Imagining your ideal world
Posted by aogSaturday, 02 October 2010 at 17:16 TrackBack Ping URL

Just a quick comment on the recent “10:10” video that’s created such a stir. My first reaction was the same as Harry’s Place that it was an over top hyperbolic parody. But it turns out to be completely legitimate, with “name” producers, actors, and backers. If you’re looking for an example of epsistemic closure you would be hard pressed to find a better one, that no one involved in this apparently realized it might be off putting.

P.S. Just One Minute’s take on the video.

P.P.S. Remember to watch out for the Tea Parties promoting violence! That’s the real threat.

Comments — Formatting by Textile
AVeryRoughRoadAhead Sunday, 03 October 2010 at 15:28

[Emph. add.] 10:10 is a young-ish enviromental campaign… Its goal is to encourage people to cut their CO 2 output by 10%.

Sep 28, 2010 | Reuters : [Emph. add.] “Gasoline-guzzling Americans have cut consumption… Total U.S. oil product demand is … down 12 percent from the peak of 19.5 million bpd in 2008.”

Mission accomplished. [dusts hands]

Annoying Old Guy Sunday, 03 October 2010 at 20:10

Another victory in Obama’s War on Prosperity.

AVeryRoughRoadAhead Sunday, 03 October 2010 at 22:00

Eh… Obama’s War on Prosperity is really a skirmish against prosperity taking place in the overall context of a peaking class struggle, the exposure of National Ponzi Financing on a global scale, and the beginning of a Kondratieff winter…

As such, it’s hard to get too wroth about such things as a shrinking GNP, increasing unemployment and reduced gasoline usage… Those are to be expected.

However, I do agree that every bone-headed anti-business move that the Obama admin makes is doubly negative in this environment, as opposed to the impacts that such policies would have had in, say, the ‘90s.

Harry Eagar Monday, 04 October 2010 at 14:48

From my seat, it looks like most of the bone=headed antibusiness moves are being made by business.

Dunno how you fix that, but giving business its head probably isn’t it.

Annoying Old Guy Monday, 04 October 2010 at 15:03

From my seat, it looks like most of the bone=headed antibusiness moves are being made by business.

I am sure it does.

Dunno how you fix that,

Get a seat with a better view of the reality field?

Bret Monday, 04 October 2010 at 16:10

Harry Eagar wrote: “…it looks like most of the bone=headed antibusiness moves are being made by business.

That’s as it should be.

The general idea is that when a business does too many stupid things, it will go out of business, and a better business will take its place, which drives the economy forward and keeps everybody motivated.

This mechanism is thwarted when the government bails out business that continually do bone-headed stuff. When this mechanism is thwarted, the market is guaranteed to fail. Of course, this is the goal of Statists who then can correctly claim that the market is failing and incorrectly (IMO) prescribe the solution for the failure more government intervention.

erp Monday, 04 October 2010 at 16:39

Business and government are not opposite sides of the same coin. They are two very different things. Government has very proscribed duties none of which include competing with or interferring with the business of America which, as Coolidge correctly pointed out, is business.

Hey Skipper Monday, 04 October 2010 at 18:21
But [10:10] turns out to be completely legitimate, with “name” producers, actors, and backers.

Three words: kulaks, wreckers, heretics.

I have taken the odd hit for insisting that communism is religious, not atheistic, because the concept of god is not required to possess religious belief.

Catastrophic Anthropogenic Global Warming Climate Change Climate Disruption is a religion.

Which also means atheism is not just a Christian heresy.

One of the actresses (as one of the meanings, the dictionary should include “ditzy, neurotic, self-centered, analytically challenged fool.) cited 300,000 as the current, ongoing, toll of climate change.

Sourced from International Organizations In Charge of Making Up Stuff, aka International Organizations for the Advancement of International Organizations.

Bret Tuesday, 05 October 2010 at 11:46

Hey Skipper wrote: “I have taken the odd hit for insisting that communism is religious…

Certainly not surprising because in common usage, religion refers to a dogma that usually includes deities and/or prophets and it’s a stretch to consider Marx (or Lenin or Stalin or Mao of Fidel or Che) to be prophet(s). On the other hand, Gaia is a god and Al Gore is clearly a prophet (or prophet-like figure), so CAGx is more like a religion.

Hey Skipper Tuesday, 05 October 2010 at 15:00

Bret:

It should be surprising that common usage should be so immune to reality. Consider the function of the cults of personality that no totalitarian system has been without. Taking the common point of view requires Marx, Lenin, Engles, Stalin and Mao did not fill the deity and prophet roles, a tough row to hoe considering that their revelations carried every bit as much actual authority as anything in the Bible.

For that matter, think of a few books about communism: The God that Failed; The Red Tsar. Both clearly see how communism was religious. (The latter is not awfully well written, but it clearly demonstrates that religious fervor that pervaded the Stalin era.)

Or watch Triumph of the Will and Downfall.

If they don’t capture the essence of religious fervor, then the term has no meaning.

Bret Tuesday, 05 October 2010 at 16:19

Many things are immune to reality.

Harry Eagar Wednesday, 06 October 2010 at 13:22

Please read David Carr’s piece in the NYT today about the Tribune Co. and explain to me about how business making bone-headed mistakes drives everybody forward and motivates them.

This is a particularly clear example, since it concerns a business in which government interference is almost nil.

Anyhow, I am not in principle opposed to letting businesses make bone-headed decisions, only to a system that rewards individuals who make the bad decisions.

Warren Buffet has something to say about this this week, reported at Bloomberg.

It’s my old ax, ground to a nub: Smithian claims about how competition rewards and punishes risk-takers, while the rest of us watch from the sidelines and applaud their audacity, are completely delusional. The system is broke, and while I don’t think government can fix it, the private sector has no interest in fixing it, either.

Annoying Old Guy Wednesday, 06 October 2010 at 14:22

Mr. Eagar;

explain to me about how business making bone-headed mistakes drives everybody forward and motivates them.

Where exactly are you typing your comment? No small part of the blogosphere and other related social information systems are driven by the implosion and failure of Old Media. I actually have a friend who is a refugee from the Tribune and she’s doing exactly what Bret described. And since I had the first personal anecdote, I win.

a business in which government interference is almost nil.

Media ownership rules? The FTC? Television and radio licenses? McCain-Feingold exceptions? If that’s your idea of “almost nil” for government interference, no wonder you consider anything activity that’s not expressly supervised by federal agencies as “unfettered” or “anarchy”.

I am […] opposed to […] a system that rewards individuals who make the bad decisions.

You mean like public service, e.g. Alcee Hastings? Richard Holbrooke? Barney Frank? Chuck Schumer? Franklin Raines? Jamie Gorelick? Ah, if only you actually meant that. But it’s just another example of you finding a constant of systems based on humans and blaming only the private sector for it.

Warren Buffet has something to say about this this week, reported at Bloomberg.

If it’s not interesting enough to be worth link, it’s clearly not interesting enough to read. Buffet, as one might recall, also had many interesting things to say about candidate Obama back in the day. How’s that demonstrating his astuteness these days?

while I don’t think government can fix it, the private sector has no interest in fixing it, either.

You being to approach understanding there. But meanwhile, will you continue to promote policies that you claim here won’t fix the problem?

Bret Wednesday, 06 October 2010 at 14:25

They made bone-headed (and worse) mistakes and have destroyed the company. The company will go under, those resources will be released for other uses. How is this a bad thing?

The alternative is to have government run companies and make bone-headed mistakes forever and never go under and therefore always have poor utilization of resources with no correction mechanism (see USSR, Cuba, etc. for examples). How is that better?

“The system is broke” where individuals and government collude to protect bone-headed managers and owners from facing the outcome of their bad decisions. Otherwise, it often works better than other alternatives.

AVeryRoughRoadAhead Wednesday, 06 October 2010 at 17:08

Buffett Rules Out Double-Dip Recession Amid Growth

Buffett has been very astute in the past, but he’s not above saying self-serving things. If he isn’t senile, then he has to know that the above just ain’t so. He’s attempting to shape investor behavior.

Hey Skipper Wednesday, 06 October 2010 at 20:13
Buffett Rules Out Double-Dip Recession Amid Growth Buffett has been very astute in the past, but he’s not above saying self-serving things. If he isn’t senile, then he has to know that the above just ain’t so.

When should we check to find out whether your “ain’t so” ain’t so?

Harry Eagar Thursday, 07 October 2010 at 13:12

I guess having your life savings hijacked is a great motivator, I’ll concede that.

Annoying Old Guy Thursday, 07 October 2010 at 13:39

Any specific examples, or is that just rhetorical venting?

Bret Thursday, 07 October 2010 at 16:47

Who had their life savings wiped out?

AVeryRoughRoadAhead Friday, 08 October 2010 at 05:38

When should we check to find out whether your “ain’t so” ain’t so?

If by 1 Jul 11 it’s not obvious to everyone that we’re still in recession, then I’m wrong, and a fool as well.

But fat chance of that, although Mr. Buffett is half right: We can’t double-dip - since we never emerged from recession in the first place. (Which even the NBER acknowledged in the fine print of their “recession over” press release; to paraphrase, they wrote that “this call is a statistical artifact of our modelling parameters and process, we’re not stupid, OK?”, and U.S. Treasury Secretary “TurboTimmy” Geithner agrees that no recovery has occurred.)

Insider Selling To Buying: 2,341 To 1

Insiders can. not. wait. to. get. out. fast. enough. This Fed-induced rally is nothing short of a godsend for each and every corporate executive.

And you should check out what’s happening on the housing front. It’s gradually coming to light that the fraud in housing lending and mortgage securitization was so extreme and pervasive that clear title cannot be guaranteed on any foreclosed home, which kinda puts a crimp in any attempt to clear the housing market.

Further, it turns out that buyers of CDO’s and MBS’s may not have any collateral backing those securities; and for legal and tax reasons, collateral cannot be added retroactively. In essence, “investors” in such products may have simply given someone a signature loan. And who are said investors? Oh, you know, pension funds, state “rainy day” funds, non-essential organizations like that, which won’t create any troubles or knock-on effects when they implode. And China, of course; I’m sure that the U.S.’s largest creditor will take in stride being ripped-off for a couple hundred billion.

Here’s one place to start:

With each passing day, the revalations in mortgage-gate, which has for now implicated GMAC and JPMorgan in foreclosing on mortgages without titles…

Today, courtesy of [U.S. Rep.] Alan Grayson’s office we discover that not only are servicers foreclosing on mortgages to which nobody apparently owns the title, but that servicers, representing such reputable firms as Deutsche Bank National Trust Company, are willing to counterfeit court summons in their pursuit of a clean and efficient foreclosure mill. As Grayson’s office points out: “Apparently what’s happening is that private process servicer companies may not be serving people with summons, and are simply counterfeiting the documents so they can keep the fees without doing the work. That means that you could theoretically be foreclosed on without ever knowing there was even a foreclosure case against you.”

WaPo Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans.

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title. […]

For big banks, “there’s a possible nightmare scenario here that no foreclosure is valid,” said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities - an expensive and potentially crippling proposition.

MERS/MBS/Foreclosure Goes RICO :

57. Additionally, and important to the issues presented with this particular action, is the fact that in order to keep its tax status and to fund the “Trust” and legally collect money from investors, who bought into the REMIC, the “Trustee” or the more properly named, Custodian of the REMIC, had to have possession of ALL the original blue ink Promissory Notes and original allonges and assignments of the Notes, showing a complete paper chain of title.

58. Most importantly for this action, the “Trustee”/Custodian MUST have the mortgages recorded in the investors name as the beneficiaries of a MBS in the year the MBS “closed.” Every mortgage in the MBS should have been publicly recorded in the Kentucky County where the property was located with a mortgage in the name similar to “2006 ABC REMIC Trust on behalf of the beneficiaries of the 2006 ABC REMIC Trust.” The mortgages in the referenced example would all have had to been publicly recorded in the year 2006.

59. As previously pointed out, the “Trusts” were never set up or registered as Trusts. The Promissory Notes were never obtained and the mortgages never obtained or recorded.

60. The “Trust” engaged in a plethora of “prohibited activities” and sold the investors certificates and Bonds with phantom mortgage backed assets. There are now nationwide, numerous Class actions filed by the beneficiaries (the owners/investors) of the “Trusts” against the entities who sold the investments as REMICS based on a bogus prospectus.

Harry Eagar Friday, 08 October 2010 at 16:31

Employees of Tribune Co. I was talking about Tribune Co., remember?

Annoying Old Guy Friday, 08 October 2010 at 16:52

Employees of Tribune Co.

As it turns out, I know former employees of the Tribune Co. and none of them had their life savings “hijacked”.

I think we’ve been through this before, but losing your job because your employer goes bankrupt is not actually the same as losing one’s life savings. For instance, in the former you don’t have your bank account emptied, or your home equity removed, or your 401(k) seized. No “hijacked” at all.

I am completely flabbergasted that you would even write such a thing. Can you point to anything except your imagination as a basis for such a claim?

P.S. Note that I have linked, twice, to your original comment, just to avoid any confusion about the context or which hijacking we are discussing.

AVeryRoughRoadAhead Saturday, 09 October 2010 at 10:04

WaPo :

Janet Tavakoli is the founder and president of Tavakoli Structured Finance Inc. She sounded some of the earliest warnings on the structured finance market, leading … Business Week to call her “The Cassandra of Credit Derivatives.”

Janet Tavakoli : This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

Harry Eagar Sunday, 10 October 2010 at 22:13

But, but, but, the Community Reinvestment Act REQUIRED them to fudge the paperwork. We know that.

Tavakoli is the risk maveness. I think she demonstrated beyond argument that the bankers either did not know what they were doing, or were crooks. Or, possibly both.

That’s a great system you have there.

erp Monday, 11 October 2010 at 08:09

Double speak has gone viral.

Hey Skipper Monday, 11 October 2010 at 16:47
But, but, but, the Community Reinvestment Act REQUIRED them to fudge the paperwork.

No, the CRA REQUIRED approving mortgages to higher risk debtors, while prohibiting passing the cost of that risk on to those debtors.

The only way to do that is to bundle those high risk loans with low risk loans.

Which the FFAs, government sponsored entities competing with non GSE banks, did.

The CRA REQUIRED the enfeebling of lending standards.

Assume just one thing: If, instead of the CRA, Congress required 10% down to obtain a mortgage. Does the real estate bubble still happen?

Harry Eagar Monday, 11 October 2010 at 20:10

Probably. Ask yourself the real-world question: What in the CRA (or any other piece of regulation) required the writing of second mortgages?

Answer, of course, nothing required it. It was purely market preference.

But if the kind of risk-aversion you are incorrectly attributing to bankers had existed, they would not have written second mortgages so easily, which suggests:

1. Fewer buyers would end up underwater, and not as deep.

2. The crash would have started earlier, with less uncovered debt and so, presumably, would have been more like a leaking inner tube than a blowout.

3. Non-participants would have been less likely to be wounded by flying debris.

I spent lunch delving into Sowell’s hilarious book on the real estate crash. He avers that lenders would rationally not wish to lend to people of low-income, unless forced by the government. That may be true (although there is a large body of evidence to show that it is not true, just search ‘international microfinance’), but lending to high-income people turned out to be foolish, too.

The problem was not with the borrowers, it was with the lenders.

Annoying Old Guy Tuesday, 12 October 2010 at 10:24

Where did the second mortgage issue come from? That’s completely non-responsive to Skipper’s point.

I think you’re setting up two false dichotomies here —

  1. That the CRA either was THE cause, or it had no effect. I think it quite plausible that neither of those is true, that the CRA was a contributing factor but not the only one.
  2. That the problem was either with the borrowers OR with the lenders. Again, I find it plausible that both contributed to the problem.
Harry Eagar Tuesday, 12 October 2010 at 13:00

Since when can would-be borrowers force people to lend them money?

It was a designed-to-fail system. Borrowers did not design, or run it.

It is not obvious that, even if the CRA did all the bad things people like Sowell allege against it — which, if you read him, are incredible, for example, the TRILLION dollars he says ACORN got out of it — that CRA was on balance negative. What would it have been worth not to have hollowed out a nation’s central cities?

I have a friend, a lender, who blames it all on Volcker, for getting rid of usury laws. That’s as plausible as blaming CRA, maybe more so.

It’s pretty clear to me from reading the complaints at Circuit Court that the lenders were violating the fundamental law of having money — never lend money to people who have to borrow to pay the interest — and lending the interest via second mortgages.

Even if the CRA was as bad as Sowell says, all the banks had to do was decline to offer seconds, and the firsts would have quickly imploded.

There’s nothing written down that just because as asset bubble is under way, people with assets have to pitchfork their money into the fire. Rubin said he ‘had to,’ but he didn’t.

You cannot argue simultaneously that capital is fungible (so that Bret can claim that you cannot really collect supertax) and that capital is not fungible. Pick one or the other and stick to it.

Annoying Old Guy Tuesday, 12 October 2010 at 13:15

Since when can would-be borrowers force people to lend them money?

They can’t. In exactly the same way, lenders can’t force borrowers to borrow money. It’s called “mutual consent” for a reason.

It was a designed-to-fail system. Borrowers did not design, or run it.

They participated, and frequently fraudulently. If you’re a counterfeiter, using the counterfeit money to play 3-card monte doesn’t discharge the counterfeiting regardless of how crooked the game is.

What would it have been worth not to have hollowed out a nation’s central cities?

It seems to me we have CRA and hollowed out central cities. Why you think that’s better than just hollowed cities escapes me. As usual you seem to value only intent, not results. Didn’t you used to harangue others for that kind of thing? I would say that it’s clear CRA was net negative, as it failed in its purpose and caused significant damage to the banking system.

If we really wanted to avoid hollowed out central cities, we would stop electing Democratic Party types to run them. But it’s clearly not worth that.

You cannot argue simultaneously that capital is fungible (so that Bret can claim that you cannot really collect supertax) and that capital is not fungible.

I have absolutely no idea what you are referencing with that comment.

Bret Tuesday, 12 October 2010 at 13:43

Harry Eagar wrote: “You cannot argue simultaneously that capital is fungible (so that Bret can claim that you cannot really collect supertax) and that capital is not fungible.

Why is that Harry’s most undecipherable comments always seem to have my name in them?!?!?

But leaving out the parenthetical, capital is fungible to some degree based on many factors. It’s not black and white. In some contexts capital is largely fungible and in others (for example in wildly differing regulatory environments), it’s not. So if two different contexts are involved, it is possible to logically argue that capital is and is not fungible at the same time.

erp Tuesday, 12 October 2010 at 15:58

… “To be and not to be” Question answered.

Hey Skipper Tuesday, 12 October 2010 at 16:28

Here is what the WaPo has to say on the subject (grabbed from Taranto’s Best of the Web)

Fannie and Freddie proceeded to load up on securities backed by risky mortgages, such as subprime loans and no-document loans. The firms asserted that they were aggressively fulfilling their affordable housing mission, and some risky mortgages were indeed going to borrowers who couldn’t otherwise afford a home.

But many of the loans were going to people who could have afforded traditional mortgages, and the companies were bulking up on the risky loans purely in pursuit of even larger profits.

By late 2003, the firms had taken on more than $4 trillion in debt, rivaling that of the entire federal government. Yet Frank, who had by then become the top Democrat on the influential House Financial Services Committee, still wasn’t focused on the risks. He had his sights set on what else they could do to promote for affordable housing, particularly low-cost rental housing.

At a hearing called by Republicans, who controlled the committee, Frank made clear that he was reluctant to tighten oversight because it could limit the ability of Fannie and Freddie to help people get a roof over their heads.

The [FFMs], he urged colleagues, “are two of the very important tools that we have” and had to do what “the market in and of itself will not do. “They were “not endangering the fiscal health of this country,” he continued. . . .

“I want to roll the dice a little bit more in this situation towards subsidized housing,” Frank said.

For all his efforts, Frank readily acknowledges that there are more people needing decent housing than there were when he started in Congress. And with millions of others losing their homes to foreclosure, Frank asks to be judged by how much worse things would have been without him.

The mind boggles.

—-

(AOG: for some reason, I can’t put a blank line between the last two paras)

Put the closing blockquote tag in its own paragraph.

Annoying Old Guy Tuesday, 12 October 2010 at 17:27

I was just about to cite that myself. But I am sure it’s the case that no one forced the bankers to sell those loans to the FMs, just like the borrowers didn’t have to borrow the money … oh wait, that’s not right. When the bankers convince someone else to engage in a transaction, it’s the bankers’ fault, and when someone else (like the FMs) convince the bankers to engage in a transaction, it’s the bankers’ fault. Bankers Uber Culpa!

And just to show how it is, in fact, those Evil Bankers and never the Good Public Servants, it turns out that Congressional staffers are engaging in insider trading because that’s completely legal. Congress and its staff are exempt from such regulations. Clearly it could only be because those people only act in the public interest, never in their own.

Harry Eagar Tuesday, 12 October 2010 at 18:57

Fannie and Freddie weren’t good public servants, in any sense of the word, since they were a (putatively) profit-generating business.

I am not sure that the CRA would (or did) help prevent the hollowing out of the central cities, but it could have. Maybe. Better than shipping central city jobs to China and creating a stranded class of near-unemployables. But that is a long story, and if you want to blame Democrats, go ahead and blame them for rebuilding the cities and destroying the neighborhoods in the ‘60s, and the Republicans for the interstate highways that helped destroy them in the ‘50s. (See an interesting case study for Greensboro, N.C., called ‘Civilities and Civil Rights,’ but I warn you, it gets complicated.)

I fail to see your point about borrowers. The system was designed to create crooks — just like deregulating the S&Ls — and was very successful.

No banker in his right mind (you might think, wrongly) would lend to a crooked applicant. But in this case, they didn’t care. Another thing I have noticed in the Circuit Court petitions for foreclosure is that in many cases the lenders never bothered to record the deeds at the Bureau of Conveyances. Mighty strange behavior, you’d think, but from what I read (at, eg, Bloomberg) it wasn’t just in my county. See Tavakoli excerpt by Rough.

AVeryRoughRoadAhead Wednesday, 13 October 2010 at 23:36

In the Roaring Twenties, they had many of the same kind of mortgage “innovations”: ARMs, No-downs, teaser rates, mortgage securitization. Obviously, this was well before the CRA.

Between 1918 and 1926, housing starts rocketed from 100K annually to 1MM annually, and “between 1921 and 1929 the nominal volume of non-farm residential mortgage debt tripled, and inflation-adjusted debt grew faster than in any decade before or since.”1

Henry Hoagland, [describing] the situation he faced in 1935 as a member of the Federal Home Loan Bank Board:

[A] tremendous surge of residential building in the [last] decade…was matched by an ever-increasing supply of homes sold on easy terms. The easy terms plan has a catch…[o]nly a small decline in prices was necessary to wipe out this equity. Unfortunately, deflationary processes are never satisfied with small declines in values. In the field of real-estate finance… we have depended so much upon credit that our whole value structure can be thrown out of balance by relatively slight shocks.2

GSE securitization started in 1969, but the RE bubble didn’t start until 1997, 28 years later, and the bubble peaked in 2006, 37 years later. By 1990, GSE securitization accounted for ~40% of all non-farm residential mortgage debt, but they never held more than that, and by the end of the bubble the GSEs held only ~30% of all non-farm residential mortgage debt.

Further, concurrent with the U.S. RE bubble, there were similar RE bubbles in, e.g., Spain, Ireland, the UK, Australia, Canada and Thailand. None of those places have identical CRA-like policies and histories; the policies vary.

Considering all of the above, neither the CRA nor GSE mortgage securitization can reasonably be held to be the proximate cause of the RE bubble.

1 Is this your grandfather’s mortgage crisis? | by Kenneth A. Snowden

2 ibid

AVeryRoughRoadAhead Wednesday, 13 October 2010 at 23:50

When the bankers convince someone else to engage in a transaction, it’s the bankers’ fault, and when someone else (like the FMs) convince the bankers to engage in a transaction, it’s the bankers’ fault.

Well, yeah. It’s the very definition of the job of banking to make prudent loan decisions. If someone convinces bankers to engage in money-losing transactions, then the bankers have FAILED at their very most basic function.

And, just as the professional car salesperson enjoys an asymmetric advantage in information and experience over most car buyers, so too does the experienced lender have asymmetric advantage over the average home buyer. Or Heck-fire, some bankers enjoy an asymmetric advantage over supposedly “sophisticated” investors - look at how Goldman Sachs has made a bajillion dollars by both frontrunning & betting against their own clients.

The bankers did not act alone in this apocalyptic fiasco. But if you’re looking for the mastermind or ringleader, it’s the banking sector.

Annoying Old Guy Thursday, 14 October 2010 at 09:25

Well, yeah, it’s the very definition of the job of a public servant to make prudent decisions with taxpayer money. If instead they create financial disasters, then they have FAILED at their most basic function.

Just to be clear, my claim is not “bankers are blameless”. It is against the claim “only bankers are at fault”. The mortgage documentation issue was exacerbated by negligent and corrupt public officials, but clearly it is rooted in shoddy banking and the bankers have to take the primary blame for it. It was stupid and (as far as I can tell) illegal.

As for the CRA and the GSE with regard to the bubble, my view is that such bubbles are inevitable byproducts of having a private sector. However, if left alone they are (in the long term) rather minor stumbles. What things like CRA and (much more so) GSEs do is add enormous amounts of fuel to an already burning fire, turning problems in to disasters.

I also think that the foreign bubbles are to a significant extent derivate of the domestic bubble — our economy is so big that credit expansion here creates the same in allied economies (such as Europe). Those economies also had similarly expansive economic policies, again in (partial) response to ours.

AVeryRoughRoadAhead Thursday, 14 October 2010 at 09:45

[M]y view is that such bubbles are inevitable byproducts of having a private sector.

Without question. Relatively free societies are occasionally prone to fits of collective madness, e.g. Beanie Babies.

Hey Skipper Thursday, 14 October 2010 at 10:59
I also think that the foreign bubbles are to a significant extent derivate of the domestic bubble.

Do not forget the Chinese trade imbalance, and what the Chinese gov’t was doing with all that cash.

Harry Eagar Thursday, 14 October 2010 at 18:55

Chinese trade imbalance? You mean exporting all those jobs worked to America’s disadvantage? Who knew?

As I said earlier, the bubble would have been smaller and would have been pricked earlier if there hadn’t been all those stupid second mortgages. You may lay off blame all you want, but 100% of that one goes to the lenders.

In 2006, I got more than 200 solicitations to take out a second mortgage. Barney Frank did not sign even one of them.

Hey Skipper Thursday, 14 October 2010 at 19:35
You mean exporting all those jobs worked to America’s disadvantage?

And your alternative would be? Specifics, please.

As I said earlier, the bubble would have been smaller and would have been pricked earlier if there hadn’t been all those stupid second mortgages.

From todays Best of the Web:

Rep. Barney Frank, the disheveled, fast-talking Democrat from Massachusetts, has been flipping and flopping of late. The Boston Globe reports that Frank now admits he was wrong about the mortgage mess:

When US Representative Barney Frank spoke in a packed hearing room on Capitol Hill seven years ago, he did not imagine that his words would eventually haunt a reelection bid.

The issue that day in 2003 was whether mortgage backers Fannie Mae and Freddie Mac were fiscally strong. Frank declared with his trademark confidence that they were, accusing critics and regulators of exaggerating threats to Fannie’s and Freddie’s financial integrity. And, the Massachusetts Democrat maintained, “even if there were problems, the federal government doesn’t bail them out.”

Now, it’s clear he was wrong on both points—and that his words have become a political liability as he fights a determined challenger to win a 16th term representing the Fourth Congressional District. Fannie and Freddie collapsed in 2008, forcing the federal government to buy $150 billion worth of stock in the enterprises and $1.36 trillion worth of mortgage-backed securities.

Frank, in his most detailed explanation to date about his actions, said in an interview he missed the warning signs because he was wearing ideological blinders. He said he had worried that Republican lawmakers and the Bush administration were going after Fannie and Freddie for their own ideological reasons and would curtail the lenders’ mission of providing affordable housing.

“I was late in seeing it, no question,” Frank said about the lenders’ descent into insolvency.

Notoriously missing is any reference to second mortgages.

Never mind the CRA’s place in the whole cause - effect schema, what if GSE’s never existed?

Annoying Old Guy Thursday, 14 October 2010 at 20:07

What I want to know is, can I use this as a standard criteria? That is, if someone claims politician X or policy Y supported by X was at fault, I can dispute it by pointing out that X’s signature doesn’t appear on any documents involved? For instance, that former Presidents Reagan, Bush 41, and Bush 43, had nothing to do with exporting those jobs to China because they didn’t sign any of the pink slips?

Harry Eagar Thursday, 14 October 2010 at 22:25

Be my guest.

The fact is, the banks were pushing second mortgages like crack to crackheads. Nobody made them do it.

They weren’t even bothering to register the deeds, which I did not know until recently, when a raft of lawsuits challenging foreclosures showed up in the 2nd Circuit Court of Hawaii. This appears to have been usual practice, not some local aberration.

It was a bucket shop.

AVeryRoughRoadAhead Thursday, 14 October 2010 at 22:50

Never mind the CRA’s place in the whole cause - effect schema, what if GSE’s never existed?

As noted upthread, there was a housing bubble in America during the Roaring Twenties, well before the GSEs existed.

Annoying Old Guy Friday, 15 October 2010 at 07:10

Wow, the whole Reagan plot against the workers gone, just to nail the bankers.

We also have the implication that either

  1. Government economic policy has no effect on private sector economic decisions (which makes such policy pointless)
  2. Government actors bear no responsibility for any of the effects of their economic policies (which makes any complaints about the GOP and its “destructive policies” moot).

Which of those did you mean to use as a base for your claim about bankers having sole responsibility, Mr. Eagar?

AVRRA;

Yes, history repeats. As noted upthread, government economic policy was credit expansionary then as well. One might also note that the housing bubble then, without GSEs, was not nearly as damaging.

Hey Skipper Friday, 15 October 2010 at 11:49
As noted upthread, there was a housing bubble in America during the Roaring Twenties, well before the GSEs existed.

Yes, I read that. However, this housing bubble is not that housing bubble, and it is this one I am talking about.

Eliminate the CRA — which insisted on an outcome in direct contradiction of the market — and instead insist on 10% down for all mortgages (which pretty much eliminates sub prime loans). Does the bubble still happen?

Eliminate GSEs, with their implicitly risk free MBSs, does the bubble still happen?

I agree that many bankers were some combination of blind, stupid, and greedy.

But government policy tossed a bunch of gasoline on what had been a well functioning housing market, followed shortly thereafter by a lit match.

AVeryRoughRoadAhead Saturday, 16 October 2010 at 06:05

Yes, the GSEs functioned as an accelerant, turning a financial firestorm into an apocalyptic inferno. However, the existence of the GSEs was not, in and of themselves, sufficient for a RE bubble. Indeed, there have been a half-dozen RE crashes since the GSEs came into existence.

I have no quibble with eliminating the GSEs, and ending the Federal income tax deduction for mortgage interest. I just don’t think that blaming the GSEs for the FIRE bubble leads us anywhere very constructive. The GSEs can be constructive or destructive, depending on the environment in which they operate. The primary issue is the regulatory capture of gov’t by the FIRE-wielders, as AOG’s been writing about in his “what’s the point of more regulation if the current regulations aren’t enforced anyway?” segments. A major secondary issue is the social conditions which lead to such widespread nihilism among the FIRE executives that they were willing to burn down all of society in order to make a buck. (Which AOG just touched on here.)

Eliminate GSEs, with their implicitly risk free MBSs, does the bubble still happen?

Yes, of course it does. We just got done agreeing that there was a pre-GSE national FIRE bubble only three generations ago. They too had MBSs in those archaic days, although they weren’t gov’t-backed.

And really, the GSE MBSs aren’t gov’t-backed, either, nor are they “implicitly risk free”. In point of fact they’re explicitly NOT gov’t-backed - but the too-smart-by-half “sophisticated” investors who work this market have inferred that the U.S. gov’t must support the GSEs by backing the MBSs anyway, and thus the “risk-free.” The U.S. gov’t has played along with this line of thought, ‘cause it’s true, they gotta support the GSEs… For now. The risk comes crashing back like a mile-high tsunami sometime in the future, when it becomes obvious to investors that the U.S. gov’t doesn’t have, and can’t raise, enough money to actually honor their recent promises to backstop GSE MBSs; and to the U.S. gov’t that the can can’t be kicked any further, and so there’s no need to continue the pretense that they’ll make good the GSE MBSs.

[I]nsist on 10% down for all mortgages. … Does the bubble still happen?

It’s social mood which drives bubbles. The Roaring Twenties didn’t have GSEs offering 3%-or-lower-downpayment loans, but private parties offered ‘em anyway. So no, the bubble doesn’t inflate nearly as much if we insist on 10% down, but who’s going to do the insisting in the face of “credit expansionary government economic policy”?

Further, even if one arm of gov’t or society does enforce 10% down, it’s still meaningless if downpayment gift assistance programs are allowed. (Closer look here.)

AVeryRoughRoadAhead Saturday, 16 October 2010 at 17:36

The Really, Really Long Bond | By Ian Mathias

The bond market is getting nuttier by the day – offering ever-lower interest rates at ever-higher risks. The recent spate of 100-year bond issues illustrates the point.

100 years ago, back in 1910, Zeppelins were all the rage. After patenting his design at the turn of the century, Count Ferdinand von Zeppelin had successfully made his rigid airship the one and only legitimate form of flying transportation. True, in 1910 there were some country boys named the Wright Brothers tinkering with terribly unstable gliders and propeller flying machines. But the Zeppelin was the standard. You see, it just made so much more sense at the time…make a big cylinder out of the thinnest metal possible, fill it with cow intestines then fill those intestines with light, flammable gas; power the thing with a fire-breathing engine to float thousands of feet above ground… What’s not to love?

While the Wrights toiled on their design, Zeppelins ruled. The world’s first airline, DELAG, flew Zeppelins exclusively. Zeppelins had conducted commercial cargo and passenger flights long before Americans risked their lives or merchandise with airplanes as we know them today. Zeppelins were a hit with the German military too, while in 1913 the American Army deemed the Wright model C “dynamically unsuited for flying.” They had this nasty way of nose-diving and killing everyone on board, the Army said, and soon after discontinued its business with the Wright Company.

So imagine this: You’re an investor, alive and well in 1910. You have to chose to lend to one of these companies money for the next 100 years… Do you write Count Ferdinand a century bond, or do you loan the money to the Wright Brothers?

The Wrights, as you know, had the right idea, even though the opposite seemed true at the time. Had you lent them money 100 years ago, there’s a chance you’d get it back today, plus interest. Their company became the largest aircraft manufacturer in the world by the end of World War II and is now known as Curtiss-Wright, a publically traded component manufacturer with a $1.4 billion market cap. […] Your best shot at getting your 100-year Zeppelin bond cashed today would be mugging the crew of the Goodyear Blimp.

The moral of the story: The vast majority of people, your editor included, don’t know squat about what the world will be like 100 years from now. […] Yet, the 100-year bond is now officially back in vogue. The last three months have seen the trifecta of century bond offerings:

  • A stalwart American company: Norfolk Southern, arguably the oldest railroad operation in the US, raised $250 million in August when it sold bonds to investors due in 2110.
  • A powerful multinational bank: AAA-rated Rabobank raised $350 million a month later selling 100-year bonds of their own.
  • A struggling sovereign state: Mexico borrowed $1 billion in early October, which most of its lenders won’t see until this time in 2110.

Here’s the best part: For the privilege of borrowing “investor” capital into the next century, not one of these issuers paid over 6%. [Emph. add.]

This is the latest chapter in the most powerful trend in investing at the moment: the hunt for yield. Investors are so hungry for high-yielding, stable return they are willing to take outlandish risks…like buying a 100-year bond from a government that has suffered two major currency crises and one sovereign default during the last 30 years. […]

Bret Sunday, 17 October 2010 at 00:11

Uh huh. And (depending on what discount rate you pick) is the Net Present Value of a stream of 100 yearly payments of X much different than the Net Present Value of 30 yearly payments of X? Or the value of a share of stock which is supposed to represent the discounted value of all future earnings (forever)?

As I think we’ve seen, it’s not much crazier than investing in 30 year mortgage bonds, and let’s hope that people keep doing that or there’ll be a lot of homeless people in the future.

What I’m saying here is that once the term exceeds a few years, it’s a different game and the length doesn’t matter much. Changes in interest rates and risk damage a 30 year bond almost as much as a hundred year bond.

Harry Eagar Sunday, 17 October 2010 at 01:39

Back when Zeppelin was active, there were 999-year gold bonds being sold in London, and no government interference to speak of.

And if King Harold had offered 990-year bonds in 1065, I bet he would have found takers.

AVeryRoughRoadAhead Monday, 18 October 2010 at 03:16

As I think we’ve seen, it’s not much crazier than investing in 30 year mortgage bonds… Changes in interest rates and risk damage a 30 year bond almost as much as a hundred year bond.

Exactly. Exactly. In the current environment doing either is insane for almost all buyers, which is why nearly all 30yr U.S. Treasury Bonds are currently being bought by… The U.S. Central Bank. If one can call transferring money from the right pocket to the left, “buying”.

But there is a natural market for 30yr bonds that doesn’t exist for 100yrs, that of pension funds, who seek to match asset duration with risk duration. For that purpose only, 30yrs are a rational buy.

For that matter, why would anyone issue 100yr bonds, unless they’re using the money on a 99-year lease somewhere… According to ValuBond via Yahoo! Finance, blue-chip companies currently can borrow twenty-year money for a wee bit over 4%, so why pay 6% to borrow? What is the money being borrowed to accomplish, that won’t be completed within twenty years? Issuing hundred-year debt absent extraordinary circumstance is inherently a bet against robust economic activity and/or low rates of inflation.

…and let’s hope that people keep doing that or…

They aren’t. Or at least, not without taxpayer subsidy. The GSEs are now guaranteeing over 95% of all mortgages being issued.

Bret Monday, 18 October 2010 at 10:39

Rough wrote: “Or at least, not without taxpayer subsidy.

True. But they would probably rationally hold them at some interest rate.

Very long bonds are sorta like that twenty dollar bill in your pocket which is a “forever bond” with no interest. They are almost more a type of money than a bond.

Hey Skipper Monday, 18 October 2010 at 13:20
In the Roaring Twenties, they had many of the same kind of mortgage “innovations”: ARMs, No-downs, teaser rates, mortgage securitization. Obviously, this was well before the CRA. Between 1918 and 1926, housing starts rocketed from 100K annually to 1MM annually, and “between 1921 and 1929 the nominal volume of non-farm residential mortgage debt tripled, and inflation-adjusted debt grew faster than in any decade before or since.”
I have to revisit this, because I finally had time to read the link, rather than accepting its assertions at face value. As it happens, not only does the article fail to mention any RE bubble in the thirties, it surprisingly sloppy:
  • The term “easy terms” is left undefined, and is likely derived from the terms that came before, which are also undefined.
  • It leaves completely unmentioned the concurrent transition of the US economy from largely rural to urban, which must involve an increase in new housing.
  • In the first chart, building starts are taken completely out of context. There is no reference to the Depression or WWII. The problems in the mortgage market in the 1930s need no other explanation than the Depression itself.
  • There is no scale for the percentage change in Mortgage Debt, nor any explanation for “10 Year” in its title. (Or rather, the title implies statistical smoothing which clearly isn’t present.)
  • One of the bullets cites an increase in home ownership rate from 41% to 46%. One would think this rate is worth knowing over the entire period, not just the thirties. Otherwise, its lack of context renders it a waste of space.
  • One element of a bubble, indeed, the essential element, is a rapid rise in price. There is no price information at all in the entire article.
  • Some assertions are directly contradicted by the data. For instance “[during the 1930s, the share of private real estate securities gradually fell to zero.” No, it didn’t. It gradually fell from about 9% to 5%. It fell abruptly from 5% to zero between 1944 to 1945.
  • Finally, the article agrees with what I asserted: The key change was the appearance of GSEs that came to hold large numbers of securities that they could profitably hold due to the implicit federal guarantee.
Private agencies followed that path, with a healthy shove from the CRA.

Just last Friday I refinanced my house from 30 years / 5.75% APR to 15 / 4.28%. There was a truly impressive amount of scrutiny involved, plus a maximum loan value of 90% of assessed value.

Despite my perfect credit score.

Those are the standards that existed before the CRA and GSE.

Note also that those standards are completely fatal to the CRA.

Hey Skipper Monday, 18 October 2010 at 13:21

If I buy a 100 year bond, am I obligated to hold it for 100 years?

Bret Monday, 18 October 2010 at 14:49

Is that a serious question?

AVeryRoughRoadAhead Monday, 18 October 2010 at 16:44

If I buy a 100 year bond, am I obligated to hold it for 100 years?

No, but somebody is, so even if you’re buying with an eye to reselling, you have to believe that future conditions will be conducive to a buyer agreeing with your initial analysis that a hundred year bond is a worthwhile asset to hold.

Coming out of the late 70s, a thirty year Treasury bond paid high rates of interest, but was held over a period of high economic activity and low inflation - a win for investors.

But we know, beyond dispute, that the next few decades will be a period of low growth and high inflation, so buying a multi-decade bond that pays less than the post-WW II average interest rate for such instruments is a sure-fire LOSER for the buyer.

Even if we ignore the current economic situation, and indeed the whole FIRE mess entirely, the demographic and gov’t debt situations in the U.S. and around the world guarantee the above. Add back the FIRE mess, and you’re left with fiscal Armageddon.

Hey Skipper Monday, 18 October 2010 at 19:37
Is that a serious question?

No, not really.

But just the article AVVR linked to in substantiating is the 30’s redux falls apart under routine and amateur scrutiny, so does a story asserting the bond market is getting “nutty” because it includes those that will mature in 100 years: no one’s risk horizon gets anywhere close to that, although the sum of risk horizons eventually will.

Harry Eagar Monday, 18 October 2010 at 22:08

‘Those are the standards that existed before the CRA and GSE.’

No they’re not.

Around 1950, you could get a 30-year, 3.25% loan with no down.

Hey Skipper Monday, 18 October 2010 at 23:14
Around 1950, you could get a 30-year, 3.25% loan with no down.

Who is you?

I’ll bet that in 1950 the answer made a difference.

Harry Eagar Tuesday, 19 October 2010 at 12:43

Any of about 14 million former GIs. Something like a third of working adults, so not very restrictive.

Hey Skipper Tuesday, 19 October 2010 at 15:20

So, in other words, 2/3 were excluded.

Unlike the CRA, which excluded no one.

Harry Eagar Tuesday, 19 October 2010 at 20:22

Actually, the CRA excluded more than 2/3rds, since a bank couldn’t get CRA props for lending to the well-off.

I had to laugh at Sowell. Don’t have the book in front of me, but he said banks would have been safer lending to people with more money.

Hey Skipper Tuesday, 19 October 2010 at 20:27
… since a bank couldn’t get CRA props for lending to the well-off.

Thank you ever so much for proving my point.

AVeryRoughRoadAhead Wednesday, 20 October 2010 at 02:30

…no one’s risk horizon gets anywhere close to that, although the sum of risk horizons eventually will.

Except that every buyer of the bond must analyze the purchase as though they’ll hold it to maturity - if YOU think it’s risky to hold the bond for more than five years, what makes you think that a few years down the road you’ll find a willing buyer at anywhere close to par?

In other words, EVERY buyer’s risk horizon is the sum of the risk horizons. If you want a shorter risk horizon, buy a shorter bond. Think of the upthread example of pension funds.

But just the article AVVR linked to in substantiating is the 30’s redux…

Well, no. This ain’t the Thirties all over again - it’s WORSE. Hollowed-out manufacturing base, all major banks insolvent, high structural unemployment, PLUS a demographic crisis, PLUS an entitlement crisis, PLUS the Federal gov’t is already up to its neck in debt, and higher interest rates are on the way, severely limiting the gov’t’s ability to respond, PLUS the waning days of cheap oil…

I’d trade today’s situation for that of 1930 America in a heartbeat. At least their troubles were largely over in a mere fifteen years.

AVeryRoughRoadAhead Wednesday, 20 October 2010 at 03:08

Charles Hugh Smith - of two minds blog :

The system for financing mortgages and regulating that financing has failed, completely and utterly. The mortgage and real estate markets are now in collapse.

Yesterday I wrote about how positive feedback loops lead to collapse. Welcome to the U.S. housing and mortgage markets. As I have documented here numerous times, the entire U.S. mortgage market has already been socialized: 99% of all mortgages are backed by the three FFFs—Fannie, Freddie and FHA—and the Federal Reserve has purchased a staggering $1.2 trillion in mortgage-backed assets in the past year or so to maintain the illusion that there is a market for mortgage-backed securities. […]

But then the private owners and managers of the “too big to fail” banks would not be reaping hundreds of billions in profits and bonuses. And since the banking industry has effectively captured the processes of governance (that is, Congress and the various regulatory agencies), then what we have is a system of private ownership of the revenue and profits generated by the mortgage industry and public absorption of the risks and losses. […]

The incestuous nature of the system is breathtaking. The Fed creates the credit which enables the mortgages, the Treasury guarantees the mortgages via Fannie, Freddie and FHA, the Fed buys the mortgages ($1.3 trillion in mortgages are on their balance sheet) and the private banks collect the fees and profits. […]

But now the entire legal basis for that privatized-profits, socialized losses system has dissolved. The foreclosure scandal is not just a “scandal” in which various frauds were brought to light; it is the failure of the entire system of originating mortgages that props up the entire real estate market. […]

4. Pending sales of properties that were foreclosed are now of dubious legality.

5. Anyone buying a house in foreclosure, or a house that was foreclosed, cannot get title insurance.

6. Investors who have been propping up the housing market by snapping up properties in foreclosure (REOs or “distressed properties”) face high risks and uncertainties in buying any real estate that was in or is in the foreclosure pipeline. That means markets will lose 30% to 50% of their buyers.

7. Buyers who closed on foreclosed homes now face legal challenges to their ownership and potentially even “clawback” of the property as the previous owner can claim he/she was defrauded by a flawed/defective foreclosure process.

8. Real estate attorneys can rejoice: everyone will get sued, in every court in the land. Banks will get sued, title insurance companies will get sued, realtors will get sued, foreclosure mills will get sued, MERS will get sued, and so on. The attorneys general of the states will all sue the banks and mortgage mills, claiming billions in damages.

Anyone who thinks this is all trivial technicalities is wrong.

9. The real estate market will collapse as the imbalance of buyers and sellers swings to extremes. Buyers vanish as trust in the institutions of real estate finance and property rights has collapsed, and millions of distressed/defaulted mortgages don’t get paid. Underwater sellers have a stark choice: either dump the house for cash (assuming the bank allows a short-sale and eats a massive loss) or stop paying the mortgage and see what happens.

That sets up a new positive feedback loop in a very tenuous market: millions of underwater homeowners will realize their homes are plummeting in value and “recovery” is hopeless. Millions more who were on the edge will be pushed underwater as prices fall. The incentives for the newly underwater are clear: stop paying the mortgage, since price “recovery” is hopeless and the foreclosure process is frozen.

The imbalance between few buyers and millions of properties on the market or in the shadow inventory has only one “capitalist” resolution: the destruction of price down to levels that clears the inventory.

Las Vegas offers a example of this clearing: condos are selling for 15% or 20% of their bubble-era valuations—and this is with massive Federal subsidies of the mortgage market. […]

The non-mainstream media can speak the truth directly. For example, here is the excellent Acting Man blog:

Total Chaos :

The biggest question of all, is there anyone working on a solution? I know the answer to that: No.

We now have socialized housing. If you disagree, just imagine the consequences if government intervention were withdrawn. Real estate markets would collapse immediately. The government is the market. There is no exit strategy…
AVeryRoughRoadAhead Wednesday, 20 October 2010 at 05:18

The term “easy terms” is left undefined, and is likely derived from the terms that came before, which are also undefined.

That was from a 1935 statement by Henry Hoagland, then-member of the Federal Home Loan Bank Board. While the terms are undefined, they’re also irrelevant, as Hoagland lays out the consequences of those “easy terms”, whatever they might have been: “[A] tremendous surge of residential building…”, “easy terms plan has a catch…[o]nly a small decline in prices was necessary to wipe out this equity. Unfortunately, deflationary processes are never satisfied with small declines in values…”, “we have depended so much upon credit that our whole value structure can be thrown out of balance by relatively slight shocks. When such a delicate structure is once disorganized, it is a tremendous task to get it into a position where it can again function normally.”

Buyers put little down, have only small equity, huge leverage => Surge in demand leads to building boom => System becomes vulnerable to small downturns => A large downturn occurs => Complex systems in disequilibrium are monstrously difficult to right.

It leaves completely unmentioned the concurrent transition of the US economy from largely rural to urban, which must involve an increase in new housing.

Was not that transition ongoing before the 20s? Yet during the 20s housing starts exploded by 1,000%. Rural to urban reinforces the 20s housing bubble, but does not explain it. By way of comparison, at the hight of the recent housing bubble, annual housing starts were only 100% higher than they were at the beginning.

In the first chart, building starts are taken completely out of context.

It depicts the actual number of annual building starts, 1910-2008. How can that be “out of context”?

There is no reference to the Depression or WWII.

Nor to any other historical event or era. I fail to grasp your objection.

There is no scale for the percentage change in Mortgage Debt…

An annoying oversight, but the one of the bullet points makes it clear that we are looking at a tripling of the nominal volume of non-farm residential mortgage debt.

One element of a bubble, indeed, the essential element, is a rapid rise in price. There is no price information at all in the entire article.

Except for the information that “between 1921 and 1929 the nominal volume of non-farm residential mortgage debt tripled, and inflation-adjusted debt grew faster than in any decade before or since, [despite] the rate of home ownership [increasing only] from 41% to 46%.”

The number of homeowners increases by 12%, but residential mortgage debt triples? One need not be a mathematical genius to infer “a rapid rise in price.”

Finally, the article agrees with what I asserted: The key change was the appearance of GSEs that came to hold large numbers of securities that they could profitably hold due to the implicit federal guarantee.

That’s an interesting interpretation, considering that THE VERY NEXT SENTENCES are “second, private agencies began to securitise on their own by underwriting the credit risk on pools of mortgages that the government-sponsored enterprises […] would not securitise. [Emph. add.] After 1995 the two forces converged to generate the third great expansion of residential mortgage debt in the past century, [and] a re-emergence of private-label securitisation on a scale not seen since the 1920s. […] The second great mortgage crisis was just around the corner.”

The Federal Home Loan Banks have been around since 1932, Fannie Mae since 1938, and Freddie Mac since 1970. Further, GSE-held CDOs have been around since the 70s. Yet, the latest FIRE bubble didn’t start until 1997. Those GSE varmints sure are slooooow poison.

Also, we have to go back to the fact that RE bubbles occurred in America BEFORE the GSEs existed, and internationally in places where no RE GSE structure, or CRA-type regulation or policy, exist. How to explain those bubbles, if the GSEs are “key” to RE manias?

All the GSEs are “key” to, is political patronage and petty corruption.

But just the article AVVR linked to in substantiating is the 30’s redux falls apart under routine and amateur scrutiny

Not so much.

…so does a story asserting the bond market is getting “nutty” because it includes those that will mature in 100 years…

The point of that article wasn’t that bond buyers are nuts for buying 100yr issues, it’s that they’re nuts for accepting the offered terms. I myself might buy a hundred year bond if it had an adjustable rate, or were a convertible debenture.

The article excerpt in question begins with “offering ever-lower interest rates at ever-higher risks”, and ends with “the most powerful trend in investing at the moment: the hunt for yield. Investors are so hungry for high-yielding, stable return they are willing to take outlandish risks…” THAT is what’s nuts.

Bret Wednesday, 20 October 2010 at 11:43

Rough wrote: “Except that every buyer of the bond must analyze the purchase as though they’ll hold it to maturity…

No. Or vaguely sorta, but not really.

If that we’re strictly true, no-one would buy a share of stock which has no maturity.

The reason one can buy stock and long term bonds is that the distant years in the Net Present Value calculation have virtually no impact on the value of the asset.

So you don’t really need to take year 99 into account (unless you’re Lord Stern and use an essentially zero discount rate when analyzing the impact of global warming hundreds of years into the future). If you’re using a typical discount rate in your NPV calculation it doesn’t even matter if the bond goes bust in 50 years.

Bret Wednesday, 20 October 2010 at 11:47

Rough wrote: “This ain’t the Thirties all over again - it’s WORSE.

Subjectively for me, certainly not. Given medical technology, I’d possibly be dead if this were the 30s. Also, I like my mobile phone and Internet, so even if we end up all being terribly poor otherwise, it won’t be so bad.

Bret Wednesday, 20 October 2010 at 11:51

Rough quoted: “The incestuous nature of the system is breathtaking.

I hate to agree with Rough on anything, but here I have no choice. This is a very serious problem that’s undermining both freedom and prosperity in my opinion. Short of armed revolution, I don’t see how anything can be done about it though.

Hey Skipper Wednesday, 20 October 2010 at 12:25
Except that every buyer of the bond must analyze the purchase as though they’ll hold it to maturity - if YOU think it’s risky to hold the bond for more than five years, what makes you think that a few years down the road you’ll find a willing buyer at anywhere close to par?

You started off from a bizarre premise, then went straight to self-contradiction.

The bizarre premise is that anyone buying a 100-year bond today (or, for that matter, anyone who is much older than 50 buying a 30-year bond) is thinking for even a second about its value at maturity: by then the buyer will have joined the choir invisible.

If I think it risky to hold a bond for five years, no matter its maturity, I won’t buy it. People will buy bonds based upon their assessment of risk to themselves at the time they choose to sell it, which is going to be well shy of 100 years.

Well, no. This ain’t the Thirties all over again - it’s WORSE … PLUS the waning days of cheap oil…

I don’t have time to take on everything from that sentence, but couldn’t help but notice the last bit.

You did know that recent advances in drilling technology means the US is lousy with natural gas for decades to come? So much so, that predictions of only a few years ago of a relentless rise in natural gas prices have been made complete nonsense.

——

There were two points to my comments about the article you cited about the US housing market. It didn’t say what you think it did, and it was plain sloppy: scale left off of a graph, a completely nonsensical title for another, citing a phenomena outside the time span in question, and taking a soda straw view of reality. Context does matter, because the housing market does not exist in a vacuum. (What effect did WWII have on housing? Would a discussion covering that period be anything but woefully inadequate if it left out that little tiff?)

But particularly perplexing is the complete absence of any reference to price throughout the whole article.

Except for the information that “between 1921 and 1929 the nominal volume of non-farm residential mortgage debt tripled, and inflation-adjusted debt grew faster than in any decade before or since, [despite] the rate of home ownership [increasing only] from 41% to 46%.” The number of homeowners increases by 12%, but residential mortgage debt triples? One need not be a mathematical genius to infer “a rapid rise in price.”
One does not need to be a math genius to note that linking a rise in debt and a rise in price is to wander into the land of non-sequitor. And, as it happens, fantasy. Go to the second page, depicting CPI adjusted US house prices since 1890. Now, justify the relationship between mathematical genius and inferring a rapid rise in price from the tripling of mortgage debt between 1929 and 1939.
The Federal Home Loan Banks have been around since 1932, Fannie Mae since 1938, and Freddie Mac since 1970. Further, GSE-held CDOs have been around since the 70s. Yet, the latest FIRE bubble didn’t start until 1997. Those GSE varmints sure are slooooow poison.
What happened after 1970? 1989? 1992? 1994? 1995? Nothing like adding gasoline to make a FIRE.
Harry Eagar Wednesday, 20 October 2010 at 23:21

If it was so dangerous for hardworking Guatemalan immigrants to take out low or no-down mortgages, why wasn’t it dangerous for Wall Street banks to leverage their capital 30, 40 or 100 to 1?

Any slight downturn in the supposed assets wipes them out, especially since many of the assets had only notional value to begin with. Think LTCM.

The one-sided tenor of this discussion suggests that the goal is not to identify a culprit but a scapegoat.

In my county, Michael Dell defaulted on a $400 million mortgage, in which he had $0.00 equity, although he had income and assets that would have allowed him to continue paying on his note.

Where is the outrage?

AVeryRoughRoadAhead Thursday, 21 October 2010 at 02:30

Also, I like my mobile phone and Internet, so even if we end up all being terribly poor otherwise, it won’t be so bad.

No, life’ll probably be pretty good by historic and global standards, just not by late-20th Century American standards. It’s the period of adjusting to lowered expectations that’s going to give society conniption fits, and therein lies the danger.

Short of armed revolution, I don’t see how anything can be done about it though.

Yeah, it’s a toughie. My hope is for political revolution before it’s irrelevant. But I’m not counting on it.

For one thing, there aren’t any “soft landing” scenarios left. So national leaders, here and abroad, have only the choice of a hard landing now, or desperate hand-waving for awhile and an even harder landing later. Well, it’s a tough sell to tell any electorate: “There’s no way out, we gotta bite the bullet.” It’s easier to allow events, no matter how predictable, to force your hand - it’s basic human psychology.

AVeryRoughRoadAhead Thursday, 21 October 2010 at 04:15

Skipper:

So, are you saying that you don’t think that there was an American housing bubble in the 20s?

Hey Skipper Thursday, 21 October 2010 at 13:06

AVRRA:

One does not need to be a math genius to note that linking a rise in debt and a rise in price is to wander into the land of non-sequitor. And, as it happens, fantasy. Go to the second page, depicting CPI adjusted US house prices since 1890. Now, justify the relationship between mathematical genius and inferring a rapid rise in price from the tripling of mortgage debt between 1929 and 1939.

Bret:

This is a very serious problem that’s undermining both freedom and prosperity in my opinion. Short of armed revolution, I don’t see how anything can be done about it though.

The original problem was undermining the mortgage market by imposing conditions that no market can survive (CRA and the GSEs were bad enough; adding the Chinese injecting huge amounts of liquidity added pure oxygen to the fire).

To avoid a repeat of the 30s, the government is ensuring the credit markets don’t seize.

Which they haven’t.

And the real estate market will not collapse due to the foreclosure “crisis”, because while doing a ruler job on documents is a clear case of submitting due process to expedience, absent a vanishingly small number of exceptions, due process was going to lead to precisely the same end as expedience.

Harry:

The one-sided tenor of this discussion suggests that the goal is not to identify a culprit but a scapegoat.

Hardly. Just like showing how an airplane ended up in pieces, there is a clear sequence of events that led to the real estate bubble; the test is to assess what would happen if any individual fact was to become its opposite. If, instead of the CRA, Congress had decided to regulate the mortgage market by insisting all loans be backed by a minimum of 10% down, all loans would be fixed rate, and the borrower must have a 5 year employment history.

Does the real estate bubble still happen?

Ironically, you, who is such a fan of regulation failed to note that the CRA effectively completely de-regulated the mortgage market by removing existing constraints on lending.

Of course, the CRA could not work on its own because it completely failed to understand the fundamental problem in the first place. Bring on the GSEs.

If they do not enjoy a risk discount derived from the implicit government guarantee, does the real estate bubble still happen?

If the Chinese had not accumulated huge amounts of foreign reserves with which to buy MBSs (thereby scoring an own goal), does the real estate bubble still happen?

And it doesn’t go any good to wave a red flag at leverage, because doing so pretends leverage is something we can do without. Which is the real crux of the eternal financial problem: determining the proper amount of leverage.

Rewind the economy to 1990, and impose a maximum 10:1 leverage ratio on the entire financial system. How would that have effected economic growth over the ensuing twenty years?

Harry Eagar Thursday, 21 October 2010 at 13:15

30:1 leverage is something we can do without. CRA didn’t require anybody to do that.

No-down mortgages had excellent repayment records as long as average Americans had reliable employment at reasonable wages. No-down mortgages were very common in the ‘50s, and foreclosure problems were negligible.

If there is anything to the raft of lawsuits beginning to be filed against the banks, then it looks as if many — allegedly, in one security offering, 97% — of mortgages bundled into a bond did not even meet CRA standards.

More regulation would have been better, no question about that.

AVeryRoughRoadAhead Friday, 22 October 2010 at 05:26

…the government is ensuring the credit markets don’t seize.

Which they haven’t.

Yet. The $64 trillion question is, for how long can they keep it up? “Not forever” is clearly true…

If [the GSEs] do not enjoy a risk discount derived from the implicit government guarantee, does the real estate bubble still happen?

Sure. The root of the bubble was loose lending standards, not low interest rates - although the latter certainly helped. Isn’t that your point about the CRA?

If the GSEs do not enjoy a risk discount derived from the implicit government guarantee, then the mortgage lenders simply charge a higher interest rate. For the most part, the people buying houses DIDN’T CARE what was the interest rate, only what their payment would be. But that doesn’t stop loan securitization or no-doc, no down, teaser rate, NINJA fog-a-mirror loans:

[Rating agency] Fitch’s analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file. (PDF) [Emph. add.]

[F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding.

——

Rewind the economy to 1990, and impose a maximum 10:1 leverage ratio on the entire financial system. How would that have effected economic growth over the ensuing twenty years?

Since until 2004 a max 12:1 leverage ratio was imposed on the entire financial system, the answer is a) not much, and b) to the extent that it would have limited ersatz growth after 2004, that would have been a good thing.

N.B. that by 2004 the housing boom had already been going for seven years, and had already clearly entered “bubble” territory in the Sand States and parts of the Nor’east.

If the Chinese had not accumulated huge amounts of foreign reserves [that were used to spike the U.S. economic punchbowl, keeping the party bumpin’], does the real estate bubble still happen?

Does that let the CRA off the hook? ‘Cause without E-Z credit, the CRA is simply the largely-irrelevant bankers’ annoyance that it was from ‘77 ‘til at least ‘03:

In a 2003 research paper, economists at the Federal Reserve could not find clear evidence that the CRA increased lending and home ownership more in low income neighborhoods than in higher income ones. [I.e., the CRA didn’t force banks to skew lending towards poor risks.]

The Federal Reserve, having examined the evidence, holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis. At the FDIC, Chair Sheila Bair delivered remarks noting that the majority of subprime loans originated from lenders not regulated by the CRA… [Emph. add.]

And, for the sake of argument, even if the CRA and GSEs were responsible for manifesting conditions in which a housing bubble was possible, the Bush the Younger admin. could have shut it down in a New York minute, simply by directing HUD to audit the GSEs’ MBSs, and getting Treasury and the SEC to make noises about making CDOs trade on exchanges, as well as rescinding the large-cap broker-dealer leverage ratio exemption policy.

To blame a policy for disaster, while the regulators are turning a blind eye, isn’t rational. It’s the institutional corruption that’s to blame, not the vehicle.

…if YOU think it’s risky to hold the bond, […] what makes you think that a few years down the road you’ll find a willing buyer[?]

People will buy bonds based upon their assessment of risk to themselves at the time they choose to sell it…

I fail to grasp the distinction. It seems that you’ve simply restated what I wrote. Please break it down for me.

PLUS the waning days of cheap oil…

You did know that recent advances in drilling technology means the US is lousy with natural gas for decades to come? So much so, that predictions of only a few years ago of a relentless rise in natural gas prices have been made complete nonsense.

“Waning days” in the context of other decadal crises, such as the Boomer retirement, (which will be problematic until at least 2035), and accumulated gov’t debt. By 2035, for instance, the ME is likely to be producing only 50% of what it does now.

Can future-tek help strip existing oil fields? Of course. Does the world have thousands of years’ worth of fossil fuels remaining? You bet. (If we include uranium). But the easy stuff is nearly gone.

While it’s entirely possible that some unforeseeable discovery, technology, or paradigm-shifting breakthrough could occur, leading to ‘energy too cheap to meter,’ basing one’s contingency planning on such is as foolish as relying upon the lottery as a retirement plan. Why do you think that the U.S. is so keenly interested in spending blood and treasure dear to maintain her grip upon the ME, despite the probability that by mid-century the global nexus for oil production will be the Atlantic Ocean, off the east coast of So. America and the west coast of Africa, and we’ll likely also have 90% efficient solar cells, algal biodiesel, orbital powersats, commercial fusion… Somethin’.

Harry Eagar Friday, 22 October 2010 at 12:50

Whatever it is, I’m bettin’ it won’t be algae. Algae are very difficult to scale up, even to the moderate scale needed for pharmaceuticals. To go up another several levels to the scale needed for large industrial output, ain’t happenin’.

If it could be done, the Japanese would already have done it.

Hey Skipper Friday, 22 October 2010 at 15:23
blockquote>30:1 leverage is something we can do without.

Credit cards.

If there is anything to the raft of lawsuits beginning to be filed against the banks, then it looks as if many — allegedly, in one security offering, 97% — of mortgages bundled into a bond did not even meet CRA standards.

Allegedly. In one offering. And what standards does the CRA have, anyway?

AVRRA:

How’s inferring price from debt going?

AVeryRoughRoadAhead Friday, 22 October 2010 at 18:44

AVRRA:

How’s inferring price from debt going?

Don’t make me come down off this porch.

Actually, very well indeed. If you were going to tweak me on this point, you most probably oughta have read your source material a little more closely, as it depicts CPI adjusted US house prices since 1890. But retail prices and mortgage debt are expressed in nominal terms, not real.

Further, the U.S. Census Bureau reports that homeownership increased by only about 5% from 1920 to 1930 (PDF), (45.6% ===> 47.8%), so whence comes this tripling of mortgage debt over the same time period?

Allegedly. In one offering.

[A]ccording to lawsuits filed by the Federal Home Loan Banks in Seattle and San Francisco, [a] sampling of 6,533 loans in 12 securitizations by Countrywide found 97 percent failed to conform to underwriting guidelines… Richard M. Bowen, former chief underwriter for Citigroup’s consumer-lending group, […] testified on April 7 before the Financial Crisis Inquiry Commission created by Congress. “Defective mortgages increased during 2007 to over 80 percent of production.” [Emph. add.]

And the real estate market will not collapse due to the foreclosure “crisis”…

The residential RE market in America has ALREADY collapsed. The GSEs compose over 95% of mortgage lending, the Fed is buying a TRILLION dollars’ worth of MBSs to prop up the TBTF banks and to placate China, title insurance companies won’t insure repo’s, and generational-low mortgage interest rates are producing plenty of re-fi’s, but actual sales of homes are off a cliff…

That’s nobody’s idea of “business as usual”, or of a “free market”.

erp Friday, 22 October 2010 at 20:36

All these acronyms are running into each other. Will somebody please put out a glossary?

Hey Skipper Saturday, 23 October 2010 at 15:38
Actually, very well indeed. If you were going to tweak me on this point, you most probably oughta have read your source material a little more closely, as it depicts CPI adjusted US house prices since 1890. But retail prices and mortgage debt are expressed in nominal terms, not real.

In order for their to be an asset bubble, there has to be an “excessive” change in price over some period: in mathematical terms, does the slope of the line connecting two points in time exceed some notional value which cannot be otherwise explained by changes in demand and hedonic factors?

To determine whether a bubble could possibly have existed, CPI correction is essential. Otherwise, you have absolutely no idea how much of the price component for a specific asset is merely a reflection of secular price changes.

Even following warmenist practice picking the absolute lowest point for US housing prices (~1921), the rate of change over the ensuing decade is barely positive.

Avoiding cherry picking by moving to ~1922, where prices are still lower than for any other year except 1921, and the rate of change for the next ten years is negative.

Then consider the thirties. The rate of change becomes positive, but the slope is by far the least for any period of rising prices since 1890.

Therefore, there could not have been a real estate bubble during the period. Furthermore, your assertion that one can “infer” a rate of change in price from a change in the amount of debt is completely refuted.

That is why I am tweaking you. The article you cited was so bad — critical terms undefined, complete neglect of concurrent events in the economy, etc — that it left me knowing even less about the real estate market of the 20s and 30s than I did going in, which is quite a feat.

Then you compounded that error by insisting on a non sequitur, then confusing magnitude with rate.

So, stay on your porch until you understand the concepts in play, and then can provide a reasoned response, not just some addendum that compounds the original error.

Harry Eagar Saturday, 23 October 2010 at 17:37

There wasn’t a bubble in real estate generally in the ‘20s, since farms peaked in ‘21 (contra what Skipper seems to be saying) and crashed in ‘22.

The famous clearing of markets never happened, although there was nothing doing to prevent that from happening. Insurance companies underwrote crop loans on the security of land, and when commodity prices crashed — and markets again failed to clear — the insurance companies ended up owning most of the South.

In ONE DAY in ‘33, 25% of the land in Mississippi was auctioned at sheriff sales.

I cannot agree with Rough that there is no current housing market. When clean properties come up, at least in my county, they sell and sell quickly.

There aren’t many clean properties, compared with what seems to be genuine pentup demand, but that is not because of CRA. That is because the banks were — and still are — run by crooks.

Hey Skipper Saturday, 23 October 2010 at 21:48

Harry:

There wasn’t a bubble in real estate generally in the ‘20s, since farms peaked in ‘21 (contra what Skipper seems to be saying) and crashed in ‘22.

The referenced data refers to housing prices only.

As for the housing market’s existence, or lack thereof, my comment to AVRRA was strictly with respect to expectations, not memory. After all, that is what his quote was talking about.

erp:

Yes, there are a fair number of acronyms floating about. The Wikipedia article on the Community Reinvestment Act gets to most of them.

Hey Skipper Saturday, 23 October 2010 at 21:52

BTW, Alaska has banks, but is a considerable distance from DC.

The housing market here has scarcely been touched by the subprime schlamozzle. An article in the Anchorage Daily News last week noted: default and foreclosure rates, at less than one percent, are essentially unchanged.

Harry Eagar Sunday, 24 October 2010 at 14:04

Alaska certainly has poor people (the most and poorest poor people, proportionally, in the country), so why wasn’t CRA forcing the banks to lend to them?

If the referenced data don’t refer to farms, which had houses on them, then the data aren’t reflecting what happened in the ‘20s. Carl Hamilton’s “In No Time at All” (reviewed at RtO) contains an excellent first-person account of the crash in farm real estate, and the transformation of midwestern owners to tenants.

It’s probably true that city real estate and farm real estate were somewhat separate markets, but not entirely. There were plenty of city workers who wanted to move to the country, and plenty of farm people who did not want to move to the city but were forced off the land.

Hey Skipper Sunday, 24 October 2010 at 16:33
Alaska certainly has poor people (the most and poorest poor people, proportionally, in the country), so why wasn’t CRA forcing the banks to lend to them?

To answer thoroughly would require a lengthy dissertation, which would point out the problem with relying upon aggregate numbers. Most of the Alaskan poor are living in very small, very isolated, quasi-subsistence communities that are separated from stone-age existence through subsidizing from various levels of government.

It would make as much sense to discuss the relative merits of chalk and cheese as to compare the CRA and bush communities in Alaska.

If the referenced data don’t refer to farms, which had houses on them, then the data aren’t reflecting what happened in the ‘20s.

The point of the referenced data was to substantiate a US housing bubble that started in the 1990s; therefore, it shows housing price trend data for as far back as it goes. Adding farms to the mix might tell us more about what happened in the 20s, but doing so would tell us less about the specific subject of house prices, as opposed to house prices conflated with house and attached farm prices.

That might be interesting, but the information we would derive thereby would be more about farms, and less about houses.

Harry Eagar Sunday, 24 October 2010 at 22:34

Or perhaps Alaska banks weren’t concerned about branching and didn’t care about CRA. What with one thing and another, the more you examine CRA, the less significant it is.

I doubt a housing bubble started in the ‘90s. In Hawaii, nominally a real estate appreciation hot spot, the rise in average house price on Oahu from 1955 to 2005 was about equal to what you’d have earned from putting the same amount into a passbook savings account. Since the price went from $50,000 to $550,00, it looked spectacular, but wasn’t.

There were bubbles in places earlier than the ‘90s. I know a man who sold his house in San Jose for 21 times what his mother had paid for it about 40 years earlier, but that bubble started blowing up at least the mid-’80s.

In Maui, prices have been rising steadily since I bought my house 21 years ago, but the takeoff didn’t come till 2005 (25% up), followed by another 25% in 2006, 7% in 2007 (signal that the speculative steam was cooling, in my view at the time), and down since then. There were neighborhoods where prices increased 400% in one year, but these freaks cannot be used to analyze the national housing market.

AVeryRoughRoadAhead Monday, 25 October 2010 at 02:59

Skipper:

Well done, sir.

Harry Eagar Monday, 25 October 2010 at 14:08

Was somebody talking about why somebody would buy a long bond?

From Bloomberg:

‘The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in halting deflation.’

You couldn’t make this stuff up.

Hey Skipper Monday, 25 October 2010 at 21:59
I doubt a housing bubble started in the ‘90s.

How could it not have? Both the rate and the time over which that rate was sustained between 1995 and 2007 are completely out of line with cyclical changes since 1890. Also, the data was for the entire US; priceage in your locality may vary.

What with one thing and another, the more you examine CRA, the less significant it is.

On its own, it would have been merely feel good legislation. Combined with the FFMs, and the recipe for bubble is complete (China helped make it worse faster). IIRC, Countrywide bragged about their CRA numbers.

NB: I am not blaming poor people for any of this; indeed, the CRA can have been a root cause without the poor ever getting a single mortgage. Rather, I am pointing a finger at politicians in both parties who, despite plenty of history to the contrary, figured that government could produce outcomes directly contrary to the market.

AVeryRoughRoadAhead Tuesday, 26 October 2010 at 01:52

…as investors bet the Federal Reserve will be successful in halting deflation…

Good luck with that. We will have high inflation sometime in the near future, but betting that it’ll manifest soon enough for a five-year bet to pay off is dicey indeed.

Combine [the CRA] with the FFMs, and the recipe for bubble is complete…

Except that the CRA is UNNECESSARY for a bubble recipe.

There have been bubbles in times and places where there was no CRA. So far you have not addressed this enormous flaw in your theory that the CRA was at the root of the latest American RE bubble, except to say that U.S. fiscal policy affects other advanced nations.

Additionally, you have asked:

The CRA REQUIRED the enfeebling of lending standards.

Assume just one thing: If, instead of the CRA, Congress required 10% down to obtain a mortgage. Does the real estate bubble still happen?

But we know that the CRA only required enfeebling lending standards to lower-income people. So how to explain the Fed’s findings that the CRA did not result in increased lending and home ownership in low income neighborhoods than in higher income ones? Either the supposed enfeeblement wasn’t relevant, or, lenders CHOSE to lower standards across the board. Not “were required to”; “chose to.”

Also, the FDIC reported that the majority of subprime loans originated from lenders not regulated by the CRA. So again, that’s not the heavy hand of the gov’mint, that’s a CHOICE by market participants.

Finally, Congress requiring 10% down is totally irrelevant if lenders decide to loosen credit eligibility; the down payment can be gamed.

Neither the CRA, nor Congress deciding to tighten things up, dictate lending. It’s all about social mood.

So until you can cogently address those points, a theory that the CRA was central to the FIRE bubble is simply hand-waving.

AOG probably nailed it.

Harry Eagar Tuesday, 26 October 2010 at 13:38

Countrywide wasn’t subject to CRA, so while it may have bragged about matching CRA standards (I have not seen that, but maybe Countrywide did that), it could not have been forced to meet them.

I have been meeting with people being foreclosed. It begins to seem pretty common that mortgage documents were either never filed with the Bureau of Conveyances or were lost.

Hard to blame that on regulation.

I guess you could call that ‘social mood.’ Kindleberger would probably have said ‘mania.’

Hey Skipper Tuesday, 26 October 2010 at 15:22
Except that the CRA is UNNECESSARY for a bubble recipe.

There have been bubbles in times and places where there was no CRA. So far you have not addressed this enormous flaw in your theory that the CRA was at the root of the latest American RE bubble.

So far as I can tell from US house prices over the last century, there has not been a US housing bubble between 1890 and 1995. No period of increasing prices before 1995 (excluding, for good reason, the years immediately following WWII) has anything like the rate and interval from 1995 to 2007. This is echoed by the quants who — foolishly — built their risk models around the fact that there has never been a steep secular decline in US house prices. Local, yes, but secular, never.

I suspect all asset bubble have similar dynamics, but are unique in their details. The CRA, in conjunction with the FFMs, initiated the bubble in that the former insisted upon infinite leverage and the latter provided vast amounts of liquidity. (NB: from a story I saw in the paper a few days ago, the total bill to bail out the FFMs, while likely smaller than initially forecast, is at least three times that to bail out the banks, GM and Chrysler.)

But we know that the CRA only required enfeebling lending standards to lower-income people. So how to explain the Fed’s findings that the CRA did not result in increased lending and home ownership in low income neighborhoods than in higher income ones?

You have put your finger right on the CRAs fatal flaw. The CRA absolutely required — a requirement that got more extensive over its history — enfeebled lending standards to poor people (Or poor neighborhoods, which is it? If poor people used the CRA to obtain mortgages outside those neighborhoods, did the Feds findings find them? Since the Fed seems unable, because of shifting definitions, to measure something as basic as the savings rate, why should I be unduly impressed with a finding that is incapable of noticing the distinction between people and places?).

But the CRA, having let loose the dogs, had no way of confining them.

The CRA and FFMs are each necessary, but not sufficient, causes. I am not letting financial institutions off the hook here, but only insisting that the widespread existence of sub-prime mortgages would not have happened without the original sin of the CRA.

BTW, it seems I agree with AOG.

Countrywide wasn’t subject to CRA, so while it may have bragged about matching CRA standards (I have not seen that, but maybe Countrywide did that), it could not have been forced to meet them.

Three ways the CRA pushed Countrywide to lower its lending standards.

Harry Eagar Tuesday, 26 October 2010 at 19:24

2. is funny. I don’t think banks had any serious worries about being regulated more than they had been. Michael Hirsh goes over the reasons in detail in ‘Capital Offense.’

Where I learned (which I hadn’t known) about how Gramm tacked on an unread 262-page deregulation rider on the appropriations bill that no one read. When our host gets back, maybe I should ask him about that.

3. Of course, this is really the argument for Glass-Steagall. Because the Reaganomics folks were in control and wanted to erase the distinction between safe banks and risk banks, and succeeded, everybody was swimming in the same cesspool.

This had nothing to do with CRA, however. It had to do with unregulating financial markets.

Michael Dell pays $280 million for Four Seasons Maui and within months refinances for $425 million. In what way is this different from Guatemalan immigrant Jose Garcia buying a house in San Diego for $700,000 and refinancing next year for $900,000?

Except that Dell actually paid real cash in, so he ended up somewhat worse than Garcia. You do not need to invoke CRA to describe general behavior.

Hey Skipper Tuesday, 26 October 2010 at 20:21

Re 2: Read everything.

Which will also, BTW, gut your appeal to Glass-Steagall.

Michael Dell pays $280 million for Four Seasons Maui and within months refinances for $425 million. In what way is this different from Guatemalan immigrant Jose Garcia buying a house in San Diego for $700,000 and refinancing next year for $900,000?

Well, completely absent any background detail, it is impossible to say.

It seems, though, there are some assets that MSD has, and Garcia does not.

And that the hotel is a business, where Garcia’s house is not.

Other than those two exceptions, and doubtless many others, you are right: they are exactly the same.

AVeryRoughRoadAhead Sunday, 31 October 2010 at 05:26

It seems, though, there are some assets that MSD has, and Garcia does not.

The Four Seasons Resort Maui, featuring private furnished outdoor decks and marble bathrooms with soaking tubs.

By Nadja Brandt (Bloomberg) — A loan on a luxury hotel owned by Dell Inc. founder Michael Dell and his family, was transferred to a special servicer after the borrower defaulted, according to Fitch Ratings.

The loan has a balance of $250 million, Fitch said today. In addition to the $250 million mortgage, the resort also backs a $175 million loan that was packaged with other debt and sold to investors. The Dell family’s private investment firm, MSD Capital LP, bought the 380-room property in Wailea, Hawaii, in June 2004, and it was valued at about $600 million in 2006, according to data compiled by Bloomberg.

That Michael Saul Dell has considerable non-RE-related assets, and “Guatemalan immigrant Jose Garcia” presumably has primarily only the equity in his home, is entirely irrelevant considering that it appears that neither the mortgage lender nor the CDO investors can lay claim to Mr. Dell’s non-Four Seasons Resort Maui assets. So in that regard THERE IS NO DIFFERENCE between billionaire Dell and recent immigrant Garcia, in the eyes of their creditors.

I am … only insisting that the widespread existence of sub-prime mortgages would not have happened without the original sin of the CRA.

Pre-CRA:

  • “Lending standards in the 1920s were unusually lax.” - Saulnier, R.J. Urban Mortgage Lending: Introduction. Princeton, NJ: Princeton University Press, 1956 p. 10
  • “Real estate speculation [during the 1920s] was widespread, fueled by lax lending standards and the ease with which securities could be sold to finance construction.” - Gordon, Robert Aaron. Economic Instability and Growth: The American Record. New York: Harper and Row, 1974. p. 35
  • “The 1920s witnessed an increase in loan-to-value ratios and frequent use of high interest rate secondary loans, characteristics shared with the recent U.S. housing boom.” - Doan, Mason C. American Housing Production 1880 to 2000: A Concise History. Lanham, MA: University Press of America, 1997. p. 35
  • “Many home loans had terms of five years or less and often involved no, or only partial, payment of principal before a balloon payment was due when the loan matured or was refinanced.” - Morton, Joseph Edward. Urban Mortgage Lending: Comparative Markets and Experience. Princeton, NJ: Princeton University Press, 1956.

Clearly, widespread existence of sub-prime mortgages is a phenomenon completely independent of the CRA. The CRA was simply one of the avenues through which the social desire for E-Z loans expressed itself this time ‘round.

Hey Skipper Sunday, 31 October 2010 at 12:33
“Lending standards in the 1920s were unusually lax.” etc

Define “lax” in concrete mortgage terms.

AVeryRoughRoadAhead Sunday, 31 October 2010 at 16:46

Define “lax” in concrete mortgage terms.

Sure, it’s defined as “enfeebling of lending standards”. You’ve cited the article Three Ways The CRA Pushed Countrywide To Lower Lending Standards to illustrate the pernicious effects of the CRA on the finance industry, how the CRA “enfeebled lending standards”; from the article:

With banks offering mortgages with high loan to value, delayed payment schedules and other enticing features…

That is EXACTLY what the ‘20s offered: “The 1920s witnessed an increase in loan-to-value ratios…”; “many home loans had terms of five years or less and often involved no, or only partial, payment of principal before a balloon payment…”

Your cite agrees with my cites, so what’s the problem?

Further, you’ve written that “the widespread existence of sub-prime mortgages would not have happened without the original sin of the CRA”, but failed to define “sub-prime mortgage” in concrete mortgage terms. However, we can infer that you believe that “sub-prime” is anything other than “a minimum of 10% down, all loans would be fixed rate, and the borrower must have a 5 year employment history.”

Therefore, you would agree that mortgages featuring high loan-to-value ratios, high interest piggyback seconds, five years of interest-only payments and a balloon payment would absolutely be considered “sub-prime” - as do the FDIC and the Office of the Comptroller of the Currency (PDF). Such loans were widespread in a pre-CRA era. Q.E.D.

Hey Skipper Monday, 01 November 2010 at 17:02

Well done, sir.

AVeryRoughRoadAhead Thursday, 11 November 2010 at 10:52

Well, that was quick:

“Buffett Rules Out Double-Dip Recession Amid Growth”

Buffett … has to know that the above just ain’t so.
When should we check to find out whether your “ain’t so” ain’t so? - 06 October 2010

Apparently we had only to wait until 03 Nov 10, as that’s when the Fed announced their long-anticipated QE II.

Why is this a “double-dip” marker?

Because the last time the Fed launched a QE initiative, we were mired deep in the worst economic downturn since the Great Depression. On 25 Nov 08, the Fed announced a $600 billion program, but by 18 Mar 09 they’d tripled the size of the action, to $1.75 trillion. This QE announcement was for $900 billion, half-again the QE initially announced when times were supposedly grimmer, and contains language suggesting that QE II will also expand mightily: “The Committee will regularly review … the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed…”

The Fed wouldn’t be trashing the dollar if the economy was growing.

AVeryRoughRoadAhead Tuesday, 16 November 2010 at 01:22

How going green may make you mean: Ethical consumers less likely to be kind and more likely to steal, study finds Kate Connolly, in Berlin | guardian.co.uk, Monday 15 March 2010:

According to a study, when people feel they have been morally virtuous by saving the planet through their purchases of organic baby food, for example, it leads to the “licensing [of] selfish and morally questionable behaviour”, otherwise known as “moral balancing” or “compensatory ethics”.

“Do Green Products Make Us Better People” is published in the latest edition of the journal Psychological Science. Its authors, Canadian psychologists Nina Mazar and Chen-Bo Zhong, argue that people who wear what they call the “halo of green consumerism” are less likely to be kind to others, and more likely to cheat and steal. “Virtuous acts can license subsequent asocial and unethical behaviours,” they write1.

The pair found that those in their study who bought green products appeared less willing to share with others a set amount of money than those who bought conventional products. When the green consumers were given the chance to boost their money by cheating on a computer game and then given the opportunity to lie about it – in other words, steal – they did, while the conventional consumers did not. Later, in an honour system in which participants were asked to take money from an envelope to pay themselves their spoils, the greens were six times more likely to steal than the conventionals.

Mazar and Zhong said their study showed that just as exposure to pictures of exclusive restaurants can improve table manners but may not lead to an overall improvement in behaviour, “green products do not necessarily make for better people”. They added that one motivation for carrying out the study was that, despite the “stream of research focusing on identifying the ‘green consumer’”, there was a lack of understanding into “how green consumption fits into people’s global sense of responsibility and morality and [how it] affects behaviours outside the consumption domain”. […]

Dieter Frey, a social psychologist at the University of Munich, said the findings fitted patterns of human behaviour. “At the moment in which you have proven your credentials in a particular area, you tend to allow yourself to stray elsewhere,” he said.

1 This footnote was added on 31 March 2010: The study findings above, and the methods used, are challenged by researchers associated with the social psychology department at the London School of Economics, the Institute of Ecological Economy Research in Berlin, and the Institute for Perspective Technological Studies in Seville. Their analysis can be found here: lrcg.co.uk

Hey Skipper Wednesday, 17 November 2010 at 10:17
Further, you’ve written that “the widespread existence of sub-prime mortgages would not have happened without the original sin of the CRA”, but failed to define “sub-prime mortgage” in concrete mortgage terms.

That’s because, IIRC, sub-prime is defined with respect to the lender, not the mortgage. The CRA required making loans to high-risk borrowers, but — by definition — eliminated pricing that risk.

Also, I stated, without inferring, that requiring 10% down on a fixed rate mortgage, along with requiring a five year employment history, would have eliminated the housing bubble.

The CRA did precisely the opposite.

Harry Eagar Wednesday, 17 November 2010 at 23:16

According to that bomb-throwing commie Thomas Sowell, the volume of subprime mortgages written to high-income borrowers was double the volume that went to low-income borrowers.

Subprime describes the mortgage, not the borrower, since many of the borrowers could have qualified for prime mortgages but were steered toward subprime vehicles because they provided more income to the underwriter.

Annoying Old Guy Thursday, 18 November 2010 at 10:23

I think the causation is the other way — people who don’t want to make the effort to be virtuous try to find some easier substitute to “balance” things out and “green” actions are a handy one.

Hey Skipper Thursday, 18 November 2010 at 11:21
Subprime describes the mortgage, not the borrower, since many of the borrowers could have qualified for prime mortgages but were steered toward subprime vehicles because they provided more income to the underwriter.

Search on [define:subprime mortgage]

Harry Eagar Thursday, 18 November 2010 at 11:47

I think the experiment sounds like garbage. However, it would be hard to explain most religion on the basis of people’s ‘trying to find some easier substitute.’ It’s like the psychological theory that people become alcoholic polydrug abusing wrecks because they think their mothers didn’t love them enough.

It might be true, but it’s hard to explain as any sort of rational/sensible workout.

Some people are just nuts.

Annoying Old Guy Thursday, 18 November 2010 at 14:38

I would never claim such a coping mechanism as rational or sensible. I also agree the experiment doesn’t sound very reliable.

AVeryRoughRoadAhead Saturday, 20 November 2010 at 07:19

NOVEMBER 19, 2010 | What’s Really Behind Bernanke’s Easing?: My guess is that the Fed chairman knows that we still have too many banks overstuffed with toxic real estate loans and derivatives. | By ANDY KESSLER | WSJ

Federal Reserve Chairman Ben Bernanke’s $600 billion quantitative easing program has been roundly criticized in this country and around the world. So why is he doing it? Does he know something the rest of us don’t?

Mr. Bernanke claimed earlier this month in a Washington Post op-ed that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.” But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy. It is also unlikely, as some claim, that the Fed chairman is whipping up a stealth stimulus or orchestrating a currency devaluation. He knows these have been tried and are more likely to destroy jobs than create them.

I have a different explanation for the Fed’s latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.

The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way. […]

In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff. […]

Like it or not, banks are still weak, and another panic may be on its way. Bank of America is the best example. As of Sept. 30, its balance sheet claimed a book value (assets minus liabilities) of $230 billion. But the stock market values the company at just $118 billion. Who’s right? […]

Mr. Bernanke is clearly buying time with our dollars. If real estate drops, we’re back to September 2008 in a hurry.

Annoying Old Guy Saturday, 20 November 2010 at 10:57

Typical government action, taking a bad situation and making it worse. SWIPIAW, being a land heiress, watches not only commodity prices but also land prices. The latter are taking off almost as fast as my rockets. We bought some more land about 4 or 5 years back for around $4K/acre which was a decent price (not overpriced but not a bargain). Now she’s seeing sales in the same area for $7K, $8K, even $9K an acre. Even with corn and bean prices up as they have, there’s no way these people are borrowing to buy, they’re paying cash. Why would they do that? Only because they expect a massive wave of inflation in the not too distant future, an expectation surely strongly influenced by the quantitative easing.

The result? In futile effort to avoid a real estate crash, Bernacke is putting a tower on the edge of the cliff for everyone to climb up before they finally go over. Yeah, that’ll make things better.

AVeryRoughRoadAhead Saturday, 20 November 2010 at 18:21

The Powers That Be are still hoping that if they can hold out long enough, a miracle will happen.

Alternatively, TPTB are extending their looting opportunities for as long as possible. Choose yer favored dysfunctional/delusional/criminal motivation.

Harry Eagar Monday, 22 November 2010 at 22:42

How do you know they’re not borrowing? How do you know they are not fools?

Corn prices, in nominal dollars, are about double what they were when I left Iowa, when land was changing hands at $1,500 (down from $3,000 shortly before), and you couldn’t make money off corn on land you’d paid $1,500 for.

Illinois farmland at $9K makes sense when corn sells for $20 a bushel.

Annoying Old Guy Tuesday, 23 November 2010 at 10:27

Because, as you yourself have told us, banks won’t lend. I also asked locals here who know this kind of thing for the area and that’s their opinion as well. Yes, it is possible they are borrowing, and they and their bankers are fools, but that seems very unlikely at this point.

As for $9K/acre for $20/bushel corn, well yes, it would make a lot of sense. Unfortunately for your point, corn has yet to break $6/bushel and is currently trading in the mid $5 range. So once again you’re flat out making things up to support your arguments. Do you ever wonder to yourself whether your need to do that might indicate something about the strength of your argument?

Harry Eagar Tuesday, 23 November 2010 at 21:11

My point is that since corn isn’t getting $20, spending $9K for farmland won’t make money, unless you are planning to flip the land for $10K to some greater fool.

Just because banks won’t lend doesn’t mean you cannot borrow money. My desk just now is awash in complaints from people who accepted promissory notes for up to $1,000,000.00 cash, no collateral.

I am aware of what corn prices are: As I said, they are nominally just about double what they were in 1987, which was around $2.75. Yields have gone up somewhat since then, about 20% probably. Nobody in his right mind is paying $7K, $8K and $9K for midwestern farmland, not if he plans to farm it as a business.

AVeryRoughRoadAhead Friday, 03 December 2010 at 20:37

Aaaaaaaaaaaaaaaand here’s the second shoe: Federal Reserve Chairman Ben Bernanke will announce on 60 Minutes this weekend that QE II will be more than $900 billion.

The collapse is accelerating - it was four months between the initial announcement and the program increase with QE I; a mere THIRTY DAYS between QE II’s initial & increase announcements.

Harry Eagar Wednesday, 08 December 2010 at 15:16

Bu, bu, but Alan Greenspan told us that counterparties would inspect each other, so the markets would self-correct.

I have been looking into several mortgages, and also some business failures, and it is unbelievable — well, it would have been unbelievable a few years ago — how sloppy the business practices were. I mean, if I had an instrument that was supposedly worth $600,000, I’d keep it where I could find it.

This morning at the courthouse, I noticed a claim caption I had never seen before: PETITION TO REINSTATE MORTGAGE. If you believe the petitioner (I don’t), somebody accidentally wrote a mortgage to pay off an old mortgage and accidentally filed both with the Bureau of Conveyances so that the borrower now owes 200% of what he received.

I have on my desk a similar case — no petition to reinstate filed, though — in which mortgages were simply multiplied by failing to cancel the supposedly paid-off mortgages.

I find it easy to believe that the paper being held by BofA is worth 10 cents on the dollar. It was a bucket shop.

Post a comment