Assessing blame for the housing meltdown

There is a consistent message out there in RightWingLand regarding the housing crisis. In a nutshell it goes something like this:

First from the Lovely and Delightful Ann Coulter

Under Clinton, the entire federal government put massive pressure on banks to grant more mortgages to the poor and minorities….

Instead of looking at “outdated criteria,” such as the mortgage applicant’s credit history and ability to make a down payment, banks were encouraged to consider nontraditional measures of credit-worthiness, such as having a good jump shot or having a missing child named “Caylee.” 

Column here.

And from the Suave & Debonaire Larry Elder:

The Community Reinvestment Act, passed in 1977, mandated that lenders lend to high-risk borrowers — or else.

Column here.

The talkers and the pundits have again boiled an exceedingly complex economic problem into simple talking points. With ease, they boil it down to “Everything is the fault of Bill Clinton and his Democratic Cronies (great name for a band).”

It’s not my intention to explain the entire crisis. I imagine Ph.D students will be writing disertations about it for years. However, I do wish to make a couple of bullet points for use against the RightWingLand theory.

• A major cause was the huge increase in speculative or vacation home purchases. According to the National Association of Realtors in 2005 40% of all residential transactions were for a second or investment property. In 2006 the speculators left the market and amazingly, residential real estate prices started to collapse.

 

• This speculation was mostly caused by the availability of easy credit. Credit that came from two main places: historically low interest rates (Thanks Allen Greenspan!) and non-traditional securtization (Hello CDOs!) These two items created an incentive for banks and non-bank entities to originate loans and sell them off in the secondary market. Hence the famed NINJA (no income, no job, no asset) loans. Aside from Greenspan flooding the economy with cheap credit, the federal government had nothing to do with this. Oh, except they didn’t regulate CDOs and require transperancy.

 

• Regarding the Community Reinvestment Act: according to testimony given in the House of Representatives only 20% of all subprime loans were given by institutions that fell under the CRA’s jurisdiction.

 

• According to the same testimony, 35% of the people with subprime loans could have qualified for a traditional loan. Yes, people need to get second opinions and research their options, but this points to predatory lending. 

 

• Finally the CRA was passed to eliminate redlining. That is, the practice of excluding entire areas regardless of the credit worthiness of any individual borrower. It did not mandate loaning to high risk individuals. I will agree that the act’s purpose has been modified over the years, but that was the primary purpose.

Hopefully this will help you out as you face the Dittoheads. The holiday season will be here soon and a lot of us have to face our conservative families. I’ll do my best to keep us prepared.

 

Too big to fail vs. too small to devastate the economy

I’ve spent my lunchbreak checking in on the latest government acquisition; AIG. I don’t know a whole lot about the regulatory environment for insurance, but once again, we have a situation where a company got so big that it could wreak havoc on the financial system. Hence, USA-AIG Inc.

The problem here is Wall Street. I don’t mean the caricatures that are getting thrown around in the media. It’s way too easy to imagine evil Wall Street tycoons twirling their mustaches. McCain is especially playing this up. After all, it’s pretty easy to invent a villain but much harder to explain how things actually work. Witness recent republican electoral victories (including the forthcoming republican victory).

Many managers at publicly-traded firms earn their compensation through the share price or some derivative thereof. Wall Street does not reward companies that do not grow. Traders are looking for the next Google or Microsoft.

This creates a clear and strong message for managers - GROW OR DIE. And the easiest way to grow is through acquisitions. In the olden days there were regulatory limits on acquisitions. Growth was regulated either through government agency or statutory limits. Under the Sherman Antitrust Act (and many others) certain types of mergers and acquisitions have to be approved by the federal government.  

The other kind of regulation are statutory limits. These laws expressly forbade certain kinds of companies from engaging in certain kinds of business. An example I’ve talked about before is the Glass-Steagall Act which separated commercial and investment banks.

Over the past thirty years banking and many other industries have become increasing deregulated. Managers have taken advantage of this and turned Mergers & Acquisitionsinto big business. Toss in a few CEO’s who want to build global empires and well, here you go. We’ve seen massive consolidation in all kinds of industries most notably banking and insurance.

Hence we have a collection of companies that are all too big to fail. And now the federal government is spending money faster that it’s presses can keep up.

There’s a point to all this rambling. E.F. Schumacher said it best, Small is Beautiful. We need to get back to a time when regulation actually existed and companies were smaller. There is scant evidence that any good is derived from acquisitions and business history is littered with failures. AOL-Time Warner, and DaimlerChrysler come to mind.

 Despite this scant evidence, mergers and acquisitions continue to happen. As long as compensation is tied to stock price, there will be a strong institutional push to acquire. Companies will not police themselves. They will continue to M&A themselves to death. The short term rewards of massive bonuses and stock options are too great.

This is why government intervention is needed.

We have massive market failures when the government abdicates it’s responsibility. Examples? Savings and Loan crises, California Energy Crisis of the early 2000’s, the housing crisis, the credit crunch…all of these have their origins in some kind of deregulation.

Go ahead, call me a socialist, but what do you call the current administration? We have deregulated ourselves right into full-bore socialism. Karl Marx would be so proud.

As a postscript, I will agree with hardline free marketers that our regulatory state is very fragmented and confused. It should be made simpler and clearer, but that’s the topic for another post.

 

AIG

The Federales have taken over AIG. The Federal Government is now the world’s largest insurance company as well as the world’s largest holder of mortgages.

Who’s next? My bet is Citigroup……

 

Welcome to the occupation.

Lehman Bros has filed for bankruptcy. Just another casualty from the sub-prime, credit crunch mess. Lynch is hanging on by a thread. WaMu is probably going to fall.

The question on Wall Street is ‘will the government bail out any other banks?’. Over the weekend the Feds told Lehman ‘no way Jose’ and that precipitated the filing.

Our government is turning into quite the diversified conglomerate. They’ve started an investment banking wing (Bear Stearns), a mortgage business (Freddie & Fannie) and have promised to get into the automotive business. (There are preliminary agreements for the government to make low-interest loans to the Detroit automotive companies.)

What we’ve been hearing over and over is these companies are too important and Too Big To Fail. The libertarians scream and gnash their teeth over these bailouts. I do too. I disagreed with the Bear Stearns bailout. I don’t support low-interest loans to the automotive companies.

But Freddie & Fannie…..oh that’s a horse of a different color. Allowing those two to falter would have sent massive shockwaves throughout the financial system. People way smarter than me have no idea how bad it would get if suddenly half the mortgages were held by two bankrupt companies.

I’ve heard the usual suspects trotted out. Corrupt CEOs, greedy shareholders, meddlesome liberals, but none of these scapegoats are the real perp.

You know who’s at fault? We are. Me & You.

George Carlin once said “They call it the American Dream because you have to be asleep to believe it.”

Well George, you were right and we’re being rudely awaken right now.

We have allowed ourselves to buy into this American dream bullshit. Specifically the part about everyone owning a house with a white picket fence in the suburbs. I hear it over and over again during this campaign. Comments praising “small town Americans”, the suburban campaign stops, it goes on and on. Obama is being rediculed for being ‘elite’ because he’s well-read and well-spoken.

As I’m fond of saying…anyway….

Owning a home. That’s one of the most basic tenants of the American Dream. A place where a man can be free to do as he wishes. People do not realize how much this ideal is supported by the federal government. Our highways that allow longer commutes – federal government. Cheap housing outside of the city – again the federal government is behind that. That’s what Freddie and Fannie did. They bought up mortgages. Almost half of them to be exact. They allowed banks to loan money, collect the transaction fees and then sell the loan so it became someone else’s problem. Namely, the federal government.

Add to this the federal practice of redlining, which restricted federally-backed mortgages in the city, and you have the federal government practically screaming “ATTENTION WHITE PEOPLE IT IS TIME TO MOVE TO THE SUBURBS!!!!!”.

So we did. Or a lot of us did. Enough to cripple cities. Some have recovered (New York, Chicago, Boston) and some have not (Detroit).

Why would the government want the population arranged in this manner? I don’t generally believe in government conspiracy theories, but I do believe the government had ulterior motives.

One; it played on the racism of white people. By getting white people out of the city and keeping black people in, the government could count on the support of racist, wealthy and politically active whites. Gerrymandering helped minimze the impact of the black vote. Score one for the feds.

Two; by dividing us by race, we identified with race rather than class. The government has almost always been terrified of organized labor. A good way to weaken organized labor is to convince people that racial concerns are more important than economic ones. Score two for the feds.

Three, spreading people out destroys a sense of community. I’ve lived both in the suburbs and the city. In the city, you identify with your neighborhood much more closely. There is a sense that if something bad happens to the neighborhood, it happens to everyone in the neighborhood. That’s why community organizers exist. Living in Chicago, I’ve seen my fair share of byzantine neighborhood fights. There’s one involving a soccer field that I still haven’t gotten my arms around.

Anyway, by destroying a sense of community, the individual has been elevated. This has allowed the “get mine and get out” brand of right wing politics to flourish for the last 30 years. This is why every speaker at the G.O.P. convention made fun of community organizers. To them and their white, suburban constituancy, there is no community to organize. The concept is foriegn to them.

Score three for the feds.

So the government sold the American Dream to us and made it easy to live far away and easy to buy a home. Now it’s all unravelling and the costs are starting to become insurmountable. The federal highway budget is a complete mess and the government has just become the worlds largest backer of mortgages. We’ve suffered through nearly 30 years of right-wing rule and likely to suffer through at least 4 more.

I don’t know about you, but I think it’s time to mow the lawn.

 

George W. Bush is right

Lord, it pains me to write the title of this post, but in interest of preserving my principles, I must. A farm bill is winding through Congress and Bush has threatened to veto it. He is absolutely right to do so. Farm subsidies have gotten entirely out of control. I understand the basic principles and reasons for subsidies. One, a nation’s food source should be protected, ’cause if we can’t eat, it will be hard for us to invade soverign nations, wiretap the citezenry, torture people uhh…I mean spread democracy…and the second reason is a significant input of farming (weather) is completely uncontrollable and (insert whining noise) it’s just not fair.

The second reason rings a bit false for me. I work in an industry where oil prices have a major negative impact on sales. Neither me, nor my company controls the global price of oil. (I do, however control the global price of copper, which is why I’m writing this post from my yacht….damn, must have been dreaming again).

Every industry has unknowns and uncontrollable elements. We used to refer to that in econ text books as “risk”. There aren’t any sure things in a capitalist system. That’s kinda part of the fun.

The only difference between my industry (which is suffering and threatening the livelihood of hundreds of thousands of people) and farming (which doesn’t employ nearly as many people) is that Washington D.C. protects one of these and tells the other to go fly a kite.

But this is America! The Golden Land of the Globally Free Economy! Do you mean to say we have protectionism (cue scary music)???

Uh yeah, we do. The farmers are protected by way of lobbyists. My industry does not do as good of a job of lobbying Congress. That’s it. The only difference. How else can you explain broad bipartisan support for this bill. It’s amazing, Congress can’t agree if the sun rises in the East anymore, but suddenly a bolt of bipartisan cooperation overtakes the Capital.

I mean for God’s sake, the republicans are lobbying George Bush sign a bill supported by Nancy Polosi! Is it opposite day?

Anyway, Bush is right to oppose this and ask for more reform. I’m realize probably the only reason he’s opposing this is because the Dems control Congress, but (TeamKuntz law #41) “A right decision made for the wrong reason is still the right decision.”

 

I would tell him to shrug

I’m re-reading one of my all-time favorite novels.  I’ve read Atlas Shrugged probably five or six times; more than any novel besides On The Road. 

Ayn Rand fans have a certain habit of being completely insufferable, but this book is still important to me. It makes me question a lot of my thoughts about free markets and government intervention. She wants people to use their minds and think. Well Ms. Rand, you’ve done it. Every time I read this book I find myself questioning a lot of assumptions I have about the free market.

I like the world she presents (except for all the decay, destruction and starvation, of course). The book shows human potential for both good and ill, and concludes that we are powerful creatures, capable of much.

I like that. Far too often we succumb to our own feelings of powerlessness. How often do you hear “Well, nothing’s gonna change anyway so why bother?” Ms. Rand’s answer to that is a screaming NO. Humans can remake the world with amazing efficiency, and one person can change the world. Henry Ford, FDR, Steve Jobs, John Lennon, Mao are just a few that come to mind.

Anyway, getting back to the book. On paper, I agree with almost everything she says. Religion is bad, capitalism is good, the mind is not impotent. Regarding capitalism, I find her arguments very persuasive. After all, isn’t in the best interest of a businessman to produce a good product and sell it at competitive prices? If you sell a defective product, consumers will not buy it in the future and you will be out of business. Just some basic Adam Smith at work.

My problem is that I see so little of that. If Smith and Rand are correct we wouldn’t have toxic toys, beef that kills people, cars that explode or operating systems that don’t work at all. If the free market was really free we wouldn’t see million dollar payouts to failed CEOs.

So why? Why all the market failures? I think the answer can be found with another economist. John Maynard Keynes famously said “In the long run we are all dead.” Meaning that government should try to cushion the shocks of the market to provide the greatest happiness for the greatest number of people. If we wait until all of the market failures to solve themselves (see housing crises), people will simply suffer needlessly. The government should intervene to assist.

This theory applies at both ends of the business cycle. Government should assist in the low points, and try to cool the market when it’s overheating. Basically, the same principle that the Federal Reserve operates under.

I think there is a dark side to this idea as well. Since we are all dead in the long run, humans have an incentive to maximize wealth in the short term, and the time value of money teaches us the shorter term the better. After all, who wouldn’t rather win the lotto today instead of working for 40 years?

Short term thinking seems to be an immutable part of the human condition.

That’s where my argument with Rand and other free market disciples begins and ends. There is a different between self-interest and enlightened self-interest. One of them works and one of them doesn’t. It requires us to see beyond the horizon of the immediate, which requires discipline. It’s not automatic, and that’s where Rand’s philosophy falls short.

It’s still a really good book. Read it.

Who is John Galt?