The Housing Boom and Bust

Thomas Sowell on how government policies made the housing crisis possible

Thomas Sowell, prolific public intellectual and the Rose and Milton Friedman Senior Fellow at the Hoover Institution, is one of America's greatest economic thinkers and educators. He's taught the fundamentals through such books as Economic Facts and Fallacies and Basic Economics and chronicled economic history through such scholarly works as Marxism: Philosophy and Economics and On Classical Economics. In his classic work Knowledge and Decisions, he espoused a sophisticated, largely Hayekian approach, revealing how the efficient spread of relevant knowledge is shaped by our social institutions, and often warped and misshapen by government.

Now, in The Housing Boom and Bust (Basic Books), Sowell contemplates the greatest expansion of government power in a generation, which was itself occasioned by the greatest economic crisis in as long. A quick but thorough guide to the causes of the crises, Sowell's book shows how government policies led to a huge increase in highly risky housing loans. As he notes, the immense local variability in housing prices and failed loans reveals that the government mistook a set of local problems for a national one, and then imposed a single troublesome national solution. Sowell argues that while foolish decisions to indulge in complicated investment vehicles affected the specifics of how the financial contagion spread, at its root the housing problem is one of bad mortgages. And those came from bad decisions by government and by borrowers themselves.

Senior Editor Brian Doherty interviewed Sowell earlier this week about the book, the crisis, and the government’s unfortunate response.

reason: Is the economic downturn caused by the housing boom and bust the worst economic circumstance of your lifetime?

Thomas Sowell: Since I was born in 1930 the economic crisis with the most impact of my lifetime was the Great Depression. As to whether this will match that, it’s too early to tell. Right now it certainly is nothing comparable to the Great Depression, but the Great Depression began as nothing comparable to the Great Depression. For the first 12 months after the stock market crash [of 1929], unemployment never reached double digits but the solution turned out to create more disasters than the problem they were trying to solve.

Whether that will happen again depends on how far and how long the current administration will push policies to solve the present crisis and what their repercussions will be. As mentioned in the book, parallel to the 1929 crash was the stock market crash of 1987. That had the potential to create another Great Depression had Reagan followed similar policies as Hoover and FDR did. He didn’t, so we just about forgot about the stock market crash of ’87.

reason: Do you see or anticipate Obama’s reactions being sufficient to turn this downturn into another lengthy depression?

Sowell: I hope not, but what we’ve seen in these past few months is an exercise in unprecedented powers. I mean, to fire the chairman of General Motors, to tell credit card companies how they should run their business, tell GM what kind of cars it should be making, and there’s no sign of an end in sight yet. Obama’s policies are a work in progress. So a lot depends on how far he will push, but I see no signs of him turning back. I see no substantial resistance in Congress. But you never know, as things start to unfold voices of sanity may prevail.

reason: What is the most dangerous sign you’ve seen so far in terms of policy reaction to the housing bust?

Sowell: The presumption that Obama knows how all these industries ought to be operating better than people who have spent lives in those industries, and a general cockiness going back till before he was president, and the fact that he has no experience whatever in managing anything. Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.

reason: You parcel out some share of responsibility for the specific way the housing bust broke down to borrowers, lenders, financial markets, and the government. What was the borrowers' share?

Sowell: There are those who borrowed to buy a place to live and speculators who borrowed to speculate, and did enormously well for a number of years. Then there were people who simply don’t understand complex mortgages, particularly people who never owned a home before and whose educations were limited. But the people I would blame the most in the sense that without their interference other problems would have been within manageable means are the politicians—people in Congress and the president and regulators—who pushed the lenders and the banks and Fannie Mae and Freddie Mac into lending and buying mortgages based on people who didn’t meet standards that evolved in the marketplace and which had worked. Those politicians, in addition to that initial mistake, ignored all sorts of warnings from all sorts of sources. As I list in the book, the Economist in London, Fortune, Barron’s, people at the American Enterprise Institute, all over the map, saw that this policy of encouraging homeownership at all costs was leading to trouble.

But the politicians clearly had as their political goal homeownership as “a good thing” and persisted—and for that matter persist to this moment in pushing it. The Federal Housing Administration last I checked was promoting supporting mortgages that have less than 4 percent down payment. We all make mistakes, but politicians have persisted in their mistakes, and in the pointing of fingers in other directions.

“Affordable housing” covers a number of things. There was this sense in Washington that the cost of buying a house had become a nationwide major problem which would require a federal answer as opposed to a local answer. All the data say that was not true. People weren’t paying a higher percent of their income nationwide for housing than they had a decade earlier. In fact, it was a somewhat lower percentage in some areas. Now in some areas, including California—coastal California—people were paying half their family income to put a roof over their head. That in turn was a result of local political people putting all sorts of restrictions on building.

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  • JB||

    "...at its root the housing problem is one of bad mortgages."

    No shit. I have been saying this for months and the retarded Obama voters just scream "Eat the rich! It's all their fault!1!"

    It's the fault of the poor and irresponsible. I say we make those fuckers pay.

  • Invisible Finger||

    Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.

    Awesome line. Pretty much sums up Obama and his supporters as mental adolescents.

  • ||

    at its root the housing problem is one of bad mortgages.



    Bad mortgages and bad zoning and land-use policies that encourage boom and bust.

  • ||

    Of course, Professor Sowell mentions the land use restrictions in the interview, as well he should. He's argued against them from his columns for years.

  • Citizen Nothing||

    I want "Public Intellectual" on my business cards.

  • ||

    I want "Public Intellectual" on my business cards.

    Having it on your card doesn't make it so. Maybe "pubic intellectual?"

    OH SNAP

  • ||

    My card says "professional hunter." Unlike public intellectual, my occupation occasionally has a tangible outcome.

  • Warty||

    Public irrumatio, Epi? I thought you told the judge you wouldn't do that anymore.

  • ||

    "Awesome line. Pretty much sums up Obama and his supporters as mental adolescents."

    I beleive unconsciously incompetant would be the proper term.

  • Oh Noes You Dint!||

    "It's the fault of the poor and irresponsible. I say we make those fuckers pay."

    Chad arriving in 5, 4, 3...

  • ||

    Public irrumatio, Epi? I thought you told the judge you wouldn't do that anymore.

    You have to tell these judges what they want to hear, Warty. Then you do what you want.

  • ||

    For the first 12 months after the stock market crash [of 1929], unemployment never reached double digits but the solution turned out to create more disasters than the problem they were trying to solve.

    I think in the U.S. and in most of the world the public understanding of economics is abysmal. But it's one thing not to understand something. I don't understand brain surgery. It's another to want to form policies on things on which you are ignorant. I hear the wonderful phrase "I want to make a difference" when it comes to policy. I would be horrified if I wanted to make a difference in brain surgery. The only difference is more people would die on the operating table.

    How does housing become more affordable except by keeping prices down?


    If you have not read Thomas Sowell, you should. He has, without doubt, earned the right to have public intellectual on his business card.

    They forgot to mention his book The Vision of the Annointed: Self congratulation as a basis of social policy It is a seminal work in the study of Leftard feelgoodism.

  • Oh Noes You Dint!||

    "If you have not read Thomas Sowell, you should. He has, without doubt, earned the right to have public intellectual on his business card."

    Abso-fucking-lutely.

  • ||

    Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.

    Awesome line. Pretty much sums up Obama and his supporters as mental adolescents.


    It goes well with

    I would be horrified if I wanted to make a difference in brain surgery.

  • Kyle Jordan||

    "I want "Public Intellectual" on my business cards."

    Me too. It'd be a bold faced lie in my case but still cool none the less.

    And thanks to Doherty for posting this. Never heard of Thomas Sowell before but I now most definitely want to learn more about him and read more from him.

  • ||

    Never heard of Thomas Sowell before but I now most definitely want to learn more about him and read more from him.

    www.tsowell.com

  • ||

    Sowell is full of shit. The mortgage crisis was fueled by the private sector - namely Lehman, Merrill, Bear, UBS, and Countrywide (assisted by a politically motivated 1% Fed Funds rate Greenspinner succumbed to)

    Below is a chart listing the culprits and how much money they tossed away. (publicintegrity.com)




    http://www.publicintegrity.org/investigations/economic_meltdown/assets/img/Chart7fullFresh.jpg

  • Mike||

    So, once the federal government drives up the price of cars, how much do you want to bet that a new government agency "Freddie Auto" will get people to buy car loans they can't afford? Of course, then we will have to bail out the people "taken advantage of" by the evil "car loan gougers".

  • ||

    Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.

    Nice corollary to RC'z Third Iron Law.

    3. The less you know about something, the easier it is.

    The mortgage crisis was fueled by the private sector

    I thought that's what Sowell said - those people taking out mortgages they couldn't afford were all in the private sector.

    namely Lehman, Merrill, Bear, UBS, and Countrywide

    Yeah, they issued those mortgages all by themselves.

  • Invisible Finger||

    Below is a chart listing the culprits and how much money they tossed away.

    Someone had to finance the affordable housing schemes.

  • ||

    And those came from bad decisions by government and by borrowers themselves.

    No. Actually HELL no.

    Banks have one strategic fiduciary duty - Risk Analysis.

    They failed. Completely and utterly failed.

    The borrowers get no blame - or why have credit standards at all?

    The government did not regulate capital ratios or rating agencies - a failure of oversight.

    But the banking institutions get 99% of the blame and now suffer from a federal bailout for their incompetence.

    But Sowell doesn't have the balls to say such.

  • ||

    Countrywide was the largest subprime mortgage originator in the US.


    http://www.publicintegrity.org/investigations/economic_meltdown/assets/img/top25-listfull.jpg

  • Sean W. Malone||

    Brilliant analysis Shrike. Brava...

  • Sean W. Malone||

    PS... Shrike... remember this?

  • Sean W. Malone||

    Hey RC - What are all the Iron Lawz in order?

  • ||

    Fannie Mae bought only "conforming" loans (low value) by law. They had nothing to do with the failure of Lehman, Merrill, Bear and others who held their own paper.

    Look up Thornburg Mortgage (jumbo loans only) -- Bankrupt -- and from leverage and credit issues. No CRA/disadvantaged borrowers at all.

    This is my field - did Fannie get overleveraged ? Sure.

    Do I listen to redneck AM radio and the blame Fannie idiots?

    Hell No.

  • ||

    And those came from bad decisions by government and by borrowers themselves.

    No. Actually HELL no.

    Banks have one strategic fiduciary duty - Risk Analysis.

    They failed. Completely and utterly failed.

    The borrowers get no blame - or why have credit standards at all?

    The government did not regulate capital ratios or rating agencies - a failure of oversight.

    But the banking institutions get 99% of the blame and now suffer from a federal bailout for their incompetence.


    Sad. The people who actually promised to pay their mortgages are not responsible? If the mortgage broker says "you can afford this" you can bury your head in your ass because it is simply "not my fault"? Individuals have no "fiduciary duty" to pay their fucking mortgage like they swore they would do when they signed a million times at closing?

  • Tim Cavanaugh||

    I am struck by the fact that Federal Reserve policy is nationwide, and in places like Dallas the increase in housing prices was in single digits and the decrease has been in single digits. So while Fed policy undoubtedly aggravated circumstances, it can't be the fundamental cause because the defaults were so heavily concentrated. 60 percent of all defaults nationwide were in five states, and I suspect if you broke down the data even more you'd find specific regions in those five states very heavily implicated in defaults.

    Interesting point. Hypothesis: State-level credit policies helped create these anomalies. I'll volunteer the Golden State as a test case against the Lone Star State. Here are California's credit laws. Here are those of Texas. Needed: Somebody what knows about such to compare and see if the hypothesis is copascetic.

  • ||

    Sad. The people who actually promised to pay their mortgages are not responsible? If the mortgage broker says "you can afford this" you can bury your head in your ass because it is simply "not my fault"? Individuals have no "fiduciary duty" to pay their fucking mortgage like they swore they would do when they signed a million times at closing?


    When it happens three million times? Its the banks fault.

    You're damned right it is.

    You try sitting in the board room and blame the "borrower" for losing a few billion.

    You've obviously never been near a board room.

  • \"Markets Are Magical!\"||

    Is there an echo in here? It's nice to see that you guys still lack any sense of nuance. It brings back memories of childhood when life was great because everything was black and white.

    Of course, the same level of ignorance that Libertarians chide just about every non-Libertarian for, is on brilliant display in this thread. There haven't been any thorough investigations of Sowell's claims. It's called "confirmation bias."

    As usual, it merely takes someone who can tolerate you guys for more than five minutes, to show just how illogical many of your assumptions are. No wonder Libertarian tension levels are always so high. They're nervously awaiting someone to come along and drown out those gratifying echos.

    Anyway, what a life. You guys should start a commune, or sect to complete the lifestyle.

  • ||

    This is my field

    Sowell is a Ph.D of economics who teaches at Stanford. He was a student of Milton Freidman at the University of Chicago. So it is also his field, I will go with Sowell.

    Fannie Mae bought only "conforming" loans (low value) by law. They had nothing to do with the failure of Lehman, Merrill, Bear and others who held their own paper.

    Are you completely ignorant of government regulation of what "conforming" is? In actual practice? Are you unaware that the secondary, in some cases tertiary, market for these loans was mostly from Fannie? Sure, sure, the government, our government, was nowhere to be seen!

    I was a real estate appraiser from 2000 until around 2005 when my conscience told me I was a part of the problem. I dealt with a large variety of mortgage lenders and the idea that FNMA standards were set by the market is absurd. I and the lenders regularly drove a truck through their many loopholes, and yes, Countrywide was one of the worst. They did all of this with the direct consent of government.

    What part of "they wouldn't have acted this way with out the implicit guarantee that the government would bail them out" don't you get? You will find few on these pages who supported the bailout, did the guy you voted for sign them into law? Hows that workin' out for ya?

  • \"Markets Are Magical!\"||

    "Individuals have no "fiduciary duty" to pay their fucking mortgage like they swore they would do when they signed a million times at closing?"

    Of course they do. Who said that they didn't? There are penalties for defaulting. However, things change, shit happens, and life does not always follow a linear path. When you have someone filling your head with "good ideas," and they supposedly know much more about the risks involved, and whether or not YOU should be able to carry the loan, then the argument becomes increasingly muddled.

    See, nuance. Give it a shot. Stomping your feet, and getting pissed at every single person who failed to keep their home is about as far from getting to the bottom of the problem that you can get.

    Look, you twats are little more than run-of-the-mill misanthropes. Libertarianism allows you to assert that disgust in a political fashion; albeit, a cowardly one. There really is no other excuse for the piss poor intellect that is often used on these forums.

    Most of you would likely fail to make it through any kind of formal debate. You're not conditioned for it.

  • Fake MNG||

    Sowell is wrong! It is the fault of all those Republican politicians from the south who want to ban abortion and make everybody worship Jesus!

    Lets nuke the South and we will live in true Libertopia!

  • Sean W. Malone||

    "Markets are Magical"... Who exactly are you talking about?

    Considering over half this thread has been discussing a dissenting viewpoint, and honestly, it's not even that far in I guess I'm just confused.

    On the other hand, hiiiilarious moniker aside, I'd be willing to bet that there isn't a libertarian alive who thinks markets are any more "magical" than biological evolution by natural selection. Of course, being more nuanced than us teen-aged rubes around here you surely already understand the libertarian philosophy better than we do.

  • ||

    Marshall -

    On the "direct consent of the government"?

    Well said.

    Blaming FNM for massive involvement?

    NO.

    "As of the end of February 2009, Fannie and Freddie held a combined $292.1 billion in private mortgage-backed securities in their portfolios, according to monthly statements from both companies. On September 7, 2008, the government took control of the two entities."

    (publicintegrity.com)

    We could have doused out that little GSE fire with 1/4 of the TARP funds.

    The private banking sector did this - and you are willfully blind to that fact (like Sowell)

  • Tim Cavanaugh||

    Fannie Mae bought only "conforming" loans (low value) by law. They had nothing to do with the failure of Lehman, Merrill, Bear and others who held their own paper.

    What I'd still like ta know is why Fannie hiked up her conforming limit in 2008, when real estate values were falling. That was just a plain weird statement to make: $417,000 is no longer a judicious buyer's upper limit for a single family home. We need to take it above $600k, and we need to do it now because prices are falling?

  • ||

    "Individuals have no "fiduciary duty" to pay their fucking mortgage like they swore they would do when they signed a million times at closing?"

    Of course they do. Who said that they didn't?


    He did. shrike | May 20, 2009, 6:24pm |
    The borrowers get no blame

  • ||

    'Markets are Magical' --

    I endorse market OVERSIGHT and REGULATIONS.

    I know - its a fucking radical notion here. I, like Soros, abhor market fundies like I do religious fundies.

    I hope the distinction is clear.

  • Sean W. Malone||

    And... having just seen your second post, your "nuance" fails to recognize that without government intervention in the first place pushing banks and other lenders to loan to low-income individuals - exactly the types who wouldn't be able to afford these mortgages if *anything* went wrong or if the rates were adjusted even slightly - and without the explicit & implicit guarantees that the banks' risk would be mitigated by government guarantees through Fannie, Freddie, the FDIC & other institutions (you know... like giant multi-trillion dollar bailouts), those banks would not have made those loans to begin with!

    What's ironic here is how condescending you are without remotely taking into account the direct and indirect effects that policy dating back to the 30s, ramped up in the 70s and again in the late 90s has caused... Nor did you bother to even address any of Sowell's points, who, as mentioned above has some expertise in these matters... But hey. We're all a bunch of idiots.

  • Tim Cavanaugh||

    What part of "they wouldn't have acted this way with out the implicit guarantee that the government would bail them out" don't you get?

    Agree with your point, but you're way in violation of all what part of X don't you get laws. X should have two syllables or fewer.

  • ||

    We could have doused out that little GSE fire with 1/4 of the TARP funds.

    No, there was no "fire" for government to "put out".

    The private banking sector did this - and you are willfully blind to that fact (like Sowell)

    I am saying that the private sector hardly acted alone. They are not blameless, nor are they completely to blame. Sowell said the same thing.

    Even though you didn't mean it that way, I LOVE YOU! Saying that I am "like Sowell" made my day!

  • Tim Cavanaugh||

    Stomping your feet, and getting pissed at every single person who failed to keep their home is about as far from getting to the bottom of the problem that you can get.

    I doesn't speak for nobody but me and my alter egos, but I don't get pissed at every single person who fails to keep his or her home. I would consider it unjust if somebody got to keep his or her home at the expense of the original lender or any of the original lender's good-faith counterparties. The injustice would not be dramatic and I would not be moved to tears for the lender's plight unless the lender had Dick Kovacevich-level powers to draw terror, pity and catharsis from an audience.

    But strictly as a legal matter, it would be an injustice. We can chastise the lender for incautiousness, but we should hesitate before blaming victims as a matter of principle.

  • Tim Cavanaugh||

    "Even though you didn't mean it that way, I LOVE YOU!"

    I may make that my signoff in all future comments. We need more positudinousness these days.

  • ||

    Sean-

    No one forced banks to make risky loans.

    Cut the CRA crap - its been proven garbage.

  • ||

    shrike you are an idiot.

  • \"Markets Are Magical!\"||

    "Of course they do. Who said that they didn't?
    He did. shrike | May 20, 2009, 6:24pm |
    The borrowers get no blame"

    You asked if they had any fiscal duty toward those loans, and I stated that they do. Those loans are not erased when the recipient defaults. They still have a duty to pay them, and if they don't, then they face obliterated credit ratings, and higher interest rates on any future loans.

    However, it's of little use to bemoan every single person who defaulted. I don't know the situations of every single person who defaulted. What I do know is that the government, as well as lending institutions have greater responsibility when it comes to the loans that they allowed to be given out.

    To only turn the microscope on the government, and masses is scapegoating at its finest, and does very little to solve the primary issues involved in the problem. People cannot get loans unless someone approves those loans.

    Of course, you guys would make a lot more friends if your comments were more balanced. These arguments begin because you take one side of the issue, and try to pretend that the problem only existed because of a single factor. It's these tedious attempts to link every negative fiscal issue with government presence that is nauseating at best.

    But that's how people act when they believe that "Markets are magical!"

    As someone once said, Capitalism is a great economic model, but it makes a shitty religion. Your group-think is abhorred for the same reason that many outspoken religious groups' principles are abhorred. Some people simply require a lot more in the way of analysis than the kind that is generally offered up around here.

  • Sean W. Malone||

    Shrike... you dumbass.


    1. I wasn't only talking about the CRA (though on that note the CRA was certainly important, and I'll expect a citation on the "proven garbage" comments in the future)

    2. Do you honestly not understand that banks, are licensed, overseen and audited by the US government? Do you also not realize that if a president or a congress wishes banks to make more loans to low-income individuals, those banks have a powerful incentive to comply. Seriously - all you actually have to do is pay attention to how banks and other companies are being pushed around right now. Note the kinds of statements like "You'd better start regulating yourselves or government will have to step in" by Obama and such... Or translated so you can comprehend it: Do X, Y & Z, or else.

    No, politicians are too sly to be direct about how they force other people into doing what they want, instead they like to threaten audits, and revoke licenses.

    3. As I just explained those loans WEREN'T RISKY!!

    Think about it... When you walk a tight rope with a net 4 feet below you, exactly how careful are you going to be compared to with no net at all?

    4. Many banks are partly to blame as well, of course... I'd like it if none of them were so entrenched in government and far more told the government where to shove it when people like Clinton were pushing lower lending standards. I'd also like it if these same banks weren't getting special deals, special protections, were held accountable for their bad choices and not be bailed out by the US Taxpayers even though their choices were pressured by both positive & negative incentives provided by government.

    You are right in that they are *supposed* to be the experts... And there were several banks like Andy Beal's bank who did say no to the government's idiotic recommendations, took flak for it at the time and is now doing well.

    Of course... He could be doing much much better if he wasn't still competing with larger politically connected banks that got handed fat wads of US Taxpayer cash.



    So yeah... That's a long post, but shit man, your position is asinine, ill-informed and far less nuanced than the one Sowell was talking about and at the same time winds up giving corporatism a free pass. Congrats.

  • ||

    Cut the CRA crap - its been proven garbage.

    "Proven"? Are you saying that the government did not attempt to coerce lenders into making loans they would not otherwise make? Or are you saying that the regulatory pressure from the government had no effect? Either of these claims seems

  • \"Markets Are Magical!\"||

    "shrike you are an idiot."

    And so it begins. Predictable.

  • ||

    Either of these claims seems highly unlikely.

  • ||

    Federal Reserve conservative Kroszner debunks the CRA as a cause of the mortgage crisis. (Wall St Journal)

    http://blogs.wsj.com/economics/2008/12/03/feds-kroszner-defends-community-reinvestment-act/

    You guys are so predictable.

  • Sean W. Malone||

    "Markets are Magical!"

    1. Put up or shut up...
    2. An ad hominem attack is a fallacy only when you use it in place of an argument.

    Much like how I called Shrike a "dumbass", I have to assume Donzo was making a separate point.

    Shrike is clearly an idiot - see above to understand why. Though again, it'd be a little cooler of you to actually make a real point backed up by a coherent argument rather than just being the lame troll you are currently.

  • ||

    Of course, you guys would make a lot more friends if your comments were more balanced.

    Ironic much? How many straw men are you going to trot out? The only ones here who "try to pretend that the problem only existed because of a single factor" are the ones blaming ONLY the private sector.

  • Sean W. Malone||

    Shrike:
    You guys are so predictable.


    You were the one who brought up the CRA as if it was the only piece of legislation or government action that had any bearing on this. The CRA merely has the biggest and most easily identifiable public face.

  • ||

    Federal Reserve conservative Kroszner debunks the CRA

    The government "debunks" governmental responsibility?!! You don't say! It simply must be true! The government and George Soros agree?! And the only answer, of course, is more government? Now I am convinced.

  • Tim Cavanaugh||

    To only turn the microscope on the government, and masses is scapegoating at its finest, and does very little to solve the primary issues involved in the problem.

    I make it my constant devotion to be harsh, critical and personally insulting toward lenders at all times. It's hardly scapegoating to say that the masses (probably closer to 30% of the masses) and government were also among the "primary issues involved in the problem."

  • ||

    Do you honestly not understand that banks, are licensed, overseen and audited by the US government?

    Not investment banks!

    Lehman, Merrill, Bear, Morgan, etc.

    (as of 2008)

  • Tim Cavanaugh||

    Oh yeah, and: Even though you didn't mean it that way, I LOVE YOU!

  • ||

    Unregulated Lehman, Merrill, and Bear are bankrupt/insolvent and you fools can't find fault on their part?

    Willful ignorance.

  • Sean W. Malone||

    Shrike. Have you ever heard of the SEC?

    Just checking...

  • Sean W. Malone||

    Also... While on the SEC topic, are you aware of who sets leveraging rules?

    I'll give you a hint... it wasn't Lehman Bros.

  • ||

    Markets are Magical:

    It's a lot more "magical" to believe that "democracy" will somehow produce efficient resource allocation than it is to believe that free markets will.

    In the one case, we have a system that is based on incentives and self-interest. Realistic assumptions about human nature. Everyone tries to make a profit, attempts to minimize costs, and makes distributed choices about where best to spend their money.

    On the other, you have a system where a centralized government takes people's money and distributes it to functions it deems appropriate, based on how people vote.

    In the latter case, the self-interest of voters and politicians constantly corrupts the process. And yet, amazingly, people keep believing that if they just elect "good" politicians, and just vote for the "right" policies, that the "common good" will magically emerge from this process.

    Progressive understanding of how society functions:

    Step 1. Everyone votes
    Step 2. Magic
    Step 3. The Common Good

  • ||

    Yeah - the SEC requires accurate financial reporting from every single publicly traded company - and the same regs happened to bring Wall St I-banks down in 2008.

    Sure.

  • ||

    One major point that has been omitted is that starting in the early 90s, the government started mandating that FMAE and FMAC have a certain quota of low-income borrowers in the loans they purchased on the secondary market.

    The quotas started off at something like 25%, but by 2004, the government had increased the percentage to 56%. Since FMAE and FMAE were buying up around 35% of the secondary market, that increased pressure on the banks to provide those loans.

    Banks have, in fact, had permission to open branches denied based on perceived failure to live up to CRA obligations, so when FMAE and FMAC, as quasi-governmental agencies, demanded more subprime loans, they had every reason to jump to attention.

    The other problem is that someone, somewhere made it legal for banks to invest their reserve capital in the mortgage market. Not realizing that "investing in MBSes" and "loaning people money" are effectively the same thing. So they were basically lending money they weren't supposed to lend.

    My suspicion is that it was, again, the government's belief that housing is the key economic driver kicking in. Some regulator decided that pumping more money into the housing sector was a good way to stimulate growth. So they made an execption for MBSes, encouraged by the belief that housing prices never fall, so the securities must be safe.

    And then, the fed kept interest rates so low that the banks all jumped into the MBS market so they could get a return. Which caused the housing market to start exhibiting correlated behavior all over the country, which fucked up the ratings agencies' risk models, which resulted in all those subprime loans getting rated AAA. Which encouraged investors to keep jumping on them.

  • ||

    Unregulated Lehman, Merrill, and Bear are bankrupt/insolvent and you fools can't find fault on their part?

    Willful ignorance.


    I don't think any libertarians are claiming they aren't "at fault". We would, however, argue that allowing these companies to fail is ultimately better for society than bailing them out. We would argue that a "free market" necessarily entails allowing bad businesses decisions to be punished by failure. As soon as you start bailing people out, you screw up the incentive structures that guide practical investment decisions.

    Just for example, if you're an investor, and you're trying to diversify your portfolio to reduce your risk, you are going to want to invest in companies likely to be bailed out, because it reduces your downside exposure. So, as a result, irresponsible companies - borderline failures - are going to attract capital, as long as someone thinks they are "too big to fail". In other words, you're creating incentives that mean that bad decisions are going to be rewarded. A small company that is relatively healthy will be less attractive because it won't get bailed out, so there's ultimately a bigger downside risk.

  • Sean W. Malone||

    "Yeah - the SEC requires accurate financial reporting from every single publicly traded company - and the same regs happened to bring Wall St I-banks down in 2008.

    Sure."

    We're not talking about "every single publicly traded company" here Shrike. We're talking about three of the world's largest investment firms. It's also not surprising that those were the three which were allowed special leveraging positions up to 30ish:1

    Again... Lehman's board didn't just wake up one morning and go "Hey, ya know what we should do? We should try to leverage all our assets a huge amount." Government regulators set up and allowed the change, legally. The idea that you keep promoting here is that the financial market is in any way unregulated, and while that makes for good TV, and incites some good old fashioned hatin' on rich people time... It's complete nonsense (and you should know it).


    The problem is, as much as you/"Magic" are complaining that the libertarian position isn't nuanced or complex enough - you guys are the ones reducing things into a single variable without bothering to address the proximal causes (stupid borrowing decisions), the root causes (the incentive structure set up by government) and instead focusing entirely on an intermediary cause that is frankly 100% predictable given government actions over the last several years.

    So by all means dude, keep ignoring incentives as clearly, in your world, they don't matter at all. Pressure from lawmakers with the power to make or break someone's multinational, multi-billion dollar company doesn't mean aaaannnnnything.

  • ||

    Progressive understanding of how society functions:

    Step 1. Everyone votes
    Step 2. Magic
    Step 3. The Common Good


    Like the "Underwear Gnomes" on South Park. Their business model was:

    Step 1. Collect underwear.
    Step 2.
    Step 3. Profit.

  • ||

    you/"Magic" are complaining that the libertarian position isn't nuanced or complex enough

    I do not think that word means what they think it means.

    Wiktionary:
    1. A minor distinction.
    2. Subtlety or fine detail.

    IMO, neither of these people is exhibiting understanding of "minor" points, "subtlety", or "fine detail".

    The "greedy bankers" conventional wisdom is pretty much the opposite of nuance.

  • ||

    One thing that Sowell never mentioned (and apparently on one else on this board) is that if you correct for credit scores, banks are (were) more likely to dish out subprime mortgages (such as ARM's) to black and latino borrowers than they would be to whites. Again, that is CORRECTED FOR CREDIT SCORES.

    My take on the crisis is that you had a gov't saying "we want minorities owning houses" -something the gov't has no business saying- coupled with lenders saying "Fine, but we're going to gouge them because they don't know any better."

    http://washingtonindependent.com/428/race-and-the-housing-crisis

  • ||

    Trillions spent, and trillions to be spent, and so trillions and trillions are to be repaid.

    Will the country's debt become to it, what the toxic assets were to the banks? Are we jumping in a hole to save those who have fallen in the hole?

  • ||

    if you correct for credit scores, banks are (were) more likely to dish out subprime mortgages (such as ARM's) to black and latino borrowers than they would be to whites.

    Unless you consider other factors besides credit scores such as job longevity, capital assets, LTV or Loan to Value ratio, debt to income ratio's and income this statement is all but meaningless. Credit scores alone are not what determines qualifications for a loan. Since we are talking about mortgages we also have to consider the amounts financed. A lack of a down payment or only a small down payment qualified as "subprime" regardless of the credit rating of the applicant.

    lenders saying "Fine, but we're going to gouge them because they don't know any better."


    Ah, yes, the evil lender sticking it to the ignorant minority, how.....racist. So blacks and Latinos are not as smart as white people and the clever bankers tricked them all?

  • The Angry Optimist||

    Just wait, guys, only 10 years or so until we can have this debate all over again with respect to the Credit Card Companies.

    Yippee.

  • Kris||

    dj of raleigh nailed it. We're in for some fun!

  • ||

    "So blacks and Latinos are not as smart as white people and the clever bankers tricked them all?"

    The use of the word 'smart' as laid out here was never implied. Your sentence should read "So blacks and Latinos are not as nuanced in mortgage transactions as white people." - the answer is yes.


    "Ah, yes, the evil lender sticking it to the ignorant minority" Yup. You got the gist of my post correctly. Can you provide anything that refutes this? Are you saying there is no discrepancy?


    " A lack of a down payment or only a small down payment qualified as "subprime" regardless of the credit rating of the applicant."

    I'm not in the realty industry, but my understanding of what subprime means is loan products where the initial rate is low then increases later, or other "balloon" loans. Is this definition incorrect?

  • jester||

    Soy Vay, especially the Island Teriyaki is an excellent marinade for chicken. Try it at your next barbeque party.

  • ||

    I'm not in the realty industry, but my understanding of what subprime means is loan products where the initial rate is low then increases later, or other "balloon" loans. Is this definition incorrect?

    Subprime merely means that the borrower has inferior credit and hence doesn't qualify for the prime rate.

    You are talking about an adjustable rate mortgage (ARM). SOME subprime borrowers have ARMs, but the two aren't interchangable.
    Most ARMs are pegged to the prime rate, and hence vary as it fluctuates.

    The worst stuff out there though are the "interest only" loans, where the borrower isn't even paying down principle for the first couple of years. The banks were out there making interest-only loans with no down payments. So the "homeowner" (if such he can be called) has no equity in the house at all.

  • ||

    coupled with lenders saying "Fine, but we're going to gouge them because they don't know any better."

    I don't know if it really qualifies as "gouging". The kind of people who were getting loans towards the end of the housing bubble were not people who should have gotten them in any sane universe.

    You have a situation where there are these high risk borrowers, and the banks are being pushed to make loans to them on favorable terms (i.e. no down payments, low initial monthly payments, etc.) But the banks have to make a return at some point, and compensate for the high risk, so you get a situation where the banks have to hike the interest rates and the payments after a period of time, because that's the only way to make money, on average, given the deliquincy rates.

    This isn't really a plot. It's a behavior that results from the incentives the banks were given - high demand for MBS products, regulators and GSEs yelling at them to lend more money to poor people, and a scarcity of low-risk borrowers.

  • ||

    "The kind of people who were getting loans towards the end of the housing bubble were not people who should have gotten them in any sane universe. "

    Agreed, a thousand times over.

    The point I had raised in my original post is that there is a demonstrated discrepancy between the type of loan whites vs. blacks/latinos receive. Obviously this has a lot to do with credit/income. However, when cases are adjusted for credit score, the relative risk ratio for blacks/latinos getting a subprime loan was 1.8 (for the same credit score you are 1.8 times more likely to get a subprime loan if you are a person of color).

    This is the "plot" as you put it. I'm not saying there is anything that can be done to fix this; my point is that the deck is stacked, and lenders are not these angels who are beyond any blame for this mess.

  • Sean W. Malone||

    Jacob,

    Both Sowell & Walter Williams would be good resources to check on whether or not there is truly a racial discrepancy that can't be accounted for by legitimate concerns.

    I don't have it on hand, but my guess is that they would find there is no inherent racism in the banks, who, after all are just balancing their concerns of obtaining the most profit from lending with the least amount of risk. I would bet that what you'd find (corrected for more factors than just credit score) is that the people who got crappy deals were a certain combination of poor, inconsistent/unstable financially and who's credit scores were generally bad - regardless or race. It may happen to be that more blacks & hispanics fit into that category, but that certainly wouldn't be the bank's fault.

    I think Williams would argue that point at least... He has a few ideas why that might be the case however.

  • ||

    "Sowell is one of America's greatest economic thinkers and educators." You gotta be shittin' me with that intro. He's a hack.

  • robc||

    they supposedly know much more about the risks involved, and whether or not YOU should be able to carry the loan

    WTF? I know way more about the risks involved in loaning to me than the bank does.

  • robc||

    shrike,

    FED FED FED FED FED FED FED.

    If we are blaming one entity, Im blaming the Fed for the housing crisis. Easy money made the boom. It was unsustainable.

  • robc||

    The worst stuff out there though are the "interest only" loans

    Its a tough call, but the 125% loans may have been worse.

    We will loan you more than the value of the house because it will keep going up!

    Starting out underwater is a bad idea (in this particular case, I blame the banks for even thinking of offering something this idiotic).

  • ||

    I'm not in the realty industry, but my understanding of what subprime means is loan products where the initial rate is low then increases later, or other "balloon" loans. Is this definition incorrect?

    Yes and no. "Subprime" can include many different criteria. Very often, people with very good credit scores took out "sub-prime" loans. Not because this was all that was available to them, but because they choose to take an ARM (adjustable rate mortgage) or finance more than 90% of their home. Cashing out, in some instances, also put you in the "sub-prime" category.

    Your sentence should read "So blacks and Latinos are not as nuanced in mortgage transactions as white people." - the answer is yes.

    Oh, so people who are not white are not "nuanced in mortgage transactions"? Again, because of the color of their skin? This is patently absurd. A friend who was a mortgage broker I did business with was the child of Ethiopian immigrants. His father, who came here with $300 in his pocket in the '70s is a multi-millionaire, who regularly finances his 80+ rental properties. Both of these men are quite aware of "mortgage nuance" in spite of their skin color. I can assure you that the mass majority of white people don't particularly understand "mortgage nuances", either. Thank the government.

    Let me repeat, the credit score of a person is only one of many criteria when you determine eligibility for a mortgage. LTV, Loan to Value, is measurement of how much of the price of a home is being mortgaged. Sub-prime used to be anything that didn't include a 20% down payment. I believe the government (surprise) may have changed this to 10% in the past decade or so but am not certain of the percentage. Also, your debt to income ratio's are important. If you make 100k but have payment obligations of 80k per year, you are a worse risk than someone with a 40k a year income and no debt. If you have not been on your job, or at least the same industry, for a certain period of time, at least a year, I believe, then you would also be "sub-prime".

    The reason that many people took sub-prime loans is not that they couldn't qualify for anything else. They choose lower payments now, in the belief that they could refinance with a better LTV after prices went up.

  • ||

    Starting out underwater is a bad idea (in this particular case, I blame the banks for even thinking of offering something this idiotic).

    I agree that it is insane but the banks didn't act outside of government regulation on the 125% mortgages, either. And, most importantly, they did not hold a gun to a single borrower's head, not one. Every person who borrowed more than their house was worth are ALSO complicit.

  • ||

    "They did all of this with the direct consent of government."

    Just wondering if the gov't "consent" to buy/bear arms makes them accomplices to all crimes where they are used.

    I will sign a wavier for the first to shoot me though for having actually read down this far; please make it quick and use BB's......

  • AJ||

    The Free Market can never fail. How could it? It's the Free Market we're talking about here. Commies bitch about 'market failures', but these problems arise from ill defined property rights and 'public goods' e.g. air. The only solution to the Free Market is more Free Markets.

  • AJ||

    Also, it's the government intervening in the market to force Fannie and Freddie to give a specific amount of loans to 'disadvantaged' groups. This crisis is the result of liberal pursuit of 'diversity' and 'social justice'. Liberal feel-good policies.

  • ||

    "They did all of this with the direct consent of government."

    Just wondering if the gov't "consent" to buy/bear arms makes them accomplices to all crimes where they are used.


    Wow, tough question. It took me almost a nano-second to think of a response.

    By definition, gun crimes are coercive (an explicit threat of violence), the person with the gun forcing their will upon an innocent victim. Who was coerced into taking out sub-prime loans?

  • Shakes The Clown||

    Thomas Sowell is my favorite American. His books are some of the best I have ever read.

  • ||

    "By definition, gun crimes are coercive (an explicit threat of violence), the person with the gun forcing their will upon an innocent victim. Who was coerced into taking out sub-prime loans?"

    Almost correct, unless you concede that I was coerced in allowing, say semi auto weapons, instead of single shot muskets... We readily know folks were signed up for more, often much more risk than they could handle while being told by the "experts" they could. What did the experts know that the borrowers did not? [hint; it has something to do with commissions]

    While it is fun to play pin the tail on the donkey, that alone falls well short of understanding or solving the problem.

  • ||

    Almost correct, unless you concede that I was coerced in allowing, say semi auto weapons, instead of single shot muskets

    You clearly don't understand the meaning of coercion. Since there is no basis for you to decide the legality of weapons, you are not being coerced into anything. You can leave the country, or choose not to carry a weapon. Your attempt to limit my right to self-defense would be coercion, however, as it does not affect you.

    We readily know folks were signed up for more, often much more risk than they could handle while being told by the "experts" they could.

    Oh, so not being as knowledgeable about a subject as someone else is "coercion"?

    What did the experts know that the borrowers did not? [hint; it has something to do with commissions]

    So the borrower had no obligation, or even any possibility, of educating themselves, through the internet or public libraries? The greedy mortgage broker just tricked good, hard working simple people who had no personal responsibility for their own financial decisions?

    While it is fun to play pin the tail on the donkey, that alone falls well short of understanding or solving the problem.

    There is plenty of blame to go around. If you had read my posts above I place an equal share, or almost equal, on ALL parties, including the banks.

    How could you "solve or understand" a problem without identifying it?

  • Gilbert Martin||

    "Also, it's the government intervening in the market to force Fannie and Freddie to give a specific amount of loans to 'disadvantaged' groups."

    The very existence of entites such as Fannie and Freddie counts as government intervening in the market. Both of them were created by government in the first place and neither one of them would have been able to survive without having had the implicit (and now explicit) government debt guarantees that they enjoyed for a great many years.

  • mark||

    I'd have to disagree with Sowell about the Fed. They lend out the money to Wall Street pretty much directly, and for next to nothing in interest. At some point in the housing boom, Greenspan should have asked, "where is all this money going?" And forgive me for magical thinking, but in a free market, someone probably would have asked that question.

  • ||

    "A friend who was a mortgage broker I did business with was the child of Ethiopian immigrants. His father, who came here with $300 in his pocket in the '70s is a multi-millionaire, who regularly finances his 80+ rental properties."

    Come on, you mean to tell me this anecdote respresents all, or even a plurality, or blacks and latinos? I have nothing against blacks/latinos (I'm asian), but you're discounting the fact they're getting a bum deal.


    The idea is that more often than not, blacks and latinos are pushed toward loan products that the same white buyers are not. I will grant you that you know a $hitload more about the mortgage process than I do, but you still can't seem to explain the discrepancy I brought up and you think my idea (prejudice) is stupid. Fine.

  • g4m3th30ry||

    Wow jacob - you honestly don't see how racist it is to say certain races are too stupid (or not nuanced enough) to understand their financial conditions?

    I bought my first house before I was able to drink - I was approved for a loan of 150K that I knew I couldn't pay. Bought a house for 105K and paid easily.

    & it took very little thought on my part... let's see I make X and the payment is Y, that leaves Z. Can I live on Z?

  • g4m3th30ry||

    able to drink legally that is...

  • B||

    "Do I listen to redneck AM radio and the blame Fannie idiots?

    Hell No"

    Ah, yet another total fucking douchebag who insists that anyone who disagrees with him must be a braindead hick "dittohead" incapable of thinking for himself. Fucking hilarious that you actually seem to believe you are more intelligent and have a better grasp of economics than Sowell. I would say you are an egotistical prick, but that would be an understatement akin to calling the planet Jupiter big.

  • Sean W. Malone||

    Re: B

    *ZING!*

    And yeah... One of the main reasons I will likely live in an apartment for a while is because I too am capable of doing the simple arithmetic required of g4m3th30ry's equation:

    Money coming in: X
    House payment: Y
    Other expenses: Z

    X-Y < Z, Not even a little bit
    X-Y = Z, Probably not
    X-Y > Z, Maybe
    X-Y > Zx2, Yes

    I mean... You can get more detailed if you'd like - figuring out what the long-term costs of house A vs. house B would be, the expected equity and interest and all that... But if the first bit doesn't work out right, it's just going to be a "no" no matter what.

    I guess some people think that that math is impossible for some people?

  • ||

    The idea is that more often than not, blacks and latinos are pushed toward loan products that the same white buyers are not.

    you still can't seem to explain the discrepancy I brought up and you think my idea (prejudice) is stupid.


    I am merely pointing out to you that racial data compared to credit scores alone is meaningless, and I gave you list of reasons why. It isn't that I am denying no one has ever been racially discriminated against in the lending process. What I am saying is that there is NO evidence that minorities were "targeted" with crappy loans. The Washington Post probably knows better, but have an agenda, of course. Even if they were, it would still be their choice to take them or not. Offering to sell really expensive mag wheels in a minority neighbor might mean that they have been racially targeted but it remains the choice, or not, of the individual to purchase them.

    Are you really convinced that there is some secret cabal of white guys trying to give minorities shitty loans? Really? That is how it sounds.

  • ||

    Last year Fannie and Freddie held or controlled more than half of all outstanding mortgages. They were overseen by a Congressional committee whose members took money from Fannie and Freddie, and these same members had repeatedly demanded that Fann/Fred loosen their loan requirements in line with the Community Reinvestment Act.

    Now, hands up, how many people think Lehman et al would have gone whole hog on subprime without both the market signal from Congress to issue dodgy loans, as well as the implicit guarantee that the government would back this debt?

    I think everyone would have to admit that the government had at least some responsibility here. Now, how many of the responsible politicians -- Frank, Dodd et al -- have been stripped of the power to do further damage on their respective committees? Have they even been thwarted from having a further role in financial policy?

    No to both.

  • Armchair Economist||

    reason: What do crisis like this, and public reaction, say about general public understanding of economics?

    Sowell: I think in the U.S. and in most of the world the public understanding of economics is abysmal. But it's one thing not to understand something. I don't understand brain surgery. It's another to want to form policies on things on which you are ignorant.


    So it's the public's fault that we don't understand the soothsaying economists? Hmm, listen to all the prestigious economists that get interviewed on Bloomberg for just a few hours and they will each offer completely different interpretations of the current events. I cannot think of any other profession where the experts can agree on so very little. At least you don't hear brain surgeons arguing on where the brain even is and whether it's in the process of contracting, dis-inflating, or stagnating. No offense, but despite your obvious collective intelligence, your profession as a whole sounds much more like a bunch of babbling philosophers than scientists or doctors.

  • ||

    LOL, the "Big Bust" is more like it! LOL

    RT
    www.real-anonymity.pro.tc

  • ||

    Why isn't anyone questioning the constitutionality of the Federal Reserve Act of 1913 and the income tax that was passed the same year to guarantee perpetual interest income to the Fed on ever increasing national debt? Can elected representatives legitimately obligate taxpayers beyond the elected officials' terms? This taxpayer thinks not.

    The Constitution gave control of the money supply to Congress, and Congress had no authority to hand that power over to the Fed. It has created a Ponzi dollar that needs to inflate constantly or collapse. The Federal Reserve Act and the income tax placed Congress in the debt-creatiion business, while the Fed owns nothing but controls everything by lending everyone's money to everyone else and collecting enormous unearned interest. Abolish the Fed much of our debt would vanish.

    We have created a debt-backed economy, with taxpayers as perpetual economic slaves. The amount of bad debt has only begun to become evident. No one is looking at the big picture, the enormity of the debt problem, including defaulting student loans and auto loans, as well as the credit card debt. You don't get value for your money with interest payments, but the Fed does. Taxpayers have merely been following government's bad example, encouraged into more debt than they can afford to feed the Fed and the burgeoning federal government.

    To obligate unborn taxpayers to debt is a worst-case scenario of taxation without representation. The American Revolution was fought over less.

  • Scarpe Nike Italia||

    is good

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