The problem with all this posturing is that subprime mortgages are not the problem. If every single subprime mortgage went bust, the loss, net of foreclosure sales, would not be $700B. The problem is the tremendous structure of speculative bets--banked by the banks--placed on these mortgages. MBS, CDO, CDS, CDO-squared, CDO-cubed, and other alphabet-soup instruments depended on these mortgages.

The right is now trying to construct a narrative that blames this problem on the poor and middle class. The outlines of the narrative places the blame on “dishonest” buyers. As a real-estate agent, I can tell you this is a complete fabrication. No one was required to lend a nickel to anybody, and the CRA was in fact weakened, not strengthened, by the Bush administration.

When the economy began to go South in the early Bush years, Greenspan called in the banks to encourage them to looser mortgage rules, while promising that the Fed would “look the other way” in regard to regulations. The banks flooded the market with mortgage funds, and then flooded the market again with speculative money to bet on the mortgages.

We cannot fix the problem if you invent myths about the causes. The bailout plan depends on a myth, and articles like this perpetuate the myth of the dishonest buyer.

One fact that Sowell fails to mention is the Bush administrations drive to continue Clinton era policies to raise the percentage of unqualified borrowers.

umm, no one is contending that the GOP continued the Clinton-era trend - in fact, I think that was the whole point of the article.  And as for blaming “dishonest buyers” - that’s not the point, either. Go back and re-read: it was the INVESTMENT FIRMS’ dishonest practices, not the “real estate agents” that are being criticized in this piece. 

Strikes me ... that as a real estate agent you would be in a great position to take the high-ground and refuse to sell to obviously financially incapable persons… There’s culpability to share, dear john.

@Ann N. I have re-read it, and it says nothing about INVESTMENT FIRMS, as you appear to be claiming. Are we reading the same article?

As for the culpability of RE agents, few of my clients are caught up in this, because I did my best to steer them away from that kind of financing. And any who took it did so against my advice. However, many agents are culpable, because the Cheney-Bush Administration changed the rules to allow mortgage brokers to give kickbacks to real estate agents, who then directed them to dishonest loan brokers. Just call it the free market at work, no regulation allowed.

Finally, since you advise re-reading, let me suggest you re-read my post. Note that I said, “subprime mortgages are not the problem.” Let me repeat that, in case you missed the point: “the subprime mortgages are not the problem.” Subprimes have a higher foreclosure rate, but that risk was known at the beginning and the risk was priced into the interest rates.

The derivatives market is the problem, and the 100’s of billions the banks printed up to support this market, and this market did not properly price risk, because they thought there wasn’t any.

Without the derivatives market, there would be no problem. The lenders would still have marketable mortgages with calculable risks. But now risk has been replaced with uncertainty, and nobody can calculate it. And what can’t be calculated can’t be priced. And can’t be sold.

Except to the gov’t, that is, to you and me.

I think my reading comprehension is just fine, thank you:

“True to their corporatist biases, the investment firms went along with this top-down socialism, just as they did in the age of the Great Society programs. “

- Glad you took the high ground, btw… but just because the law allows one to be corrupt doesn’t excuse the rest who didn’t.

- By collective culpability I maintain that the problem was probably a group effort - investment firms, government, kick-back hungry realtors.  My very pedestrian point is that all parties would have had to be willing contributors in order for this fiasco to have come about.  Sub-prime mortgages were a kernel to a much larger issue, no argument there.

The Democrats do not know any better but might we now ponder the beloved quack-brained term “Compassionate Conservative” and carve it on the headstone of the dead GOP. First though, certain zombie elements of this farce must be finally finished off.

If we could only finish them both off.

Thank you, John Medaille, for your honesty and professionalism, and for your elucidating comments.

I cannot help but wonder if the policies put in place during the Clinton administration which allowed this situation to occur were done so deliberately to heat up an economy which would otherwise have been feeling the pinch of the loss of the manufacturing base under the same administration’s NAFTA policies?  Distract the proletariat with fetes and fireworks?

Ann, Fine you were talking about investment firms. I agree. But the article mentions “welfarism,” and it just isn’t true. Nobody (except the banks) received any welfare payments. They paid (and over-paid) for the houses they bought, and even in FHA loans they paid for the mortgage insurance. There were no give-aways here.

You said just because the law allows one to be corrupt doesn’t excuse the rest who didn’t. I don’t know what that means.

As for culpability, yes there is enough to go around. The repeal of Glass-Stegal happened on the Democrat’s watch, and Clinton rejected the idea of regulating the credit swaps. But it is too easy to blame the whole thing on mere greed, because that covers up the underlying problem with the economy.

The banks have to lend money. One hopes that they would lend it for productive purposes, for new factories and new enterprises that create real wealth. But that economy is gone, shipped overseas, kaput. But they still must lend, so they lend for speculative purposes--derivatives in this case. They created $100’s of billions that add no real productive capacity, not so much out of greed as out of necessity.

We are concentrating on the wrong problem, and blaming the wrong people. Nations do not grow rich by financial manipulation; they grow prosperous by making things and offering real services. If this economy is gone, it doesn’t matter if we rebuild the financial sector; there will still be nothing to do but speculate. But if we rebuild the real economy, the economy of real things and real services, rescuing the financial sector will be a trivial task.

Mr. Stewart, I think you are correct. It was not exactly “conspiratorial,” so much as the only course of action open to them. When the real economy falls, the next best thing is financial manipulation, flooding the market with cheap money for dot-coms or housing, or whatever can be got to bear the load.

Our real problem is the real economy, not the financial one. Take the $700B and invest it there, and the financial economy will fix itself.

Lemme see:  I get a mortgage for a house if I have no job, no good credit history, and no downpayment.  Sounds like welfare to me.  The fact that it became a cost for the poor to bear down the road doesn’t change the initial give-away.

Sounds like welfare to me.

I believe they were called “loans” and were made on the security of the home. And nobody forced anybody to make that loan.

That’s not like any welfare program I’ve ever heard of.

Mr. Medaille:

Thank you very much for your incisive posts and your intelligent defense of the “real economy.”

Sez John: “I believe they were called “loans” and were made on the security of the home. And nobody forced anybody to make that loan.

That’s not like any welfare program I’ve ever heard of.”

Well, look.  Who was ever forced to go on welfare?  Who ever forced gov’ts to provide welfare?  Nobody was forced to buy these homes, and the investment firms happily cooperated with the scheme.  And welfare is a loan too, a debt to be paid by future generations (gee, like this mortgage crisis).

It would be great to live in this so-called real economy too--too bad Americans don’t save enough to have a real economy. The Chinese save 30% of their income--now, that’s real.

Mr. Medaille claims that “the right is now trying to construct a narrative that blames this problem on the poor and middle class.”

But this is ridiculous nonsense. Nowhere in Havers’ piece does he blame anything on “the poor and middle class.” Nor does Thomas Sowell. Nor does Steve Sailer.

It was not “the poor and middle class” that came up with the idea of relaxing lending standards in pursuit of higher levels of home-ownership, especially among non-Asian minorities. It was bureaucrats and politicians of both parties, very much including Democrats like Franklin Raines, Christopher Dodd & Barney Frank, who are getting the blame here. Does Mr. Medaille really believe that these people are innocent?

It is also ridiculous nonsense to carry on as if these relaxed lending standards were not a serious part of the problem here, simply because they’re not the *whole* problem.

To suggest that “the problem” must be *either* the bad morgages *or* the speculative bets placed on them is simply the fallacy of the false alternative. Obviously, they’re *both* “the problem.”

--
Says Mr. Medaille:

“The banks have to lend money. One hopes that they would lend it for productive purposes, for new factories and new enterprises that create real wealth. But that economy is gone, shipped overseas, kaput. But they still must lend, so they lend for speculative purposes--derivatives in this case. They created $100’s of billions that add no real productive capacity, not so much out of greed as out of necessity.”

Okay. What created the necessity?

I suggest that the cause was currency inflation, courtesy of America’s central bank, the Federal Reserve System.

Readers are encouraged to look into a collation of links approaching this issue from the perspective of sound (by which I mean Austrian School rather than Keynesian, monetarist, or neo-Keynesian) economic principles.

See “The Bailout Reader” at http://mises.org/story/3128

=====
“The most rigorous economic analysis and the coolest, most balanced interpretation of recent economic and financial events lead inexorably to the conclusion that central banks (which are in fact monetary central-planning agencies) cannot possibly succeed in finding the most advantageous monetary policy at every moment. This is exactly what became clear in the case of the failed attempts to plan the former Soviet economy from above.

“To put it another way, the theorem of the economic impossibility of socialism, which the Austrian economists Ludwig von Mises and Friedrich A. Hayek discovered, is fully applicable to central banks in general, and to the Federal Reserve and (at one time) Alan Greenspan and (currently) Ben Bernanke in particular. According to this theorem, it is impossible to organize society, in terms of economics, based on coercive commands issued by a planning agency, since such a body can never obtain the information it needs to infuse its commands with a coordinating nature. Indeed, nothing is more dangerous than to indulge in the ‘fatal conceit’ - to use Hayek’s useful expression - of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times. Hence, rather than soften the most violent ups and downs of the economic cycle, the Federal Reserve and, to a lesser extent, the European Central Bank, have most likely been their main architects and the culprits in their worsening.

“Therefore, the dilemma facing Ben Bernanke and his Federal Reserve Board, as well as the other central banks (beginning with the European Central Bank), is not at all comfortable. For years they have shirked their fiduciary responsibility, and now they find themselves in a blind alley.

They can either allow the recessionary process to begin now, and with it the healthy and painful readjustment, or they can procrastinate with a ‘hair of the dog’ cure. With the latter, the chances of even more severe stagflation in the not-too-distant future increase exponentially. (This was precisely the error committed following the stock market crash of 1987, an error that led to the inflation at the end of the 1980s and concluded with the sharp recession of 1990-1992.)

“Furthermore, the reintroduction of a cheap-credit policy at this stage could only hinder the necessary liquidation of unprofitable investments and company reconversion. It could even wind up prolonging the recession indefinitely, as occurred in the Japanese economy, which, after all possible interventions were tried, ceased to respond to any stimulus involving credit expansion or Keynesian methods.”

-- Jesus Huerta de Soto, 6 October 2008

( see http://mises.org/story/3138 for the article in its entirety)
--

While there is alot of blame to go around. John is more correct in that this is just a blatant attempt by the right wing punditry to assign blame to the CRA and Democrats and deflect the blame away from the fat cats on Wall Street and deregulation.

As a gun owner who has seen these pundit spin cycles after every gun tragedy, I understand how they work. Every player on the team writes (or has ghost written for him) The same simplistic factless piece with a slightly different spin. The idea is to find something that will resonate with the public or make it look like there is a great groundswell of support for what those behind the curtain want.

In every one of these articles the same thing is chanted “facts are important”, “the fact are”, “are facts important?” Yet none of these articles have any real facts except the following:

Jimmy Carter signed the CRA in 1977.

Bill Clinton reemphasized the CRA in 1995.

Democrats were associated with Fannie and Freddie and they encouraged these loans.

Furthermore, what is implied is that any bank that didn’t make CRA loans was in deep do-do and that any loan made to a black or Hispanic must have been a CRA loan no matter where or how much the loan was.

Yet I have heard many loan officers say that the CRA never forced a bank to make poorly documented loans that were outside normal lending standards. Futhermore, the CEO of Wells Fargo said on CNBC that they made no subprime or alt-A loans and walked away from 160 billion dollars of business and could afford Wachovia. How did they stay in business defying the CRA like the pundits claim was virtually impossible?

How about we get some real facts? What is the total amount of active CRA loans out there. What is the default ratio. How much would the banks be out in entirety if they had to be worked out or forclosed and new buyer found. How much is this against the amount lost by the conventional loans taken out in non CRA area by other borrowers. How much is this compared to the derivative losses?

As a young engineer who stupidly bought a house in an area that could likely be a CRA area, I can tell you that houses here are like roach motels. Once you buy, you are stuck unless you have a truely life changing experience. By the time your area goes up in price by 10%, the desirable areas have already gone up by 50%. The only way to move up and get out is:

Your income goes up massively.

You bite the bullet and put your entire life into the new place for the next 5 years.

You move into the exurbs or out of state where houses are much much cheaper.

The punditry would have you believe that every poor person who bought must have a CRA loan. However, I would only count a CRA loan as a PREVIOUS RENTER who is buying a house in a CRA area. That would eliminate the person buying in the exurbs. That would eliminate the owner in the CRA area who has found his 100,000 dollar house is now 400,000 and he takes the 300,000 out.

I think if you get a real accounting of the losses and their true category the amount assigned to the CRA will be miniscule compared to the amount from the greed from the bankers and Wall Street pushing bad loans on the public.

One more point, the people who took out the rediculous loans they couldn’t afford are not to blame. Those people were just taking advantage of the free money. They should lose their houses but they never owned them to begin with. It was the loan officers who were supposed to be the gatewatchers. What is the difference between somebody giving you money and having you sign an IOU you can’t honor and somebody giving you money you can’t pay back for a house. Who is the idiot here?

We need an edit button.

My point by hightlighting the “I’m Stuck” nature of buying in a CRA area was to show that CRA buyers are NOT a significant part of the move up chain in real estate.

Some of the poster on web sites where this “CRA is at fault” line of thought want them included as they want to make it seem that as people bought in CRA areas, those sellers moved up (like the Jeffersons) and the whole train was driven by these CRA buyers at the bottom.

It don’t work that way. The better areas have the higher percentage of people whose incomes have exploded. They move up first and more often, not the other way around.

This notion of “the predatory shiftless poor caused the banking crisis” could be debunked by a clear accounting of what money went where but we will never see that....rest assured, better to obfuscate and posture.

This said, it is almost an article of faith that Social Engineering by Government Fiat nearly always perverts the original goal. I know they are an august and serious lot but perhaps the exalted leadership in Congress might be forced to sit down and watch the Wizard and Broomstick segment of Fantasia. Under no circumstances should they be allowed to watch the Hippo Ballet section though because in their minds, this might be construed as a celebration of bloatedness.

For the record, as Mr Burton correctly points out, I do not blame the poor buyers for causing this crisis; they did not engineer it (although their naivete about sub-prime mortgages didn’t exactly help the situation either).  My simple point was that BOTH parties and their Wall St. allies are at fault for creating this debacle; the free market was not to blame.  This was a crisis born of perverse political economy, the worst example of collusion between corporations and politicos in recent memory.

Once again, I must strongly reject Grant Havers’ attempt to place a moral equivalency between banker and borrower in this crises. In first place, the borrower no more understood the papers he signed than Grant understands the medicine his doctor prescribes. When Grant takes medicine, he does not rely on his personal knowledge of pharmacology, he relies on his trust in the doctor.

In the same way, the buyers relied on the honesty of the banks, a virtue which was completely lacking. The incentives were for the banks to fudge on the terms, since they were not going to hold this paper, were not going to establish a long-term relationship with the borrower, but merely sell it off to someone else. They didn’t need borrowers who could pay for 30 years, but only borrowers who could pay for 30 days, because after that they were somebody else’s problem. Or so they thought.

In the second place, the sub-prime market is not the problem. Let me repeat that, because the point seems to be lost: <b>The sub-prime market is not the problem.</i> This market has its expected rate of default, but that was already priced into the interest rates. The problem is the derivatives market built on sub-primes. If you can find me a poor person who sold a CDS, I will personally pay the default on the CDS.

I suspect that most of us, when we signed our mortgage papers, did not understand--and likely did not read--what we were signing, any more than we understand the chemistry of the medicines we take. In both cases, we relied on professionals to advise us, professionals we believed had our best interests at heart.

Blaming the poor, even partially, fits the morality play, but is a betrayal of real morals. The responsibilities here are clearly asymmetric; there is no equivalence.

SJDoc asks, “Who created this necessity (for the banks to lend money)?” The system does. Money is created by the banks, and they must keep creating it to remain solvent. If they cannot lend in the real economy, the must lend in the speculative economy. What is lost in all of this is the distinction between the two. For the last 30 years, at least, all policy decisions have been made from the standpoint of the speculative (financial) economy rather than the real economy. But the financial economy only exists to enable the real economy. When the right order of things is reversed, we get the problems we have gotten.

By the way, the best analytic tool to comprehend this is one of the oldest: Aristotle’s distinction between “natural” and “unnatural” exchange. Natural exchange is the exchange of real goods and services, which is “natural” because it is limited; it terminates in real things, which are always limited in a finite world. Unnatural exchange, on the other hand, is an exchange only for money, which is unnatural because it is unlimited; the numbers can grow to any arbitrary value. That is why you have derivative markets that exceed the value of the entire GDP of the planet.

And a word to the goldbugs among us: Can somebody please tell me why one commodity (gold) should be equal to the exchangeable value of all other commodities? This does not seem either mathematically possible or economically desirable. We were on the gold standard, and it was a complete disaster. Why would we want to do that again?

My last post disputes the very idea of “moral equivalency” which has been falsely and ignorantly attributed to me and Sowell.  There was not a level playing field between buyer and banker.  Obviously the more powerful party--the banker--has a greater moral responsibility to inform the buyer of all the risks involved.  My piece was targetting the powerful, whether these were political parties or Wall St. nabobs. The fact that poor buyers failed to grasp how real estate markets work (according to classical economics, not Republicrat political economy) does not excuse the powerful players in the least.

Mr. Medaille now emits further nonsense about “Grant Havers’ attempt to place a moral equivalency between banker and borrower in this crises [sic].”

But where did Mr. Havers attempt anything of the kind? One searches Mr. Medaille’s posts for quotations from Mr. Havers supporting this bizarre claim. But one searches in vain: for Mr. Medaille is not in the habit of providing evidence.

Shame on Mr. Medaille. Such behavior disgusts me.

Steve Burton

http://www.whatswrongwiththeworld.net/

I apologize, Mr. Burton. I thought you had taken the trouble to read Grant’s post. I didn’t realize that I should read it for you. Grant says With stunning hypocrisy even for them, Democrats are now blaming what amounts to the worst case of government-funded welfarism in the republic’s history on the free market. But this simply isn’t true. There was no gov’t funding involved. None of these loans (with the exception of some local, city-funded “first-time buyer” programs) were gov’t funded. The FHA and VA provide mortgage insurance for the bankers for up to 20% of the loans, but the buyers pay for this. Further, almost none of these loans were FHA/VA because they don’t meet the standards. So I can tell you from personal experience in hundreds of closings that NONE of this is true.

Further, I am perplexed by the claim that this is not a free market failure. Is Grant complaining that there was too much regulation or too little? He is not exactly crystal clear on the point. I can tell you that there was not only no regulation, there was no oversight.

None of the loans were forced by the gov’t. The banks were free to do as they wished. If that is not “free market,” someone will have to explain the term to me. The nonsense of the whole thing is given by Sowell’s complaint that the Democrats failed to regulate this market, and that complaint is true. But then for Grant to claim that the failure to regulate constitutes “welfarism” is bizarre, to say the least.

There is a legitimate charge to be laid at the feet of the Democrats, namely that they acted like Republicans.

Mr. Medaille: change the subject, much?

Your reply is simply unresponsive.

But I’m sure you’re doing your best.

You’re a bit non-specific there, Steve. Perhaps you can point what question I didn’t respond to? It is not clear to me. You asked for a quote, I gave it to you. What more did you want?

Have you considered that the recipients of welfare ("welfarism") in this case are the banks?  This isn’t such a subversive idea, really.  Seems to fit with what Dr. Havers probably had in mind.

http://www.digitalcitizen.info/2008/09/09/corporate-welfare-today-fannie-mae-freddie-mac/

Moreover - and this is where the simple ability to read comes in real handy - Grant did not implying that ‘claim that the failure to regulate constitutes “welfarism”’ To imply that that a lack of regulation leads to said welfarism, is another story altogether.

Ann says Have you considered that the recipients of welfare ("welfarism") in this case are the banks? 

Maybe, but then he wouldn’t have referred to the Sowell article, which made the meaning clear. And

As far as what Grant meant by Welfarism, he wasn’t specific, so I used the common, ordinary meaning of the term. If Grant had meant coporate welfare, he could have said so, either in the first post or his following posts. And he can still say so now. Until then, I’ll assume the ordinary meaning.

From what I can tell, the Sowell argument refers to certain government rulings that encouraged/ pressured the banks in to adopting certain practices, namely the Community Reinvestment Act (http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Predatory_Housing_Lending
Moreover, welfarism being “government funded”, seems to refer,intuitively at least,to the storm of bail-outs that some people might have noticed in the last week or two. 

Speaking of the Community Reinvestment Act, how DO you square that with Free Market economy?

As explained by a previous poster, not one single loan was forced by the CRA. And CRA requires only market level loans to qualified buyers. It had ABSOLUTELY NOTHING to do with the subprime market, which in turn has ABSOLUTELY NOTHING to do with this crisis.

3 points:

1) yes, welfarism can mean corporate welfare in this case, although there can be overlap with statist welfare (as the Great Society programs demonstrated); this I call Republicrat political economy
2)for the record, I am in favor of the free market (that was more than implied in my original piece); a true free market never would have handed mortgages to borrowers/buyers who simply could not pay for them (through no fault of their own).  Laissez-faire is more disciplined than the current corporatist state, in which Wall St’s nabobs likely knew that they would be bailed out in the event of a meltdown.  After all, they knew that the original borrowers/buyers would not be able to afford these homes from the start.  They must have calculated that a bail-out was both probable and desirable; this is not how a free market works.  Banks would’ve have provided more oversight under the free market; it would be in their self-interest.  And, as Ann pointed out, the Community Investment Act rejects laissez-faire in toto. 
3) Under a free market, there would be true moral equivalence between buyer and banker.

1) You have told us what “welfarism” could mean, but not what you meant. Therefore, I take the word at its normal meaning. Is this what you meant?

2) If you believe in a strict free market, then your complaint against the Democrats--or the Republicans--is hard to understand. They both took a free market, hands-off approach. This would seem to be the approach you support. What is your complaint? You said they likely knew they would get bailed out in the event of a meltdown. That’s more than I know, but perhaps you have better sources of information. I suspect that they thought the investments were sound, having hired nuclear physicists to work out the CDS models. They would hardly have done that if they knew that the govmint would make everything okay no matter what they did. It makes a nice moral judgment on the bankers, and perhaps reinforces our sense of moral superiority over them. But it ignores the requirements of the fractional reserve system under which they must work.

3) So I was right, you are arguing for moral equivalence. But you are simply wrong, as technical matter. When a doctor prescribes for you a toxic substance, the fault lies not with you, unless you happen to have training in pharmacology and could be expected to know that the substance was toxic. By the same token, when your broker prescribes a toxic loan, you cannot be expected to be an expert in credit markets, unless that happens to be your area of expertise.

Moral equivalence requires that the information be symmetric between the parties. But obviously, it is not, neither in medicine nor in credit, nor in many other things. Were information can be assumed to be asymmetric, regulation is required, or you do not meet the requirements of a free and honest exchange.

Grant, I would like to know how you think a free market would have prevented banks from making bad loans when they knew they were going to sell them and push the risk on somebody else. Especially, in this corporate world where dancing on the edge of the law and cheating people seems to be SOP.

Nobody was preventing banks from making loans, in fact it was more like a feeding frenzy to make them. Surely, you aren’t saying the government was forcing banks to make the loans, are you?

To JM:  I will not play your game of splitting hairs.  What I meant is also what I could have meant.  (Egad!) Since I mentioned Wall St originally, I must have had in mind something akin to corporate welfare. 
Also, a “hands-off” approach in this case is not equal to the free market, anymore than the lack of a police force in a regime is equal to a free market (that would be anarchy).  The fact that both parties and the gov’t paid no attention to the full and likely effects of a fiasco which they created has nothing to do with laissez-faire.  They shouldn’t have encouraged or sanctioned Wall St to make these poor investments in the first place, without any semblance of market discipline--again, that isn’t laissez-faire.  And these firms were big enough (and essential enough, in the wider economy) to expect a bail-out, despite their poor investments, which is of course what has happened.
“Moral equivalence” under laissez-faire in this case means that a bank wouldn’t have been a lender to high-risk applicants like the poor, and the poor wouldn’t have taken on a mortgage which, rationally, they could not afford.  This minimal rationality, so central to a free market, was sadly missing.  MA is not simply a matter of equal information, but rational calculation of risk on the part of both parties to an exchange.
In a rational world, economic agents should also obey the law of diminishing returns, whether in investment or in writing.  Good night and good luck.

Grant says What I meant is also what I could have meant. Well, that’s an interesting interpretive approach. Not one that leads to a great deal of clarity, but ok.

And apparently laissez-faire means (or could mean?) greater regulation. And then there’s this gem “Moral equivalence” under laissez-faire in this case means that a bank wouldn’t have been a lender to high-risk applicants like the poor. This is an interesting use of the terms. I’m not sure why they would be forbidden to make loans freely contracted; most of the poor are paying back their loans (until they lose their jobs), but my understanding of laissez-faire is that if the parties are willing to take the risk, the gov’t shouldn’t prevent them. But then, apparently, words mean whatever they could mean, which is...whatever.

What you consider “splitting hairs” most people would consider “defining your terms” or even “thinking.” But I realize such exercises are unfamiliar to narrow partisans. Ideologues let the ideology do their thinking for them; they never know what they mean until the read it in the party line. And it could be...whatever.

From the Independent Institute:

“Homeownership had been stagnant in the U.S. for some time, Liebowitz says. Though seemingly noble for the government to want to stimulate new ownership, “the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise: intentional weakening of the traditional mortgage lending standards,” he continues.

The government’s weakened underwriting standards allowed lenders to grant mortgages with virtually no down payments, few restrictions on the size of monthly payments relative to income, little examination of credit scores or employment history, and so forth. Initially these new rules succeeded in increasing home ownership rates, and “the decline in mortgage underwriting standards was universally praised as an ‘innovation’ in mortgage lending,” Liebowitz says.

As home ownership appeared to become easier, consumer demand spiked, resulting in a pricing boom at the turn of the 21st century. The rising prices ushered in a host of speculators, who accounted for roughly a quarter of sales during this time.

The speculators would buy and subsequently sell houses over short periods of time in the expectation of turning a profit, and of course the new loan standards appealed to them. They pursued adjustable rate mortgages with the smallest down payments and the lowest interest rates in order to secure the biggest return. It never mattered how painful these mortgages might become years down the road, because the home would be sold again long before then. As borrowers began to default on their loans, though, the high housing prices began to decrease. When the speculators realized they could no longer make a profit, they naturally left the market, leaving the investors who backed them with the mortgage debt. Liebowitz argues that this hypothesis—rather than the popular subprime vulture hypothesis—fits much better with the fact that foreclosures increased mainly for adjustable rate mortgages and not fixed rate, regardless of whether mortgages were prime or subprime.
It is necessary to understand what caused the mortgage crisis in order to avoid repeating history. Many pin the blame for the crisis on greedy and manipulative lenders or the speculators who bet on the basis of artificially inflated prices. However, in Anatomy of a Train Wreck, Liebowitz argues that the government-dominated housing and regulatory establishment is truly at fault. Powerful government agencies and intellectuals must understand the imperative need for strict underwriting standards. Such standards are essential safeguards that ensure that housing prices accurately reflect supply and demand in the housing industry, preventing a housing bubble like the one that led to the current crisis, Liebowitz concludes. Lawmakers and government housing officials would do well to understand this, and they just might manage to avoid such a train wreck in the future.”

The full article is at:http://independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf

“So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the “Neighborhood Assistance Corporation of America.” He once boasted to the New York Times that he had “won” loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one “community group” operating in one city – Boston.

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as “subprime” loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.”

The full article is at http://www.lewrockwell.com/dilorenzo/dilorenzo125.html

Simon, My question about the “Independent Institute” has always concerned their “Independence.” But independent or not, they are here engaged in myth-making. Yes, gov’t looked the other way while this was going on, but there is not one law on the books that required the banks to make bad loans. They are big boys (and girls) and they claimed to know what they were doing.

And they did know, sort of. The subprime market is performing to expectations, with a higher default rate compensated by higher interest rates. Of course, with the collapse in the economy, there WILL be a real problem in the subprime market, with failures higher than expected, but that is not caused by the subprime market, but by the deterioration of the wider economy.

I don’t know how many times I can say this:

THE PROBLEM IS NOT THE SUBPRIME MARKET.

THE SUBPRIME MARKET PERFORMED AS EXPECTED.

THE LOSSES IN THE SUBPRIME MARKET ARE INSUFFICIENT TO EXPLAIN THE LOSSES IN THE WIDER ECONOMY.

THE SUMPRIME MARKET HAS NOTHING TO DO WITH THIS PROBLEM.

Any other ways I can say this? I can’t think of any.

The problem comes in the derivatives market. The subprime market is maybe $1.4T; the derivatives market has a notional value of $600T (or more, nobody really knows.)

The myth of the CRA is just that: a myth. CRA does not require a single bad loan. The banks did that by themselves, and even what they did, while risky, was not that bad. Even selling “insurance” on these loans wasn’t bad, if they had just sold it to the bondholders. But when they began “insuring” people who would take no losses, and insuring them with no insurance reserves, they guarenteed that the effect of each default would be magnified 20, 50, or 100 times. That is how such a relatively small failure in such a relatively small market becomes a national crisis. If the “independent” institute had any real independence, it would not be looking at the CRA, but at the derivative market.

There, there, Mr Medaile:  nobody is blaming the realtors for this mess.  We are blaming the fat cats, who blame market forces for a gov’t made crisis.  When Obama or Bush is cornered on their responsibility, what better thing to blame than an impersonal mechanism like the market?  They are the true ideologues.  Realtors should be smart enough to see through these lies, and read the fine print (although you don’t always do that, do you?)

Dear Anti,

Can you explain to me why the market can be praised but not blamed?

Dear JM:  the market should be blamed when it is the culprit.  It is not in this case.  Here are some facts:

1) in 1995, Congress amended the CRA Act to require banks to lend to high-risk borrowers.  If they failed to comply, they were hit with fines and faced rejection when they requested mergers and bank expansions.  This GOV’T combo of carrots and sticks encouraged the sub-prime boom.
2) The GOV’T offered an implicit guarantee to Fannie and Freddie to cover their performance; they’re gov’t creations, after all.
3) Greenspan’s decision in 2004 to reduce the short-term interest rate to 1% dangerously increased irresponsible lending and speculation
4) One result: Fannie Mae leveraged its equity 40 to 1, the highest leverage ratio in history, all because it was not subject to market discipline (as has been pointed out!)

In short, it’s a gov’t mess all round.

Anti, once again, since you haven’t gotten the word, the CRA was about red-linning, the refusal to make loans to credit-worthy borrowers because they lived in a certain place. It did not require any subprime loans.

And twice again, since you never get the word, THE SUBPRIME MARKET HAS NOTHING TO DO WITH THIS!!!! The failure is in the derivatives market, and I have yet to see a poor person who issued any credit-default swaps.

It’s always fun to watch the “free market” types blame the poor when the market fails.

JM cannot see the forest for the trees.  The CRA, yes, banned red-lining, AND the sub-prime crisis partly originated from this, leading to a “reverse-red-lining” (loans favoring the poorest buyers).  I quote Abraham Miller on CRA’s role in setting the standard: 

“Now the political left would like you to know that the CRA-controlled institutions did not lend the largest percentage of sub-prime mortgages. But that’s information by deception, because the mortgage business is a competitive business.  If the government strong arms one part of the business, the other part will respond.  And strong arm was what the Clinton administration did, even using the Office of the Comptroller of the Currency to pressure banks to lend more money to the disadvantaged. Caught in the act, a spokesman for the office noted that its abuse of power was “for the best of intentions:” the same inclination used to pave the road to hell.....

In the short run, all sorts of money was to be made by lowering standards and processing sub-prime loans for the poor. The Wall Street Journal raised concerns about Fannie’s and Freddie’s capital requirements.  Senator Phil Gramm (R, TX) raised issues about community pressure groups, such as Barack Obama’s ACORN, extorting money from banks by holding their feet to the CRA fire, and threatening to militate against mergers and acquisitions unless the banks entered into preferential agreements with community groups.....

The Federal Deposit Insurance Corporation even has a web site so you could see how well your bank is meeting its obligations under the CRA.  Those of you who had money in Washington Mutual, which just went belly up, will be happy to know that WaMu, over the five individual reporting periods, had almost exemplary ratings on its commitment to CRA. That should give WaMu depositors great joy, to compensate for the financial mess they may be in.  If WaMu had been less responsive to the CRA and more responsive to the market, maybe it wouldn’t be insolvent...... 

I am not suggesting that the CRA by itself led to the current crisis, but the CRA was the first and most important part of the food chain.  The CRA caused the expansion in the number of questionable loans that lending institutions made, but Wall Street and insurance underwriters were all too willing to package these loans, enhance their ratings through convenient exercises in fantasy, sell them, and insure them with reserves that were more inadequate than the incomes of the people who got the loans in the first place..”

These are facts, not lies.  The GOV’T was the catalyst, not the market.

Honestly, who can be so ignorant to think that Fannie and Freddie acted like pure free market agents, sans gov’t cajoling?  Come on!

Just because somebody says its true doesn’t make it true. CRA required no bad loans. In fact, if you, or Miller, can locate even ONE bad loan that was forced by the CRA, I will pay off the mortgage.

You can’t, because nothing in the CRA requires any particular loan and in fact requires that the borrowers be credit-worthy.

Like all ideologues, you are fact-optional; if you read it on a blog and its fits your ideology, then it must be true. But to find a single example of this mythical “truth,” that you cannot do.

The myth of the right is that the market can do no wrong, and when it does, it must be somebody else’s fault, somebody poor, somebody black, somebody hispanic. On the right, those are the only villains.

Well, JM, now you’re just offering rhetoric.  You haven’t written anything to challenge the fact that the CRA engaged in reverse redlining, that it is aligned with Obama, that Fred and Fan are gov’t supported entities, etc, etc.

Nobody is blaming the poor here (can’t you read?) IT IS THE GOV’T AND ITS CORPORATE ALLIES!!  Reverse red-lining actually harmed the poor, as the mass foreclosures show. 

If ideologues actually provide facts, then call me an ideologue.

Anti, you haven’t yet given me one fact to respond to; you haven’t shown where one single subprime loan was required by the act. How can I respond to evidence you haven’t offered?

You are blaming the poor. Supposedly, bad loans to them, demanded by their powerful corporate and congressional allies, forced the banks to make these loans.

This is poppycock. The poor have few allies on the boards or in the Congress; their lobby is notoriously weak.

Oh, and even if what you said was true (which it isn’t) the subprime market didn’t cause this problem.

JM, you are not interested in facts.  And your distributism ideology is a joke, a witches’ brew of petit-bourgeois socialism and medieval romanticism, btw.  Chesterton as economist??  No wonder you don’t care about facts.  Enjoy voting for Obama, the most socialistic candidate in US history.  You will get what you deserve.

Anti, you can change the subject if you like, but you cannot show me a single example of the CRA forcing a subprime loan, nor can you tell me how the relatively small losses in such a minor market caused the entire system to fail.

The unregulated derivatives market should be a perfect test of free-market financial capitalism.

And it is.