Calculated Risk commentary: Subprime Thinking
from Wednesday morning
re-posted with permission from the author
When I started this blog in January 2005, one of my goals was to alert people to the housing bubble, and to discuss the possible consequences of the then approaching housing bust. Residential investment has historical been one of the best leading indicators for the economy, and I was deeply concerned a major housing bust – both in terms of activity and house prices – would take the economy into recession.
There were others sounding the alarm – Robert Shiller, Tom Lawler, Dean Baker, Doris “Tanta” Dungey, and others. There was discussion of loose lending standards (including, but not limited to subprime), lack of regulatory supervision, agency problems with the originate-to-distribute model, and more. And although we might have disagreed on the exact causes of the bubble, as far as I know none of the people who are commonly credited with identifying the bubble, and predicted the bust, blamed it primarily on Fannie and Freddie or the Community Reinvestment Act (CRA).
When the Financial Crisis Inquiry Commission was announced, I was skeptical if they’d be willing to address the willful lack of regulatory supervision, and the role of Wall Street in the crisis. This morning, Shahien Nasiripour at the HuffPo wrote: Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis
The Republicans, led by the commission’s vice chairman, former congressman and chair of the House Ways and Means Committee Bill Thomas, will likely focus their report on the explosive growth of subprime mortgages and the heavy role played by the federal government in pushing mortgage giants Fannie Mae and Freddie Mac to purchase and insure them. They’ll also likely focus on the Community Reinvestment Act, a 1977 law that encourages banks to lend to underserved communities, these people said.
…
During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.
How depressing.
If Nasiripour story is correct, the explanations offered by these four individuals are blatantly false. Lets name names: Bill Thomas, Peter Wallison, Keith Hennessey and Douglas Holtz-Eakin. These are all subprime thinkers.
Keith Hennessey, a Republican member of the commission, released a copy of the Republican “primer” on the financial crisis on Wednesday. Here’s his blog entry and link to the primer.
Financial Crisis Primer, 15 Dec
http://keithhennessey.com/2010/12/15/financial-crisis-primer/
Here is the Republicans’ primer on the commission report which we will not see until next year. They don’t call it a report.
http://keithhennessey.com/wp-content/uploads/2010/12/Financial-Crisis-Primer.pdf
News flash: “love of money” loses role as ‘root of all evil’ replaced by “big gumint”.
Thanks to MG linking to Hennessey we see those four republicans’ as “Four Horsemen of the Blame Gumint for the Apocalype”.
They are selling the con that gumint is the root of all evil.
Even more so than “love of money”.
Play well to the Tea Party?
At the end they could have a link to the deed for the brooklyn………………..
There is no evidence at Bill M.’s blog, Calculated Risk, that he has read the primer released by the four Republican members of the commission. Too bad he didn’t go after the document’s contents instead of cranking out a fairly weak main post wrapped around “if” they did this sort of nonsense. CR should consider leaving the whining and name calling to the weaker blogs and Internet hacks. Well beneath his normal standards.
Read the Republican primer document. Then complain.
I’ve got mine, but I do worry about my kids. The country deserves better than this play acting at the job of governance.
ilsm has read it. And he knows how to complain.
The rethuglican truth squad is out in force.
I read it. Looks like subtle propaganda.
I think CR and also NC mostly take issue with the leak on the editorial standard for the Final Report (as opposed to a mere “primer”).
It’s this:
During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.
Not using those 6 words turns the Report into a comic book.
Bill did label the post as commentary, and very appropriate commentary it was considering his expert forecasting and analysis of the housing meltdown. Neither is there proof that you have read The Primer. If you had you would know there is no content, just lies.
Here’s a real WaPo article on Fannie dated 8/2008. Up until 2006 they had very little subprime and Alt-A. 2006-2008 is when they went in big. But their amount was only around 10% of the market when they finally went down. Freddie did it too, of course. I don’t have their numbers but I know it’s much, much less than 90% of the market.
“At the end of June, Fannie Mae owned or guaranteed $388.3 billion of Alt-A and subprime mortgage investments. In comparison, it said its capital — the financial cushion that enables it to absorb losses — totaled $47 billion, which exceeded the government’s minimum requirement by $9.4 billion. “
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111.html
Larry,
I have read the primer. Which pages do you want to discuss instead of just ranting like a kid?
Bill (CR) could have commented on the content of the Republican primer, but that hasn’t happened. His position thus far: “If Nasiripour story is correct, the explanations offered by these four individuals are blatantly false.” He and everyone else can read the primer and discuss what it actually says…and then complain about its contents.
There is plenty in the primer that I disagree with, but I waiting for an informed discussion to develop. You claim that the primer is full of nothing but lies. Back it up. Otherwise, you’re just blowing off, not saying anything specific. Standard little league rant.
Cedric,
Not using the phrase, Wall Street, didn’t change any of the observations in the document. A number of Wall Street firms are identified in the primer. Same story for CDOs, though it appears to me that they skipped over a volume of info on derivatives that were in play during the ramp up to the financial crisis and thereafter.
None of the words cited in the news article are in the primer, but that didn’t sway me one way or the other. I read the document. I see the good and bad of its contents. There is some meat in the document, not all of which I support.
I’m more interested in reading the final report, but we won’t see that document until next year.
The Primer lost me on the first two sentences…
—————————-
Why was there a housing bubble?
Bubbles happen. In retrospect, they always seem easy to identify, but as they are building, experts debate whether they exist—and, if so, why. The recent housing bubble was no different.
———————————
But that was probably because I was reading reports from hedge fund managers back in 2002 remarking on how central banks around the world have opened up the money supply spigot to unprecidented levels, and something big was bound to happen.
A few big things…Dollar Index went from 120 to a low of 70. Gold went from under $300 to $1400. EM stocks and bonds went thru the roof. And we got a huge housing bubble in many countries around the world.
I think I’ll stick with reading stuff from the financial industry. Critically, of course.
The “paper” claims the only way to increase home ownership, a goal of the government, was to give loans to riskier borrowers. Is this true? I thought the purpose of the CRA and similar programs was to consider other forms of incomes and other types of assets in evaluating the ability of someone to pay back a loan. Even if the GSE’s guaranteed every mortgage, and you blame that for the bad business practices of the loan originators? At the end, Countrywide and WAMU were giving loans to anyone, justified by documents they falsified themselves. It’s like blaming the existence of a fence for the creation of counterfeit money. Would WAMU have created these loans if they were required to hold on to the note? And what percent of the notes did the GSE’s back?
Countrywide made money for itself by committing fraud. The fraud worked because rating agencies lied about risk. MBS investors bought junk abetted by the lies of rating agencies. Wall Street sold the junk because it was profitable, and accepted the lies because it was more profitable investors. But even this was not sufficient to bring down the economy; it was side bets that multiplied the impact. Without the side bets the crisis would have been easily managed.
To conclude, the collapse was due to the bubble; the bubble was due to the lure of easy profits and mass hysteria (it happens). The mass hysteria was able to create the bubble only through the actions of banks. The number of foreclosed homes and the decline in prices in well to do, white neighborhoods I imagine far exceeds in value the damage from minoirty owned homes, which is where the right wing is trying to take this. Look at Mountain House in Tracy: $700,000 homes going for $350,000. This does a lot more damage than a formerly $200,000 townhouse in Baltimore going for $100,000.
It appeared that the Republican members of the commission ignored the principal driver that got the USA out of the recession during the early 2000s. It wasn’t an accidental bubble in my judgment. It looked planned, in considerable detail, and got out of hand long before the housing sales imploded. One would have to be blind to not see it coming much earlier than 2006. Recall some of Greenspan’s remarks about types of mortgages which consumers should pursue back then. Few were willing to challenge him, which struck me as a gutless sham. The guy was way out in left field.
Good points. It struck me at the time that the developing housing bubble looked like a multi-party scam. Of course, it followed on the heels of the Dot com bust which was another air filled bubble. And personal credit levels starting jumping off the chart as early as 1994. The country was in full party mode for over a decade. Then it finally blew up.
MG,
Bernanke had the monicker Helicopter Ben in late 2002, if I recall my reading at that time.
Then he was doing Greenspan’s bidding.
Kept it going once he took the front office.
MG,
Greenspan made a number of comments showing where his head was at, especially in retrospect.
2001 = “The consumer is in good shape” At the time corporate debt was high due to the aftermath of the internet, telecom, corporate IT boom.
2002 = “Our housing stock is old”
2003-2005 “We a not having a housing bubble” “There are pockets of frothiness in the housing market” (Kansas was cool) “We don’t know how to identify bubbles”
2005 – “If you don’t take out a variable rate loan, you are spending too much on your MORTGAGE”
Those are just a few gems from memory.
The last comment is the one that blew me away. I remember the day he said it. Friends and I cursed him well into the night. We were livid over that nonsense.
So, Larry Signor is a a hit and run artist? Say it’s not so…
So, Larry Signor is just a hit and run artist? Say it’s not so…
The other thing that was swept under the rug was that the Fed was the “consumer protection regulator”. I think Frankendodd took that job away from them, thank the Lord.
Here’s another way to look at it: if the GSE’s did not exist, could the bubble have happened? If the GSE’s did not exist, could the side bets on the mortgages been made? If the GSE’s did not exist, would white, upper middle and upper class individuals driven up housing prices by a factor of 2 or 3 in some areas? If the GSE’s did not exist, would poorer non-whites been able to borrow for real estate purchases? If the GSE’s did not exist, would Countrywide decided to not commit fraud in mortgage underwriting?
I attribute 50% of the crisis to wall street, 35% to greenspan, and 15% to everything else combined, including GSE’s.
The report is similar to other attempts to pin this (with no real data analysis) on “social policy” which amounts to loans to “high-risk borrowers” to purchase low-end homes. (BTW: the term “high-risk borrowers” seems meant to point us at a certain population. The term is questionable to me–I think loans may be high-risk, not borrowers.) The report starts, however, with a depiction of the problem that points to people refinancing and moving-up to more expensive homes and accepting teaser-rates and other things that have nothing to do with the villianous social policies. So, nothing new here–another data-poor argument that also lacks consistency.
The thing that always makes me laugh when I hear that phrase – “High risk borrower” – imagining the guy who was well paid on one side of the desk to well, take the risk. Where’s he at?
The borrower may or may not be homeless. For now it depends on what lawyers he can afford and maybe what blogs he reads. But the guy who took the risk? Is he a manager or director now or what?
But more to the point of the main post, yeah it should bother people that the republican members of this committee need their own language which excludes certain terms to explain the work they have completed in service to the nation. If your explanation excludes certain words and actors yeah that probably needs to be explained on some kind of rational basis.
If I was or had ever been considered republican this would bother me.
promoted to V.P. of sales.
CR sets the record straight:
From Tanta 2008; http://www.calculatedriskblog.com/2008/07/krugman-on-gses.html
Paul Krugman has a new column on Fannie and Freddie which I think is important. I’m going to take issue with a fair amount of it, but not with the basic argument that the uproar over the GSEs is “overblown.” That, I think is a point worth making.
Read on at the link.
CR sets the record straight:
From Tanta 2008; http://www.calculatedriskblog.com/2008/07/krugman-on-gses.html
At the end Tanat said: the GSE’s can go back to being government agencies. In 2008 they were stockholder owned!!
Paul Krugman has a new column on Fannie and Freddie which I think is important. I’m going to take issue with a fair amount of it, but not with the basic argument that the uproar over the GSEs is “overblown.” That, I think is a point worth making.
Read on at the link.