Steven Malanga of Real Clear Markets and the Manhattan Institute tells a convincing narrative about how the notion that it should be "ok" to give loans to people who may not be able to pay them back got a foothold first, in our politics and next, in the banking industry. I don’t know why I am surprised to see that it may have come from the media--in fact, I’m not--but I am surprised to see such a clear and direct link established. Malanga shows that a prevailing journalistic meme from the early 90s regarding the injustice of local banks to minority lenders, gained popularity through the assistance of deeply flawed computerized model. It was developed, primarily, for lazy investigative reporters and a desire to duplicate the Pulitzer Prize winning efforts of The Atlanta Journal-Constitution for it’s story on the theme.
These sets of stories accusing banks of blatant racism took hold--despite severe criticism from academic reviewers who questioned the validity of the model and its use of incomplete data. Eventually, they began to affect the political climate in Washington and a study from the Federal Reserve Bank of Boston seemed to lend some credence to the general theme of these newspaper stories--even as it proved them to be greatly exaggerated. Nevertheless and despite severe criticism even of this study from independent researchers as well as an FDIC economist, government went on a campaign to encourage banks to lower their standards to make more minority loans. Of course, the standards had to apply to all . . . not just minorities.
In the midst of this and to convince banks to accept this new regime, sophistry followed. All sorts of clever arguments were developed to explain why up was down and down was up. Banks bought it--no doubt, in part, because the competition was buying it too and there was a lot of money to be made . . . for the time being. In addition, when Freddie and Fannie began easing up on their standards for mortgage purchases, the housing market boomed and banks were only too happy to embrace these new standards. Moreover, those CEOs who did this with the most gusto, like Angelo Mozilo of Countrywide, were heralded as geniuses and pillars of the community. They were honored and celebrated to such an extent that it is hard to imagine the case of whiplash they must be suffering now.
It would be wrong to say that the media is to blame for the mortgage crisis. But I think Malanga ably demonstrates that what is to blame is a kind of misplaced and compassion-driven logic that patronizes the needy at the same time that it inadvertently victimizes them. It is the story of the last 60 years (or more) of American politics.
Yes. Thank you. That is how I remembered it. So much, maybe all, depends on the word "discrimination." As one economist (who? sorry, memory does not serve me well) put it back then, banks and their loan officers are supposed to discriminate. Discrimination between good borrowers and bad borrowers makes sense and if it happens to overlap with racial discrimination, that may just be a sad fact of life.
Do you really think that we are ready, politically, to give the essentials of this economic dream? I bet not.
A good point about how stupid the media is in that they believe all this touchy feely stuff.
Some of the problem was caused by bad loans. The problem was REALLY compounded though through derivatives. The problem is NOT that there are bad loans (which these banks could swallow), the problem is through the use of derivatives that the bad loans were spread throughout the market place. Because there is no clear loser on these loans, and because it is not clear how much the loser(s) have to pay, the fair market value of these loans cannot be established. Imagine trying to value a company when you don't know what its assets are worth. That is why stock is falling and people can't get credit. No one knows what anything is worth so potential creditors cannot determine how credit worthy an institution is.
So while its correct to say that bad loans caused it, what REALLY caused it were people doing exotic derivatives and derivatives of derivatives!
Yes, Steve. I do understand that. But isn't it the case that the reason for the "spread" was to cover up or try to negate the ill effects of all of these bad loans? This was all part of the slick sophistry that accompanied the selling of this notion that it's really not a bad idea to give bad loans. Spreading them around was a way of making them seem less bad than they were--at least that's how I understand it. The fault was that bankers believed this nonsense. Perhaps the incentive (and the social pressure) to believe was too great.
I'm sure there's some blame that can be laid here. But the temptation to make this a partisan "blame game" obscures that the culpability is really widespread, and you should feel under no special obligation to discover a partisan spin at the expense of overlooking reality. Lenders wanted to make these loans, believing that their backsides were covered by permanently rising housing costs. Borrowers wanted the loans, because it's nice to have something for nothing. Wall Street wanted the loans, because it's something else they could sell. All of us grew comfortable being referred to as "consumers," and not as citizens. George Will says it true in the opening paragraphs of today's column, where he states an "inconvenient truth":
We are waist deep in evasions because one cannot talk sense about the cultural roots of the financial crisis without transgressing this cardinal principle of politics: Never shall be heard a discouraging word about the public.
Concerning which, a timeless political trope is: Government should budget the way households supposedly do, conforming outlays to income. But the crisis came partly because so many households decided that it would be jolly fun to budget the way government does, hitching outlays to appetites.
Beneath Americans' perfunctory disapproval of government deficits lurks an inconvenient truth: They enjoy deficits, by which they are charged less than a dollar for a dollar's worth of government. Conservatives participate in this, even though deficits fuel government's growth by obscuring its cost.
Julie, a good blog that addresses the media's (as usual) dishonest role in creating the mortgage crisis. However, it's somewhat worse than you say here: "government went on a campaign to encourage banks to lower their standards to make more minority loans. Of course, the standards had to apply to all . . . not just minorities." Government did not just "encourage," government enforced affordable housing quotas with a will on mortgage banks and on Fannie Mae and Freddie Mac. The Clinton Administration in 1995 issued regs to the banks "requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks." (This is from Wikipedia's description of CRA.) If the banks could not show enough numbers of questionable mortgages on their books, 4 federal regulators are ready to deny the bank's request to expand or merge. Meanwhile HUD has imposed actual explicit QUOTAS on Fannie and Freddie every year since about 1994 (they continue in conservatorship, by the way). Something like 50% of their portfolio MUST be in such questionable mortgages. For anyone who would like to see this up front, here is a HUD press release showing that the GSEs had met their quotas to the tune of between $431 and $973 BILLION in "affordable housing" mortgages (https://www.hud.gov/news/release.cfm?content=pr06-136.cfm). If you check the reports for the next two years, they add on about another TRILLION dollars to the holdings. Some they kept, some they fobbed off on unsuspecting (and very careless) investment houses. Financial institutions are cautious and timid by their nature. They are unlikely to fight hard against government strong-arming; rather they try to figure out a way to make money regardless -- in this case certainly they promoted teaser rate, subprime mortgages in minority communities to make their legal quotas. They did no favor to the homebuyers without sufficient credit to pay them off. If you look at the question of how this came about, you see -- to the disgrace of our whole nation -- that the United States Government through this regulatory approach made itself America's premier predatory lender.
10/1/2008 2:57 PM
I am willing to grant this much to Dr. P, that from FDR on, govt. moved away from promoting thrift and savings (read Coolidge speeches for example) to promoting consumerism. 70 years would be a long time to keep pounding any people on the virtues of spending and incurring debt vs. the unpatriotic "vice" of "hoarding," and so too many Americans find themselves piling up debt. (Even this must be tempered by the fact that every American worker DOES save about 13% of every paycheck in a rotten but mandatory Social Security program.)
But I object to Dr. P's point to the extent that entrepreneurs and investors in general seek sound investments, not fraudulent ones. In a free market, the enormous buildup of uncreditworthy "affordable housing" loans by banks and perhaps the GSEs would have been avoided. But, given the fact that government compelled financial institutions to write billions or trillions in bad mortgage debt, you must expect entrepreneurs to find a way to make a profit from what they must do anyway. It is simply wrong to speak as if Americans have suddenly become any more greedy or desirous of earning profits than they ever were. In fact, people will find ways to make profits, in a wholesome way if governments structure free markets properly, or doubtfully when government destroys market freedom as it has in mortgage finance.
I am not one to argue that govt. must balance its budget annually although home budgets must. I would say that political leadership should reread some Coolidge speeches and learn to shift the social paradigm to make thrift patriotic and living in daily debt harmful to the nation. I also think our leadership could speak less about the "American dream" house as a material "investment" that must grow in price and more about the home as the center of family life and immaterial or spiritual satisfaction.
Good comments, all. But I especially like Dennis' appeal to Coolidge. Now would be a good time for a serious reflection on Coolidge.
I would love to buy the conservative argument here and bash unrealistic wine and cheese liberal types. I no problem with that, however, the fact that the media is owned by big business makes me wonder. I guess some alternative media sources could be turned too to better explain things. Three months ago I watched a documentary online about a group of elites that don't exist who had a yearly meating in Canada in 2006 that never happended. The host of the show lied and said he was arrested and jailed without cause during the shooting. Then he didn't say that the elites that don't exist planned to blow up the dollar and wreck the global market in the next two to three years and base it all on the sub prime mortgages. Then he left out how they would offer a solution that would make the problem worse by causing massive inflation and consolidate more and more control in their hands that don't exist. If only there was an alternative media that could have seen this coming instead of giving us human intrest peices about the Jenkins down the street who can't get a loan because their not WASPS.
Here is a rather good educational video about the sources of this whole crisis that rather carefully spells out why and how this happened. And when you add to it this recap of the 2004/5 House look at Fannie Mae you know this IS A PARTISAN ISSUE and the DEMs should be made to pay for their CREATION OF THIS MESS. Yes Republicans, esp the moderates aided, but the real culprits are clear. And here is what you will never see on the MSM, which helps frames BO's role here and would explain why such a young Senator would be #2 on the people Fannie Mae gave money to.
I should have added one more comment to my observations on Dr. Pat's comment above. He writes: "Borrowers wanted the loans, because it's nice to have something for nothing." In general he is criticizing rampant consumerism. Fair enough...but the more I think of it, the more this seems wrong. Why were so many people scrambling to buy homes in the last few years? Of course they were apparent bargains, with cheap interest rates and the apparent promise to rise in value. But mostly they bought as a means of savings. Any working person who is paying off a mortgage, even at low interest rates, is taking out a big bite of earnings and putting it away in his home in the expectation that in later years he will have accumulated a tidy nest egg for retirement. Home buying in other words is not necessarily consumerism. It may be a sign of the very thing we need more of: savings. When you consider that most working people are putting some 13% of their earnings into Social Security and then on average another 25% and often more into their mortgage, that's a 38 or 40% bite (apart from taxes) which doesn't leave much for "consumerism." I conclude that it's a bad rap in the main to blame Americans for their materialism, greed, etc. when they are in fact doing what they can to save for their future.
Julie, Peter and all of you who support the bill, perhaps you would like to do a little light reading. Here is the bill. Maybe you can explain a few of the provisions for me so that I can become supportive of this fine 451 page bill.
Clint, you misread me if you think I am a "Fan" of this bill or an enthusiastic supporter of it. And while I have heard all kinds of reasonable arguments against the particulars of this bill (and the last two permutations of it) I have yet to hear a good argument against swift action given all the dangers we're facing and all the incompetents in charge. Since something will be done (and probably, something must be done) I remain convinced that the longer we wait, the worse it will be. I have no realistic expectation for better given what/who we're working with. See my comment under your latest in the other thread.
Julie, I would just type "I give up" but the stupid spam blocker would take even longer.
If you think it is prudent to go $700 Billion further in debt to foreign countries--many of whom are our enemies, that's up to you.
Part of the necessity of a bailout was caused by our heaping national debt. China owns interests in our country that would have been effected by MBSs. If we don't bail them out, they were going to hurt us by dumping the $1 trillion of our bonds that they own. Of course in this moment of prudence we are only saving up an even greater avalanche by selling more bonds to foreign countries. Countries used to buy our bonds b/c they were safe investments. Now they buy them b/c they have so many that they can control our government.