because Fannie & Freddie said they could!Stupid is as stupid does.
Therefore, aside from the few who really could not have forseen their circumstances, yet acted otherwise responsibly, all others should pay the piper. I couldn’t care less if they land in the streets due to either their devil may care attitudes, or their abject sense of entitlement!
I disagree with the conclusions of this article.
I am in the land development business and half of our business is residential development. I accepted a promotion in my company in the summer of 2006 and it required me to relocate to another state. My pay was increased and my new mortgage was higher. With the collapse of the housing industry, my business is barely getting by. We have been forced to reduce our workforce, eliminate bonuses and raises and cut weekly hours.
I had no problem affording my residnece in 2007 but the last 2 1/2 years have been a struggle.
I am not looking for your pitty. However, I would like to point out I did not lie on my mortgage application or embelish my salary to get a higher loan amount. I figured out what I was making and what I could afford, and looked for houses in that price range. I am struggling due to no fault of my own and blame Congress for forcing banks to issues bad loans.
Being in the real estate business, you were better positioned than most to recognize the bubble in housing prices.
As you point out, you moved to take advantage of a promotion. Up thread, someone else tells of turning down a promotion because they couldn’t afford the housing bubble prices in California.
You gambled, and lost.
Teleprompter you cant spell is that why the Obamanation pronounces Corps as CORPSE?
Recently, ACORN demonstrated on behalf of one of its officials to stop her house from being foreclosed upon. It turns out that the owner borrowed a substantial amount based on the increased value of the home, and this value increase was totally the product of a bull housing market.
This homeowner is not innocent at all but tried to take advantage of the system and lost instead of being prudent and responsible.
I live in Sacramento, which is one of the epicenters of this meltdown.
I can tell you innocents were in damn short supply. To be sure,
they’re all heart wrenching pathetic victims now, but I remember when the money was flowing, it was all chuckles and smirks. Everybody knew what was going to happen. They just figured it was going to happen to somebody else.
There’s plenty of blame to go around folks. The minute our grandparents and great-grandparents bought into the ‘debt is prosperity’ Keynesian narrative, we were screwed.
Do you have school loans? Many conservatives still think of such debt as an ‘investment.’ During the last twenty or thirty years, did you buy a bigger house than you really needed or could reasonably afford? …with as small a down payment as you could get away with? You bought that house with greed in your hearts, thinking that it would always appreciate, didn’t you? You weren’t thinking of it as a home, you wee thinking of that debt as an ‘investment.’ Ever take a vacation by paying for it with your credit card? You need the vacation so you can be more productive when you get back,right? Debt as an ‘investment.’ on and on and on it goes, from the toys in the yard and garage to the clothes you wear.
Debt as an investment.
You wanted it all, without saving and sacrifice and without thinking about preparing a future for your children, free of debt and free of obligation. Let them incur their own debt…as an ‘investment’ in their own future.
However, when the government does it, or when someone who isn’t you, or doesn’t share your ideologies and beliefs, does the same thing, that’s evil.
The later also applies to your elected representatives. Unless he/she is just like you, they’re eviiiil. Which is why we always end up with the government we deserve.
Mote. Log. Eye. That sort of thing.
“Many conservatives still think of such debt as an ‘investment.’”
Why shouldn’t conservatives, or anyone else think that? Borrowing money to pay for college can be an investment, if you are getting a degree that will increase your income enough to pay off the debt.
Most companies float bonds to when they want to build a new plant. Are they not making investments? Or is it only an investment if you are able to pay cash, up front?
…and you perfectly illustrate my point for me…
War is peace.
Freedom is slavery.
Ignorance is strength.
Debt is prosperity.
Depravity is chastity.
It’s not that debt is prosperity; it’s that there are things for which assuming debt is reasonable because it’s the only practical way to procure sufficient capital in a timely manner. The key is doing a cost/benefit analysis of the situation: can I reasonably assume that the present value of the benefits that this capital outlay will bring me exceed the amount I have to borrow to cover the outlay?
The only thing I’m illustrating is the depths of your economic ignorance. If what you invest your money in pays back more than the cost of the loan, then you are way ahead.
There’s a reason why big companies float bonds for major projects. Find that reason and educate yourself.
Student loans / financial aid for college is yet another are the government has meddled in and distorted the market.
One of the truly great advantages of growing up poor is the self reliance that one develops never leaves, and the knowledge that there is no such thing as a free lunch, somewhere, someone, sometime, has to pay. If our schools actually taught children real life skills rather than educating them with useless political correct socialist propaganda perhaps some those in trouble would have seen thru the sham of “no one ever loses in real estate” B.S. and the “easy credit” nonsense.
I never considered that to be the obligation of schools. What you describe is a parental responsibility. Something that I taught my children. They have weathered the economic downturn quite nicely because of it. My condolences if you bought into the idea it was someone the responsibility of the schools to teach basic economic literacy.
I used to have high regard for the economics profession, but as time went on and with conversations with my teachers, I quickly realized that economics is not any scientific field, but is one that is wholly dependent more upon philosophy and politics than anything. One of the worst things that could happen to the field of economics was the introduction of mathematics into the field. The moment mathematics entered the field, “social scientists” began to think that all they had to do was tinker to create a more perfect economy and remove many of the vagaries of market capitalism (unemployment, loss in savings, etc.) from it. Needless to say, they were wrong and are still wrong. I mean, when the greatest economist says things like, “In the long run we’re all dead” what are you to say other than the the profession is a bunch of crock?
That is not to say that all economists are bad, but even the great minds, such as Milton Friedman and F.A. Hayek, got caught up in the weeds when they would debate Keynes and Galbraith as opposed to just dismissing them as overeducated know-nothings.
The author is indeed correct: people feel they need to comment on economic matters, but when it comes to some abstract field where you really need to know something, then they keep their mouths shut. Unfortunately, pols win elections by giving things to people that they take willingly from someone else. You can’t take atoms from a particle accelerator and gives those to people.
And in regards to the housing mess, I wrote about my own personal experience a few months ago, and you can read it here. Bottom line: it’s vapid foolishness to think that a program from the government is going to help people from losing their homes. But hey! Giving some people things at the expense of others is a winning liberal political strategy. Hopefully, that strategy will run its course starting this year.
No one forced the banks to leverage up these weak mortgages or to buy or sell these weak motgages. No one forced the banks to invest in financial instruments based on these weak mortgages.
There is plenty of blame to go around.
My understanding is that when Fannie and Freddy repackaged these loans, they sold them to the banks as being investment grade, when they weren’t.
The problem was not that, with the best of intentions, there was the idea of making it more possible for people, especially lower income people, to own a house albeit with a mortgage. The problem was that efforts were made that went beyond trying to encourage banks to “loosen up” and by themselves efforts began to change the nature of the mortgage market. This change (IMO) seemed to be when organizations like Fannie and Freddie loosened up on the parameters for acceptable mortgages and seemed willing to buy most any mortgage.
The problem here is that the RISK of default associated with a mortgage was being lifted from those organizations that would normally hold it — like banks and such — and transferred to other entities. With the risk of default being passed along to somebody else, mortgage brokers (who make their money on the points to arrange a loan) and banks (who charge points for the same thing on their own as the brokers) had little, if any, reason to not originate loans. After all they would not be holding them anyway. As the supply of worthy borrowers got thin, the fees from origination would begin to dry up, but then if there was no risk to the bank why worry? Reduce the requirements. Keep up the cash flow.
All the entities buying the mortgages and/or packaging them in to collaterallized mortgage debt instruments may not have realized just how the mix of mortgages was changing over time. They assumed that the mortgages were, on the whole, just like in the past when requirements were stricter. There was always a risk of default but it was a “known” amount on the whole and it was the change in default rates which many didn’t see.
The few analysts who realized that the market was changing didn’t have enough evidence to convince managers to stop the gravy train. After all, those analysts might be wrong and costing the company money is not a good way to stay employed (since few probably thought that the fallout would be quite as bad as it got).
So who are the innocents? If you look hard enough you’ll certainly find some. A lot, maybe. After all, anybody who didn’t realize how the market had changed would have been caught by surprise and acted in good faith. Still there is enough guilt to go around. People taking mortgages that on any rational basis of reality was problematic or stupid to take. Mortgage brokers had no responsibility except to arrange loans. Banks should have been more careful, but it was not their job to safeguard the economy, just their own interests and with risk assumed by others why should they not make money? Government should have been more circumspect about making it too easy to get a mortgage, but then they weren’t looking at or thinking about consequences down the road.
So it all came crashing down. Are we really surprised that such a state of affairs could get started, be maintained, and not be really stoppable until the consequences occurs?
IMO of course.
Its tough when you buy property, watch it go up, then it comes back down again. However, at least you still have the property. I feel bad for the young. Even as property goes down in value, most prices are still too high for them and the job situation is really tough in many areas of the country. Looking back though, things were always tough at one time or another so looking at the bright side, we will survive this one as well. Hopefully. Good article, thanks.
I thought that a banker at Citibank pointed in the right direction. He said that when the music plays everyone has to get up an join the dance. If you didn’t get that he meant that when the government inflates the currency (the music) everyone has to respond to that fact.
Sounds like Chuck Prince, the former head of Citigroup.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”
It was in answer to questions about Citigroup’s large stake in Leveraged Buyouts which seemed to be risky in the light of the then recent Subprime Meltdown.
Prince apologized to the American people the other day.
“I can only say that I am deeply sorry that our management – starting with me – was not more prescient and that we did not foresee what lay before us.”
Which sounds nice and apologetic until you realize it’s not like he’s going to spend a dime of the millions he made to fix this mess.
So, in short, the quote isn’t about bankers accepting some government mandated inflation, it’s about bankers determined to make that last buck possible before the music stops playing and the house of cards gets blown away.
Truth is true whenever it is examined, as opposed to people insisting something is true at a certain time, but shown to be false at other times.
Let that be the criterion to evaluate this: http://network.nationalpost.com/NP/blogs/fpcomment/archive/tags/Ross+McKitrick+and++Bruce+D.+McCullough/default.aspx and this: http://www.fraserinstitute.org/commerce.web/product_files/caseforduediligence_cda.pdf
Otherwise, the same, or very similar, mistakes will be made again and again and again.
A little lying/fudging/manipulating for ‘the greater good’ always turns out to be a successful experiment in tinkering with the reality of gravity in the end though. Right?
Oops.
There are people who simply cannot stand being on the sidelines, powerless.
For, what is the record of the human race when it comes to conquest & survival?
(Something I remember from the WKRP in Cincinnati episode where Venus Flytrap gives a lesson in the structure of the atom)
You get more of the behavior you reward. Not a happy thought….
I’m with Goy. Goverment policies were the prime
cause of the crisis.
Gov’t incentivized (forced) banks through such
ideas as the CRA to make bad loans (for its
political purposes). But it also guarenteed these
loans.
Gov’t policy created a housing bubble; maybe it did
make sense to stretch on one’s mortgage if prices
were steadily going up.
Let’s look at incentives; we already know about human nature.
And that’s why you’re wrong.
Because you’re buying into an argument that gets a lot of credence among Tea Partiers and that simply doesn’t match the facts or the numbers.
Government forced banks through the CRA to make bad loans.
No. About half the subprime loans came from mortgage companies like Ameriquest, Countrywide Financial and New Century. 30% were from bank affiliates and thrifts. Neither of these entities were beholden to any regulation by the CRA.
It’s hard to assert that a company like top-5 subprime lender Ameriquest was victimized by CRA policies when none of them pertained to their subprime loans and when they were fined over $250 million for predatory lending and fraudulent practices. This was six years after they came under heavy fire from ACORN who picketed and protested against this subprime lender in low income communities.
Government policy created the housing bubble.
There is no doubt that low interest rates helped fuel the crisis, but equally important were the lax and non-existent regulation of mortgage lenders who rubberstamped subprime loans, the private investment banks who repackaged them, the private ratings agencies who certified them as AAA investments or the entire market for credit default swaps which.
Regulation at any of these levels could have ended the party sooner and taken the punch bowl away from the banks who profited so heavily from this market.
What ends up being disturbing to me is the focus on the idea that the financial crisis is the result of do-gooder policy gone wrong. It’s just another repackaging of the “welfare queen” tale of the eighties.
Private innovation created the zero down loan, the NINJA (no-income no-job no-assets), came up with complicated ways of slicing up the loans that in the end failed to mitigate risk, and then told ratings agencies how to stamp these assets with an all important AAA.
Yet it’s the government’s fault.
“I am not an economist” … which makes me more than qualified to write about economics for PJM.
Lefty;
It’s just another repackaging of the “welfare queen” tale of the eighties.
Home loans have been made to welfare takers in the past. It ain’t just a tale.
http://www.city-journal.com/2009/19_2_homeownership.html
I purchased a nice house in a good neighborhood for less than the bank was willing to loan me. I had, and still have, a reasonably ample and secure salary. The house was somewhat pricy per square foot (though not for the area) and housing prices in the area had been rising fairly steadily at about 6% per year for years when I made the purchase.
I still have the job, and there’s little question I can continue to make my payments, at least until something else goes wrong. But housing prices have been hammered here as everywhere else and my house is now worth less than the balance on my mortgage.
Was I irresponsible?
I suppose that if I was sufficiently cynical, I might walk away from the loan. Foreclosure would cost me less than what I’m going to end up paying on the mortgage. But I’m not going to do that because I just can’t muster enough cynicism.
Am I still irresponsible?
I recognize I am not like folks who speculated on real estate, or who wrangled a regular mortgage when they should only have qualified for a subprime mortgage. Still, I think the truth for many lies somewhere closer to “innocents” than “irresponsible home buyers.”
#32 Monten Kindervelt — I recognize I am not like folks who speculated on real estate, or who wrangled a regular mortgage when they should only have qualified for a subprime mortgage. Still, I think the truth for many lies somewhere closer to “innocents” than “irresponsible home buyers.”
You are one of the 11 million who is upside down and still paying their loans. No it’s not your fault. As lefty says above, the evil speculators argument popular with the tea party set simply is inaccurate. Were there speculators? Yes. Were there bad banks encouraging morons to buy more than they could afford? Of course. (All good lies have a kernel of truth.) These aren’t the majority affected. You are.
I’d say that most of the 11 million who are upside down are innocents, and most of them have a story that parallels yours. I don’t get the feeling from your post that you deliberately went out of your way to be unlucky so as to qualify for a handout. My guess is that Dr. Dalrymple is simply wrong.
I am extremely inspired along with your writing talents as smartly as with the format for your blog. Is that this a paid subject or did you modify it your self? Either way keep up the nice high quality writing, it’s uncommon to see a nice weblog like this one these days..