Economics

The Truth About Fannie and Freddie's Role in the Housing Crisis

Separating economic myth from economic fact

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Editor's Note: Reason columnist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Myth 1: The government-sponsored housing finance companies Fannie Mae and Freddie Mac had nothing to do with the housing crisis. They were simply innocent bystanders caught in the crossfire. Economist and New York Times columnist Paul Krugman, for instance, has argued that Fannie and Freddie's role in the housing market was insignificant between 2004 and 2006 because "they pulled back sharply after 2003, just when housing really got crazy." According to Krugman, Fannie and Freddie "largely faded from the scene during the height of the housing bubble."

Fact 1: Fannie and Freddie contributed to the housing crisis by making it easier for more people to take out loans for houses they could not afford. Beginning in 2000, Fannie and Freddie took on loans with low FICO scores, loans with low down payments, and loans with little or no documentation.

The federal government's role in the housing market goes back at least to 1938, but that role changed fundamentally in the 1990s when the government made a push to increase homeownership in the United States. At that time, the federal government pursued several policies that were meant to encourage banks to lend money to lower income earners and to give incentives to low income earners to buy houses. The result, as we now know, was a gigantic amount of subprime mortgages at a time when house prices were starting to go down.

In 2010, Edward Pinto, a resident fellow at the American Enterprise Institute who has served as chief credit officer at Fannie Mae, issued a memorandum on the number of subprime and other high-risk mortgages in the financial system immediately before the financial crisis. In that memorandum, Pinto recorded that he had found over 25 million subprime mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million total mortgages in the United States, it means that as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices stopped rising, as you can see in the chart below.

Freddie and Fannie were active players in this market. 

For instance, as George Mason University economist Russ Roberts explains in his paper "Gambling with Other People's Money":

Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS [mortgage-backed securities] sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, MD-based publisher that covers the home loan industry.

In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.

In addition, lawmakers in both parties enacted policies directed at increasing home ownership rates, resulting in lower mortgage underwriting standards for Fannie and Freddie. Roberts notes that from 2000 on, Fannie and Freddie bought loans with low FICO scores, loans with very low down payments, and loans with little or no documentation. Contrary to Paul Krugman's assertions, Fannie and Freddie did not "fade away" or "pull back sharply" between 2004 and 2006.

As the following chart from Roberts' study shows, during that same time Government Sponsored Enterprises (GSEs) bought near-record numbers of mortgages, including an ever-growing number of mortgages with low down payments.

Moreover, as the chart below shows, while private players bought many more subprime loans than Freddie and Fannie, GSEs purchased hundreds of billions of dollars worth of subprime mortgage-backed securities (MBS) from private issuers, holding these securities as investments.

The bottom line is that while Fannie and Freddie weren't the only factor leading to the financial crisis, they played an important role in pushing up the demand for housing at the low end of the market, especially between 1998 and 2003. That in turn made subprime loans increasingly attractive to other financial institutions as housing prices rose steadily.

Myth 2: Fannie and Freddie's role in the housing market increased homeownership, especially for first-time buyers and lower income earners.  

Fact 2: The small increase in homeownership rates were temporary and artificial, driven by unsustainable incentives. In the best case scenario, Fannie and Freddie may have increased the homeownership rate from 63 percent to 69 percent, but the rate has now fallen back to 66 percent. Moreover, Fannie and Freddie did not make housing more affordable and even priced many first-time buyers out of the market.

When it was created in 1938 Fannie Mae's mission was to stabilize the Great Depression's battered home mortgage market by focusing on first-time homebuyers.

From 1940 to 1965, homeownership expanded from 44 to 63 percent. It's debatable whether this increase in homeownership was good, bad, or even if it was the product of Fannie's actions at all.  

However, it is interesting to observe the role that government support has played in Fannie and Freddie's actions. While Fannie and Freddie enjoy access to capital from the public equity market, they also benefit from exclusive privileges including a line of credit with the government, no oversight by the Securities and Exchange Commission, and a government guarantee that gives these entities a lower cost of funds than their private sector rivals.

As business journalist Bill Bonner explains in The Christian Science Monitor:

Armed with these advantages, GSEs increased their book of business from $13 billion in 1965 to $1 trillion by 1990 and $3.4 trillion in 2003. Once the great real estate bubble had concluded by year-end 2007, Freddie and Fannie combined had purchased $4.9 trillion of mortgages, repackaging 70 percent of these into guaranteed securities for the secondary market.

This (along with Ginnie Mae) gave the GSEs roughly half of the $11 trillion mortgage market, but their share of new originations has become near dominant.

Many sources peg this at 70 percent, but an interesting take from TIME magazine business and economics columnist Justin Fox takes into account the impact of refinancing into GSE-backed loans. Juxtaposing GSE total volume ($ 539 billion) against new originations ($313 billion), GSE market share was 172 percent for the first quarter of 2008.

As the chart below shows, while homeownership topped out at 69 percent in 2004 and stood at 66 percent in 2010, it hasn't really increased from its 63 percent level nearly 50 years ago when the government restructured the agencies to promote their growth.

Unfortunately, we also know that many of the government's policies ended up increasing housing prices dramatically by increasing demand, thus pricing many first-time buyers out of the market.

Myth 3: Fannie and Freddie are essential for maintaining a working mortgage market. Without them, interest rates will increase and homeownership will plummet as more people are priced out of the housing market.

Fact 3: Interest rates are likely to go up. Yet it is not clear what impact this will have on homeownership rates. In the 1980s, interest rates on the average 30-year mortgage were significantly higher, yet homeownership rates were almost the same as they are today. Besides, the alternative to homeownership is not living on the street.

President Barack Obama has proposed allowing Fannie and Freddie to slowly fade away. This would certainly have consequences. For one thing, without federal backing, a 30-year mortgage with a 5 percent interest rate is unlikely to be replicated by any bank. In addition to charging higher interest rates, banks would also likely require a larger down payment.

However, it is wrong to assume this will mean a severe decline in homeownership. First, as the following chart shows, in the last 30 years, interest paid by homeowners has fluctuated quite dramatically while the rate of homeownership has remained steady.

In 1981, for example, interest rates were at an all-time high of 16.6 percent and the homeownership rate was 65.4 percent. In 2009, interest rates were at a nearly record low of 5 percent but homeownership held steady at 67.4 percent. The last time we had that homeownership rate was in 2000, and at that point the interest rate was 8 percent.

Furthermore, low down payments are a relatively recent phenomenon. In the 1980s and most of the 1990s, down payments had to be roughly 20 percent of the value of your home.

Finally, higher interest rates and higher down payments are not necessarily a bad thing for homebuyers. Both will incentivize new owners to keep and maintain their new property. If we have learned anything in the last decade, it's that redefining the American dream to mean homeownership for everyone is a very risky endeavor. Besides, the alternative to homeownership is not life on the streets, it is renting.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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95 responses to “The Truth About Fannie and Freddie's Role in the Housing Crisis

  1. Here’s a link to an article by David Burge, also destroying a Krugman argument.

    http://iowahawk.typepad.com/io…..ers-1.html

    Paul Krugman’s writing seems to involve a three step process:

    1. Formulate conclusion in line with Progresive idealogy.
    2. Search for evidence that supports conclusion.
    3. If something comes up quickly, cite it and discontinue research/thought. Otherwise, cite nothing. QED.

    1. See recent column about how the increases in food prices were caused by global warming.

      1. The biggest problem with Krugnuts isn’t that he’s a fucking disingenuous loon, but that for every person who knows he’s a disingenuous loon, there are at least 10 others who would gladly wait in line to have the opportunity to stroke his cock.

        1. You’re an idiot who probably thinks that insufferable retard Walter Williams is a real economist.

          This article leaves out the fact that GSE conforming loan guidelines limited purchases to $330,000.

          It was the higher cost mortgages in growth areas (NV, CA, FL, AZ) that were private market that blew up the Wall Street system – not FNM/FRE.

          Were the GSE’s too highly levered? Of course – thus their receivership.

          It wasn’t the CRA or FNM/FRE like Rush (King of the Rednecks) and his step n’ fetch black minstrel say.

          That’s why rednecks don’t win Nobels – and you can’t understand Econ.

          1. RACIST!!!

          2. So, assuming government market manipulation was limited to property under 330k (it wasn’t)- higher demand for properties under $330,000.00 wouldn’t contribute to pushing property values above that amount, and accelerate the market for more expensive property?

            Did you even read the fucking article? Do you even understand economics? Because your ignorance demonstrates that you do not.

            1. I read the article you asswipe.

              FNM/FRE default rates were in the 2% range in 2009 (last year I have data) – while the private market hit 20% where WaMu and others coerced borrowers into Option ARMs on non-conforming loans.

              The private market FAILED while FNM/FRE were trying to give them a get-out-of-jail card.

              The GSEs should be shut down for sure but I put blame where its due – the idiocy of the free market – just like tulips and tech stock in 1999.

              1. You didn’t answer my question. And you are conveniently refusing to acknowledge the many government home ownership incentives other than the finance companies, and the loan mandates or threats of loan mandates, and the effect of bailouts on the recipients’ determination of risk.

                1. There were no “loan mandates” you jack-off redneck.

                  No bank was ever required to lower risk standards – that is a myth perpetuated by Rush (King of the Rednecks) Limbaugh.

                  Some banks, like US Bank and PNC had negligible losses – others that pumped no-doc loans got killed.

                  It was a market failure – you methed out hick.

                  1. Banks were not evaluated as to whether they offer enough credit? That looks a lot like a regulation to me, and the foundation is definitely there for more intervention.

                    And I don’t agree that a correction of stupidity is a market failure, it is simply the market.

              2. WaMu and others coerced borrowers into Option ARMs on non-conforming loans.

                “THOSE HOMEOWNERS WERE COMPELLED AT GUNPOINT TO BUY HOMES THEY COULDN’T AFFORD! THE MORTGAGE LENDER CRASHED INTO THEIR APARTMENT AND FORCIBLY MANIPULATED THEIR HAND TO SIGN THE LOAN!”

              3. That’s right, I issued no affordable housing goals forcing Fannie Mae and Freddie Mac to purchase high risk loans that banks for many decades would never even consider originating. Keep up the good work, shrike.

          3. Wrong. Fannie and Freddie were insuring toxic mortgages deep into 2006, you have obviously not studied the data. FA Hayek, Milton Friedman and recently Prescot won Nobels so not sure what your point is.

        2. STROKE….you mean chock!

      2. Yes, along with heavy snow.

  2. The idea of government promoting home ownership started when they noticed that people who owned homes also held steady jobs, had stabile families, saved money, had a low likelihood of criminality, etc. And in true bureaucrat fashion they confused cause and effect and decided that homeownership leads to responsible behavior, rather than responsible behavior leading to home ownership.

    1. This!

    2. And, I’d like to add, it was mostly promoted by the Right in the 90s, in response to the Left’s claim that absentee landlords were causing all the problems in the inner-city.

      1. The Right should have responded that inner-city absentee landlordism is the result of rent control.

    3. Exactly right, WTF. I remember Kemp’s organization being a huge promoter of what became known as the ‘opportunity society.’

      1. Yes, the “If inner city blacks get homes they will become sober, responsible, middle class American taxpayers, and will thus vote Republican” hypothesis

        Permanent Republican majorities!!!

  3. The pertinent question for Fannie and Freddie defenders is: If they know how to securitize home loans, why is it necessary to give them billions, and billions, and billions of dollars?
    (answer – its not necessary, but than the back door backout of the idiots at the major financial institutions would be EVEN more obvious – and we can’t have that. Because in a crony capitablist system, the last thing you want is a profit and LOSS system)

  4. La la la la la la… I can’t hear you… la la la la la…

    1. I SAID, “YOU’RE GOING TO PRISON!”

      1. Better make that a women’s prison.

      2. Barney Frank would be happy as a pig in prison, think of all the long hot showers!

        He and Chris Dodd need to share a cell for the rest of their pitiful lives.

    2. You’ve got my cock in your ear.

  5. I bought my first house with less than 20% down (in 1997) but, I had to purchase private mortgage insurance until I had 20% equity in the house. Is this not required anymore?

    It seems the additional cost would deter people who cannot afford to buy a house, it insulates the bank from risk and, it sure as hell provided me with incentive to get to 20% equity as quickly as I could.

    1. They got around that by financing the remaining 20% at another bank as an unsecured loan at a high rate. When loans went into default, those little unsecured loans got crushed. Those were the first tranches to eat shit.

    2. I’m going to say it’s not. I purchased my house in September 2008 with nothing down at all (we caught the Ameridream program on the last possible day, so the seller paid the down payment for us in return for a higher mortgage). We didn’t have to buy any mortgage insurance.

    3. Definitely is now at least. Just signed mortgage paperwork two days ago. 5% down. Anything less then 30% requires mortgage insurance. its like an extra 180 a month on a 300K house. Still the smart move given only 5% interest rate on mortgage.

      1. 20% that is

    4. Quality lenders still require this as mine did in 1999 when I bought my first house.

      As soon as I could (~2002), I refinanced to get the 20% equity and get rid of the PMI.

    5. I bought my first house using money I made working back alleys on Fire Island.

  6. Does your little video have an Oscar?
    http://www.imdb.com/title/tt1645089/
    Then your arguement is invalid – it was wall street guys doing corporashuny stuff.
    Thus says the academy of fuckwits.

  7. Fannie and Freddie contributed to the housing crisis by making it easier for more people to take out loans for houses they could not afford. Beginning in 2000, Fannie and Freddie took on loans with low FICO scores, loans with low down payments, and loans with little or no documentation.

    BULLSHIT!!!

    Replace Housing crisis with financial crisis and then you will be correct.

    The housing bubble was regional and it was a price bubble not an inventory bubble.

    What caused the housing bubble was Growth management regulations that constrained the supply of homes and land. This supply constraint drove up prices.

    In areas where there was little or no growth management there was no price bubble.

    Could Fannie and Freddy throwing money out of helicopters for home loans have caused an inventory bubble if there was no growth management regulations constraining supply?

    That is possible…but i suspect an inventory bubble would never have gotten as big as the price bubble we did get…and it would have burst far sooner.

    1. I suspect an inventory bubble would never have gotten as big as the price bubble we did get…and it would have burst far sooner.

      The reason being that an inventory bubble would have sent signals to the market that something was wrong faster then the pricing bubble.

      1000s of vacant homes that were not selling would have told builders and developers to stop building while the price bubble encouraged builders developers to keep building.

      1. I’m calling bullshit on your BULLSHIT.

        The fact is both of you are partially correct. The growth management regulations did have something to do with the initial rise in house prices, but even if they did the resultant increase in house prices does not have to be “softened” by F&F taking on riskier loans. F&F changed their approach at the request of lobbyists (re: public employee pension plans who wanted higher yield than F&F were providing) which required them to buy riskier loans, causing further price increases in houses. F&F’s change in policy enabled a wave of people buying second homes which further strained supply.

        1. F&F’s change in policy enabled a wave of people buying second homes which further strained supply.

          The only problem is that regions/states that did not have growth management did not have pricing bubbles and they did have accelerated growth. Those same regions had the same access to free money from Fannie and Freddy that the rest of the country did.

          If Freddy and Fannie were the cause then why didn’t those regions/states have the same price bubble?

          1. Las Vegas metro area; Phoenix metro area? To my knowledge, neither of these places had artificially restricted supply due to GMR. They were entitling land left and right and had no shortage of developable areas. The homes were being bought up in the boatloads by idiots who were taking out 100%/no money down loans on multiple properties at a time as investments.

            1. Las Vagas is in Nevada where the US government owns all the land. It is only by act of congress that vacant land is opened up for development. You are correct that there is no growth management in Vagas…but there is a government control of supply which has the same characteristics that growth management has.

              If you look at Arizona prices before during and after the bubble you will see it is fundamentally different that say California or Massachusetts of Portland or Seattle.

              The GMA region home price graphs show a quick run up from 2004 to 2007ish then a crash after wards. A distinct bubble. Arizona (and Phoenix if you want to look at it alone) show a slow inflation driven line that is not out of historic norms then after the start of the recession (2008sh) you see a slight but definite drop in prices corresponding to the recession driven drop in demand.

              I would also guess that Phoenix did have an inventory bubble. I suspect that if looking at home sales you will see a graph similar to the home price graphs of GMA regions ie a rise starting in 2004 a peek at 2007 and a drop after wards.

              1. Thus my belief that the original public land survey and associated controls on settlement were partly responsible to damning the whole fucking country to the spatial problems it has today.

                The federal government should never have been given the power to own land that no one owns and grant control of it to parties that never even fucking settled on it.

            2. I think one factor in regard to Las Vegas and Phoenix area growth was that development was running up against Indian Reservations in places, a little like California land is squeezed between mountains on one side and the ocean on the other. Less land to build on means higher prices.

          2. Because in those areas where there was adequate inventory, pricing inflation (the bubble) did not occur, and buyers could still qualify for loans at traditional loan to value ratios. These could in turn be sold in the traditional secondary market.

            In regions where the pricing bubble ran rampant (and inventory was squeezed), F&F provided the grease to pump it up further by opening up securitization conduits for thousands of liar loans and app-only loans with little or no equity requirement — loans that traditional secondary funders (in more rational markets) would not touch.

            This rampage was fed further by the circular reasoning that went: I don’t care if I’m over my head, prices will always keep going up and I can bail out any time and still make a gain on sale. F&F fed this fantasy by opening their gaping maws and taking in every piece of crap under-qualified deal that came through the door (or the conduit).

            1. I don’t know if you are disagreeing with me or agreeing with me and simply extending what i said.

              either way i think what you wrote is accurate and does not disagree with my points.

              Bubbles in general follow your explanation and it is an accurate description of how bubbles work.

              “Sure its expensive and I can’t afford it…but it will be worth more in a few months just like it is worth more then today then it was a few months ago.”

          3. BTW, it’s time to re-read Extraordinary Popular Delusions and the Madness of Crowds and be reminded how easily and quickly fads and bank runs and housing bubbles can happen.

    2. “What caused the housing bubble was Growth management regulations that constrained the supply of homes and land. This supply constraint drove up prices.”

      It was a combination of things. Low interest rates and tax credits drive up principals because people buy the house they can afford based on monthly budgets, not principals. Growth management may have kept supplies down, but incentivizing ownership gave people more money to play with to bid up the principals without raising month to month/year to year costs in proportion.

      1. My point is that the housing bubble without growth management would have been an inventory bubble…and it would have had a different character then the regional price bubble we did have.

        In fact it would have been far less severe and would have burst far sooner.

        as i stated above:

        The reason being that an inventory bubble would have sent signals to the market that something was wrong faster then the pricing bubble.

        1000s of vacant homes that were not selling would have told builders and developers to stop building while the price bubble encouraged builders developers to keep building.

  8. If you cannot save up 20% of the price of a house, you cannot afford to buy that house.

    1. Incorrect. My wife and I could not afford to save up the 20% down needed, but we can easily make our mortgage payments every month and are in no danger of defaulting (unless we both lose our jobs). We bought 3 years ago and could sell now with a (very slight) profit if we needed to.

      So, 1) we could not afford the down payment, but 2) we can afford this house.

      1. Your one of very few who can say and do that then.

        The 20% was more of a measure of how you handle your money, ie a way for the bank to see that your responsible.

        1. 20%, more than anything is about the amount where if the buyer walks away, the lender can get out from under the house without taking a hit themselves.

          This is probably not necessarily true in a lot of the insane markets today.

      2. Making mortgage payments is not the same as buying a house. If you are not able to do pay off the mortgage within some reasonable amount of time, you are essentially just renting the house via a mortgage.

        1. So 20% down and paying off the house in 30 years is “Buying the House”. 0% down and paying off the house in 30 years is “just renting via Mortgage”. I think I got it now. I’ll call the bank next time I have a plumbing problem. They’re going to shit when they find out I forgot to drain the outside faucet before the water froze in it.

          1. How could you possibly be able to pay back 100% of the house’s price in 30 years, but not be able to save up 20% of the house’s price? You are not making sense to me.

            1. MATH is MATH. We bought quickly after college, not leaving the time it would have taken to collect a 20% down payment. They offered 100% financing so we jumped in. We could have certainly saved up that kind of money over time, however, instead of wasting money paying REAL RENT throughout those years, we decided to start paying off a house instead. I tell it time & time again that one size NEVER fits all. 20% down is probably a good yardstick for most, but how fucking retarded do you have to be to not be able to weigh the pros & cons of your own situation? Do the math & come up with what best fits your life. In summary, we purchased early in our career.

              1. instead of wasting money paying REAL RENT throughout those years, we decided to start paying off a house instead

                Paying off an interest-bearing debt for 3 decades=not wasting money. Got it.

                1. I see now. Paying rent for 30 years is better than purchasing an asset which may be worth about a much as you spent on it 3 decades from now including interest paid.

                  Holy shit I should lease my cars as well! Never own anything, just keep giving money to owners of assets. I should feel guilty every time I pay off an asset & no longer have monthly payments when I could be giving that money to someone else forever. Hey, you looking for a place to rent? I gotta nice cozy little bedroom for ya. Think about it, you can help payoff my car a little faster.

                  While I may lose some money on a 30 year loan, I’m certainly guaranteed to lose ALL of my money renting instead.

        2. No you’re not. If they stay for a few more years they’ll have equity and, when they sell, they’re going to get that money back. That’s not renting.

          1. ^^ Bingo. We already have some equity, and in another 3 years or so, we’ll have enough to make enough profit on the sale to have a decent (though still not 20%) downpayment on a different home if we so choose.

            1. Profit on a personal residence? Funny. Treat your house like a business and add up all the expenses incurred during ownership and you will, most likley, have a loss. Personal home ownership is not an investment. A personal residence is a place to live and to enjoy a better quality of life over renting. It is an expense, you know, kind of like food. Man, I bet you think Social Security is not an entltlement, but an investment which generates a profit.

      3. Same here Jim. I could not afford a $70K down payment on my house, but I can certainly afford the payments, while paying off my truck in 3 years, her car in 4, on schedule to pay off my car in less than 4 and make double payments on my boat. Yes, my savings are still increasing and contribute heavily to my 401K.

        The problem is that many folks can’t do simplistic math & are thus incapable of managing their money on a monthly basis. You just have to know how much you make & how much shit REALISTICALLY costs. Aside from anything catastrophic happening, good money managers should be able to purchases houses with very little money down & could still be less of a risk than some retard couple who are incapable of spending within their means but happens to have 20% down that was given to them by their rich well meaning parents.

        It would have taken several more years of working to save up that $70k, which by that time would have had me buying at the height of the housing bubble. So relieved that 100% mortgage worked out!

        1. I forgot a couple commas in my 2nd paragraph. Here they are.

          , ,

          1. Just in time, too. I was getting pretty pissed about being gypped those commas.

        2. Same here. I usually get vehicles paid off within a few years, while increasing savings. Since I know I’m responsible, and my credit score reflects that, I didn’t feel like waiting 8 years to save up a downpayment while also paying to rent. And I’ve been successful in this particular venture.

      4. Me too. Put 5% down and am good to go until I get fired. Would probably about break even at this point. Might be in the red after maintenance and commissions factored in. But not terribly. Like many I suspect, I hurried to buy for fear of being priced out by everyone’s favorite “increasing home values.”. Probably should have waited, but what’s done is done.

        It is ridiculous that no one seems to get that the best way to increase home ownership long-term is to decrease prices. That also means quit interferring and adding stimulants that create artificial shortages and therefore artificial higher prices.

  9. I do not understand that 45% > 45% pie chart.

    1. The missing 10% is profits to corrupt wallstreet financiers. Those graphs are supposed to be kept secret; guess now we have to kill you for noticing.

    2. I think it’s perfectly clear.

  10. One thing I haven’t seen is an analysis of how higher interest rates and down payment requirements would impact asking prices. Presumably, they would have a downward pull on price.

    If you think of the cost of housing as a multiplier of average incomes, you can see how the recent bubble was indeed aberrational. Instead of average buyers paying, say, two or three times their annual income to buy a house, they had to pay four or five times.

    There is only so much income available to put towards a house. If the interest rate and down payment are low, the asking price can be higher. But if the former are going up, presumably the price would have to come down in response.

    Also, a lot of people like Krugman talk about the “collapse in consumer demand” occurring right now. I don’t see much evidence that is happening (except for in housing).

    But more to the point, if you take into account that for the last decade (?), everyone buying a house had to devote more of their income to their house than any previous generation – then you would expect to see an offset somewhere else.

    The vast majority of buyers who took on mortgages reflecting aberrationally high prices are still living in their homes and paying their mortgages. For as long as that remains the case, there is going to be less demand elsewhere (i.e., for flat screen tvs and whatever else Krugman thinks people “should” be buying).

    1. Instead of average buyers paying, say, two or three times their annual income to buy a house, they had to pay four or five times.

      Had to? Or chose to?

      Make no mistake, the lender (or more likely the sucker buy the MBS) made the exact same bad decision. Both sides need to take their losses and move on. Trying to pick just one loser in the transaction is what is prolonging the downturn.

      1. I just meant “had to” if they wanted to own a house. Ultimately, the buyers chose whether to incur that burden. My point was simply that our parents had available to them an inventory of houses that would only cost them one to three times their annual incomes. For many buyers who first bought homes in the last decade, there were few such options available.

        I wasn’t implying any sort of pity for buyers. Or “trying to pick just one loser.” I wasn’t making any kind of point about that at all.

        There’s plenty of blame to go around in all of this and there are losers in every category.

        1. There’s plenty of blame to go around in all of this and there are losers in every category.

          I agree there is plenty of blame.

          But the entirety of the blame for the financial crisis belongs in the hands of the federal government.

          We can bitch and moan about poor poeple buying homes they cannot afford until the cows come home…but that in no way changes the fact that it was the federal government who created the perverse incentives and it was the federal government that dumped 6 trillion dollars into loans and loan guarantees through Fannie and Freddy.

          People are dumb and poeple always strive for a better life. Normally the market sends signals telling poeple what do to do get what they want. If the federal government changes those signals so they point in the wrong direction poeple will follow those signals.

          People were dumb before the government fucked it up they were dumb while the government fucked it up and they will continue to be dumb in the future.

          Piling blame on them is as pointless and idiotic as piling blame on gravity or the color of grass.

          1. The entirety of the blame goes to the federal government?

            Tell me how Lehman, Bear, and Merrill died because of the federal government?

            Remember, they were entirely UNREGULATED!!! (x for the SEC that any company has).

            1. 1. Yes.
              2. The central bank.
              3. No, they weren’t.

            2. And don’t forget, there are regulations against fraud, but the feds have ignored enforcement against both the fraudulent bankers and the fraudulent debtors. Probably because the debtors are “ordinary people” who happened to lie on their loan applications, and it would be politically inconvenient to punish them.

              1. You are truly a fucking idiot.

                My solace is that Cro-Magnon Libertarians like yourself can’t find 1% of the vote with a flashlight and your Larry Craig buttcheeks wide open for sale to the highest bidder.

                1. “screw you guys, I’m going home.”

                  1. You must have hit her pretty close to the mark to get her all riled up like that, huh, kid?

                2. With your ridiculous comments I am wondering if you are a parody of a liberal

            3. Shrike, it just occured to me, maybe failure to predict earthquakes is what *causes* earthquakes?!?!

              1. Shrike, I’m still waiting for it…

            4. who cares if they were unregulated, maybe if barney frank and his counter parts did not incourage the giving of bad loans this would have never happened they were warned to stop and he just continued pushing for more bad loans, they knew what they were doing and know using it to make a bigger government because it makes people believe the only way economy will work is with their help

        2. Yes, pity is not allowed on this website. 🙂

          1. pity doesn’t fix anything.

            it is good mental masturbation for people who like to think of themselves as caring though.

            this is not to say that pity is never warranted, but wtf does it have to do with apportioning blame for the financial downturn?

  11. And don’t forget, there are regulations against fraud, but the feds have ignored enforcement against both the fraudulent bankers and the fraudulent debtors.

  12. When will the people learn that government stuffs up everything it touches. It might have a big heart but it has a shit brain.

  13. Whoa…since when did you guys start doing game commentary?

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