Misleading intro to article. The expansion of credit was not due to over ambitious politicans who wanted homeownership for the poor. It was fueled by lax accounting and regulatory standards which expanded private securitizations of mortgages (did not involve freddie and fannie). This generated money which went into legislator pockets though.
It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result.
Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much.
I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.
Your article had a lot more credibility before you came up with this comment : The vast majority of RMBS and CDO-of-RMBS losses have nothing to do with the government.
Your story would have been even better if you included the necessary element of how the repayment characteristics of selling beer to unemployed people on credit were better than the interest rate they would pay. Because, as a foundation to these securities, the banks (based on flawed rating agency analysis) believed that the subprime mortgages would pay back.
If the banks had had a better understanding of how past performance (subprime mortgage payers in the 1990s) was no indicator of the future (people in 2005 buying investment properties to flip, based on the theory that property prices would increase at 4% p.a. forever), then they would have lost so much money that they required bailing out.
The major post-crash failure of government (IMHO) is that they didn't take large equity stakes in the banks, and prevent them from making obnoxious bonus announcements.
freddie and fannie started issuing "subprime" loans in the 90s, to lower income and minority borrowers with reasonable default rates. by the time the boom came around their marketshare in this market plummeted because everybody else dropped their standards (the garbage was to be somebody elses problem anyways) and their marketshare dropped. the growth in subprime during the bubble period had little to do with them.
they are currently the garbage bilge where junk loans are deposited, but that is by design to protect housing prices.
they were not a huge area of growth when housing overheated, subprime or otherwise.
Simply false. The garbage was usually your own problem, the AAA tranch was sold to someone else. This is what took down Lehman, for example. BNC Mortgage (owned by Lehman) made bad loans, Lehman sold off the AAA tranches while holding the riskier tranches for themselves.
Originators underwrote the mortgages who usually sold them to banks who packaged them into bonds. Later on to streamline this process the banks bought mortgage originators (lehman bought bnc) because their appetite for product was huge.
But originally the loans were passed onto somebody else (and most private label issuance by notional balance was in fact not held by either originator nor the underwriter/ibank). It was a method of breaking out credit risk (the borrower risk was separated from originator risk) and seen as a feature. Really it was the whole point of securitization -- to get bankruptcy remoteness for credit products.
Originate to securatize is now seen as a problem because it does not give the originator an incentive to make good, proper loans (which is already tough to do). We dont know if credit standards and checking would have become so lax without the securtization machine during 1998-2007 but it seems unlikely.
Just to be clear. I think you're arguing that it was failures in both policies (government backed loan programs that made money cheap) and oversight (no one was properly overseeing the whole mess).
If that's what your saying.. I would completely agree. There were so many moving parts in this and we needed ALL of them to fail for catastrophe.
because private label mortgage issuance shut down. over 90 pct of mortgage origination are now agency. this includes all refis which rolls crap out of private label onto the govt sheets. we went from investors loaning money to the taxpayer and this is a subtle method of bailing out the fin industry. no way fin instutions would have paid back any govt loans without this help and its a convenient place to sweep away the losses.
also prime mortgages from the bubble years got hammered and of course that hurt them.
because private label mortgage issuance shut down. over 90 pct of mortgage origination are now agency.
Interesting - it's as if the private sector has figured out that maybe fewer mortgages should be issued until we come up with better underwriting standards.
Fannie/Freddie are now taking taxpayer dollars to continue issuing mortgages that the private sector considers too risky.
Clearly, Fannie/Freddie are paragons of underwriting and would never issue bad loans.
also prime mortgages from the bubble years got hammered and of course that hurt them.
Wait, Fannie/Freddie made bad loans and assigned them the label "prime"? They clearly had nothing to do with the mortgage mess whatsoever.
Well, without them to pick up the slack we would have almost NO mortgages issued in this country, which some of us might think is bad. The alternative would be for rates to rise (some of us might think this is a good thing, which it might be) and to allow housing prices to fall. This has many knock on effects like crippling pension funds and banks and insurance companies etc etc.
I find it horrible that guilty parties profited/are profiting from their mistakes. But its a complicated problem which is why we are going to go through hell to fix it.
FWIW I this does not excuse govt behavior, which leans far far too much in the way of banker cronyism, which might have been the original point of the article. I am just pointing out that its a complicated situation that is a mess to sort out.
Also I never stated that fre/frn never made bad loans and were not players in this whole debacle. I just stated that they were not the main engine of horrific growth and the "cause" of all of these problems.
This is completely wrong. Credit standards not only dropped dramatically at Freddie/Fannie, but they drove the decline elsewhere. Causality is clear: Private banks issued loans that they knew that Freddie/Fannie would securitized; as the government agencies decided they'd buy crap, the private banks provided it. (For crying out loud, the government agencies CREATED the subprime market.)
In actuality, about half the bubble has been directly traced to the lowering of underwriting standards by Fannie/Freddie, which in turn was directly caused by....a desire to provide home ownership for the poor.
I'm hesitant to wade into this debate, but this is a pretty sophistic argument, for a few reasons:
* He largely ignores the potential for a catastrophic financial collapse in 2008-2009. At the time, pretty much everyone agreed that stopping the bleeding was a good idea. Among economists, that some sort of vigorous action was necessary is close to a consensus view. To completely dismiss this is ridiculous. Further, he doesn't address how expensive TARP actually ended up being, or that the majority of the money has been paid back.
* The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The only meaningful tax increases that I can recall come as part of the Affordable Care Act.
* The author makes no concrete arguments for why no changes to financial regulations are unnecessary. Instead, there's a glib aside that the 'government also announces a series of regulations to “fix” the problem'. Really? This is important. Tell us why. If the government had stopped banks from selling Heidi's bonds as AAA-rated securities, wouldn't this crisis have not happened?
Overall, this is a simple, facile metaphor with many implicit assumptions, designed to bolster the author's libertarian worldview. To the author's credit, he does a good job explaining the fundamentals of the housing crisis.
Tarp money was mostly paid back. The Fannie/Freddie bailout was not and is unlikely ever to be.
The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office.
The funds were obtained on credit. Most people believe the only way the US can pay down this debt is to raise taxes.
The likely situation is that the US will pay down its debt through a combination of spending cuts and tax hikes. But there is no doubt that the tax hikes will be substantial.
I believe we're in a pretty poisonous political environment, where the dominant strategy for a politician seems to be to convince your constituents that they're being taken advantage of. Most people who benefit from government programs don't realize it (see http://economix.blogs.nytimes.com/2011/02/11/keep-your-gover...), and most voters have an incredibly skewed view of what, exactly, the government spends money on. When polled, voters oppose cuts to almost every major program.
That the median voter has largely incoherent views on the budget, but is very angry about it, leads us right into our current mess.
To my original point: OP's argument is big on righteous indignation, along with a narrative that allows him to cast himself as a "good guy" and short on actual facts to how to dig our way out of this mess.
This is a bit like going out to lunch with some friends, agreeing to split the check evenly, having one of them start ordering incredibly expensive bottles of champagne, protesting, and being told "don't worry, nobodies had to pay for their share of Bob's drinking". Sure, not yet. But the bill hasn't been presented yet...
Also, sure, stopping banks from selling risky bonds as AAA-rated securities would have helped. But no regulation announced to date in the US has stopped or will stop credit rating agencies from calling a risky MBS AAA-rated, or banks from selling a risky but AAA-rated MBS to a willing buyer. Indeed, no such regulation is even possible; it would fall afoul of the US constitution.
The author's glib dig about regulations that "fix" the problem is arguably the best bit in the article. Can you name any regulation promulgated since the crisis that might, even in theory, help? The biggest one so far has been Dodd-Frank, and it's a joke; many analysts think it made the problem worse.
The quoted $18 price plays no role in the story; the point is that it was bought on credit, with the people taking the credit being insolvent, and that there was a systemic bias towards issuing them credit anyways.
The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing. In this story beer went to $18 and everyone was willing to pay it, not because it was worth $18 but because no one was having to actually SPEND anything (yet) for it (except those buying the bonds).
It may not have been the most important thing, but you need the "bubble" in the story for the bubble to "pop":)
>The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing
That's not correct. The market expands as new bonds are issued. The key factor is that further credit is given, regardless of the size of each individual loan.
Yes, but this is about what causes the bubble. Sloppy credit is necessary and sufficient for that. Price increases are at worst an aggravating factor once the bubble is already under way.
If you seriously think that this whole debacle hasn't taxed our economy and the value of our currency more than $19B...then you're smoking something really good. :)
I know we have -3% unemployment in tech. Not quite so elsewhere, my friend.
He seems to think it was "free market principles at work" that caused this. It was those dangling carrots in front of poor people and convincing them that letting any Joe Scmoe borrow money for a house was a good thing. Now these same people are out there sympathizing with the people whose lives they destroyed and promising more things, such as putting all their loans under control of the government.
At least the bank can't send a swat team to my house to collect payments.
It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result.
Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much.
I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.