Tuesday, September 23, 2008

The Financial Mess

I currently have nothing to say about it beyond agreeing with this statement:

I have no way of judging whether the Wall Street bailout is a necessary evil or an impending disaster. But we're in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people....

Update, 9/24/08: Ben Stein does a good job of simplifying things here.


mazenko said...

I'm not sure where I stand on the plan, yet. However, I'm not about to pin it on political elites any more than the free market. Bear Stearns/Merrill Lynch/AIG were not being manipulated by politics.

We should probably acknowledge the links pointed out by Ed Gramlich, a Fed official, who was criticizing sub-prime lending and trying to get Greenspan to increase oversight by 2004. This, of course, he related to the repeal of Glass-Stagall. That deregulation of banking contributed to the problem far more than Fannie Mae's lending.

Keep in mind that up to Gramlich's warnings in 2004, sub-prime was only 8.5 percent of mortgages in the US. However, by three years later, it surpassed twenty percent. At this time, Fannie/Freddie had nothing to do with the sub-prime, and were becoming insignificant in the mortgage game precisely because they can't do any subprime lending. They are restricted by law from sub-prime lending. Additionally, regulators by 2003 put new restrictions on them as a result of growing financial scandals.

Granted, FNM/FRE's problems came not in lending but in not maintaining enough capital to back any downturn in the market. Thus, we have the issue of finance and regulation. NOW, I'm not arguing that deregulation is the sole culprit or that excessive regulation is the answer. But I certainly can't endorse oversimplying the issue into the standard "government is the problem" mantra.

Again, this implosion occurred during the past eight years when, in the words of Gramlich “the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision.” What he didn’t mention was that this was the way the laissez-faire ideologues ruling Washington -- a group that very much included Mr. Greenspan -- wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing."

Now, I'm no economist (though I did stay at a Holiday Inn Express last night - (sic)), but I think Gramlich has the credentials to know what he's talking about. I won't pin this on political elites. All these banks made clear free market decisions to lend to people they shouldn't have, loan more than they had, leverage beyond reason, purchase and re-sell securities for which they had no clear understanding of value, and hope that it all worked out.

Darren said...

The repeal of Glass-Stagall is also making the recovery easier, as those savings banks that are strong are buying the investment banks that are not.

I've seen plenty of "qualified" people at all ends of the political spectrum try to affix blame in any number of places, and I'm sure there's plenty to spread around. However, I doubt banks would have lent money to people who couldn't afford it if there wasn't "encouragement" from Congress to do so. Do you remember the threats of even more regulation if they didn't? Do you remember, especially during the boom years of the 90s, the calls that it's a "human right" to *own* a home?

I don't pay the head of Bear Stearns, but I pay the Congress. I'm far more willing to assign blame to them.

Ellen K said...

I keep hearing Gomer Pyle in the back of my head saying "Greedy, greedy, gree-ee-ee-dy" Up and down the line there were people on the take-investors that pushed mortgage corporations to go after lucrative subprime mortgage placements, Congress who forced lenders into opening loans for unqualified borrowers, brokers who talked people into more loan than they needed and borrowers who felt entitled to the good life as seen on Oprah and all of the Home Design shows who KNEW they were barely making it, but insisted on interest only loans for the first five years. I've bought two homes. They all come with statements clearly showing what you will pay year by year, month by month. But all those informercials touting flipping houses in Florida, California, North Carolina and such never bothered to discuss the downside of such a proposition. I know a couple right now that bought a nearly million dollar home in what is a very desirable of suburban Dallas. They bought it five years ago for an interest only loan thinking they would sell at a profit before the balloon came up. Now they can't sell. They sank their retirement into this as a get rich quick scheme. I feel sorry for them in that they were so greedy that now they will pay. But I don't think it should be paid back with MY TAXES. *end of venting*

jim said...

This is from the San Francisco Federal Reserve Bank.

"Before I turn to potential interventions, I want to make one final point. There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans,16 and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households.17 We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term."

This crisis had nothing to do with the Community Reinvestment Act. The Stein article you link to state s that the crisis had little to do with loans in the subprime market. Few of the loans in the subprime market were covered by the CRA, and most of those are not in trouble.