“Fannie Mae Made Me Do It”

By Simon Johnson.  This post is the first few paragraphs of a column now available at Project Syndicate.

The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense?

In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many people into taking out subprime mortgages that they could not afford.

This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?

Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January.  (The slides are on his MIT website.)

To read the rest of this column, please click here or cut and paste this address: http://www.project-syndicate.org/commentary/johnson16/English.

175 thoughts on ““Fannie Mae Made Me Do It”

  1. Has Acemoglu paid any attention to the fact that a large part of the poor do not vote and are generally too expensive to buy? So why would a rational politician pay attention to what their needs might be? The US median voter is not poor (though has become relatively poorer over time , like most US citizens) but tends to get attention.

    As to the main issue: one should aks what would have ahppened if: If interest rates were kept higher. If documentation and securitization standards would have been much stricter. If certain developer-linked insttitutions had much more regulatory attention. If congress and the Bush government had not employed Fanny and Freddie to keep the building cycle from collapsing earlier, etc

    To frame this debate in terms of “the poor did it” is of course nonsense. And that is not quite what the GOP paper says either..

    Incidentally: who should provide housing for the poor? If no one does, would that be a problem? And how would that problem manifest itself politically? It does not seem that championing the poor (of which there are many and growing) is politically profitable in the world’s richest democracy. Why not?

  2. The response to this allegation should always be the same:

    Did Fannie/ Freddie and the CRA subsidize and force banks to make commercial real estate loans in the US? How about real estate loans in Ireland/Iceland/Portugal/Spain? Government loans in Greece? No? Interesting.

    Asset bubbles and financial panics and the economic booms and depressions that accompany them have been part of capitalism for 400+ years. Long before we had central banks or GSEs or anti-redlining laws. We had them back when we were on the gold standard as well.

  3. In addition, (besides suckering the poor into investments they could not afford) the creditors demand for full payment and not renegoiating the terms of the contracts, lead to the “poor” kicked out home owners returning and damageing the home that has yet to sell. Further weakening the real estate mkt and puting more pressure on the investers whom will find it more difficult to get the return on the investment they were promised. Its a visous circle and some of us like to make money racing it.

  4. To affect the market you only have to affect the margin. The margin of the housing market was affected by giving property rights to renters that increased the demand at the margin. No-money down mortgages provided the lure of a free-ride which also increased demand. Conflating risk and uncertainty resulted in a price discovery problem where financially engineered, uncertain MBSes (negative cash-flow investments that were marked-to-model) were priced as AAA risk.

    The boom-bust cycle that followed was inevitable. So long as you conflate risk and uncertainty in a deterministic one-size-fits-all governance regime, the troubling trend of larger and more frequent economic dislocations will continue.

  5. This reminds me of nothing so much as the relationship between the drug dealer and his hapless customer. Who is the greater criminal? The dealer, who lures new users with initially cheap highs, ups the ante once they are hooked, and admittedly enduring risks, nevertheless profits greatly as long as the game plays out? Or the users, who become hooked and turn to ever-riskier behavior to feed their addictions?

    At least drug dealers are sometimes arrested and incarcerated for their crimes. So, too, some drug addicts. Not so our bankers and “financial innovators.” Yet their cynical destruction of our neighborhoods and communities continues unabated.

    I hope against hope that the 50 State Attorneys General can and will do something about this. But certainly, I will not hold my breath.

  6. Regarding FNMA and FRMC, the Republicans want to sell these to private investrs immediately. However, this story, reported today in the times –

    seems to suggest that the big banks would like to become FNMA and FRMC – all of them. So not only will they be too big to fail, but even the products they create and sell will be government backed. This is actually a little sickening, but would love to hear SJ or JK take it on.

  7. Excellent post, Simon. Going thru Acemoglu’s slides, it is difficult to dispute his conclusion:

    “All in all, preliminary (and admittedly subjective) reading of facts suggests that politics was key as the Rajan hypothesis also maintains, but in a different way. Not as a mere response to inequality, but a potential driver of the changes in parts of the income distribution and financial crisis.”

    Statistically, the conclusion might have to be cast as preliminary. However, in terms of outcomes observed, it is incontrovertible. As your colleague on Project Syndicate, Jean-Paul Fitoussi, notes:

    “Experience, it turns out, is not just the name we give to our mistakes. As the financial crisis has shown, it is also the process that enables us to increase our understanding and ultimately to envisage a new world.

    “Unfortunately, however, this process has not gone far enough, enabling many banks, governments, and international institutions to return to “business as usual.” Indeed, today the global economy’s arsonists have become prosecutors, and accuse the fire fighters of having provoked flooding.

    “At the peak of the crisis, governments had an opportunity to create a new global financial infrastructure. But they let it slip through their fingers. The fact that many Western economies got out of recession last year should not fool us into thinking that the crisis was only a brief interlude, and that the post-crisis world can return to the pre-crisis status quo. There is pressure to re-write the history of this crisis by depicting effects as if they were causes, and to blame the governments that managed the crisis for starting it.”

    As you’ve stated numerous times, Simon, we have not addressed the causes of the global financial-markets crisis. The next one is right around the corner.

    The triggering mechanism will be more insidious than the widespread domestic fraud that provoked the mortgage-market meltdown, cf the non-market valuation established for FB by the American and Russian oligarchs in the Goldman – Digital Sky Technologies “hook-up” … . Not for nothing, but these folks are all cut from the same cloth. And they have no interest in markets qua markets — the more that can be done out of the light of day, the better. Hence the massive investment in, and fighting for control of, dark pools and flash-trading (HFT) platforms.

  8. I will surmise that it’s the law of unequal justice, Example: If I do my wife wrong, and she does me wrong, we are even. After the divorse we part close friends and reach an agreement.
    That agreement being, she has a daughter from another man and I agree to “not” do her daughter wrong. And possibly more like anything I can do to wright the wrong I did to her mother. And in turn she raises the daughter as best she can until the daughter is ready for me. Its complicated or its not, depends on your point of view, you have both creation and time on your hands.

  9. If there had been no teaser and NINJA loans to provide Wall St. with paper their lackeys labled “investment grade”, they couldn’t have made their huge fees slicing and dicing and duping pension funds and others into buying the smoke and mirrors they were getting rich off of.
    The Republicans began framing this as “blame Freddie and Fannie” as soon as the #(U)W hit the fan. No big surprise there.
    As to whether we need housing for the poor, well, I guess not. They can sleep under the overpasses with the rest of the homeless and die in dark alleys. That’s what this crop of conservatives seems to think their god wants – the twisted Calvinims that says if a man’s in the gutter that’s God’s plan and if you help him out of it, you are interfering with Divine Order. The reverse, of course, is that if you are filthy rich, you deserve it because that’s God’s plan for YOU, and it you make your gazillions on the backs of others, that, too is ok. God is smiling.

  10. The poor had nothing to do with it. Sheer Wall Street Free Market pr.

    But in stopping a fraud such as this in the future, the important thing is to understand the sectors most responsible, Investment banks and rating companies.

    Without them, the crisis does not happen.

    The thought that the GSEs were responsible is inane when you understand that in the largest housing boom in US history they LOST 40% of market share.

    Click to access testimony-102710-cecala.pdf

    The thought that government programs to increase the amount of poor homeowners(like the CRA) were responsible is ludicrous when you understand that the amount of CRA loans decreased for the 10 years prior to the boom and right through the boom.

    Click to access n08-2_park.pdf

    No question there was fraud in many sectors, but the investment banks and ratings companies led the way and committed the most fraud.

    “Citicorp’s key mortgage credit guy testified many months ago before the Financial Crisis Inquiry Commission (FCIC) that 80% of Citi’s mortgages sold to Fannie and Freddie were sold under false “reps and warranties.”


    ” Wall Street’s pooling and packaging loans didn’t involve due diligence on the underlying quality of the loans. Since underwriting standards by mortgage lenders had dropped precipitously, many of these complex deals given top ratings went bust within months in 2007.

    That alone is evidence of the industry’s falling standards. Prior to these problems, the mathematical chances of a default on a top investment grade rating were less than 1 percent. What changed is that structured finance became popular _ the practice of pooling together loans and offering slices to investors at different risk levels….

    In another bit of explosive evidence, the panel on Friday will release an e-mail from a Standard & Poor’s employee acknowledging complicity in building up a doomed market.

    “Rating agencies continue to create an even bigger monster _ the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters,” the employee wrote on Dec. 15, 2006.”


    And guess what?

    We are stuck with it. We cannot prosecute the thieves and fraudsters. Because they are too big to fail, and they would fail if we ever made clear the truth and prosecuted the bankers and raters.

    There is not a single major bank in the US(and Europe) who could survive being forced into taking back the fraudulent bonds they sold. And that will be true for another decade or two.

    And one day the problem will be “fixed”. All the forclosures will be done. All the losses taken by the investors will be taken. All the investors will settle forpennies on the dollar for the fraud the banks and rating companies committed. And everything will be back to normal.

    Unless they do it again….

  11. @ Carla

    Its worse! At least with drugs there is a point in time when a cost is brought to bear that forces bad behavior to be internalized. Not so with subprime real estate so long as no-money down, NINJA mortgages could be packaged as uncertain MBSes and sold AAA risk. The drug cartels would love to have that spread. Soros opined that the Former Soviet Union failed because it treated capital as a cost-free byproduct of a political process. I argue that our policymakers did likewise with subprime real estate.

    But is it an issue of supply or demand? Hint: what if “ever riskier” was not determinate risk, but indeterminate uncertainty? If you view the problem solely in terms of one-size-fits-all deterministic governance, you mistakenly believe that uncertainty can be bounded. As with breast cancer, given today’s medicine it is not so much whether you have breast cancer (risk) as whether the breast cancer has metastasized (uncertainty).

    Thus, I argue that governance has to move beyond one-size-fits-all deterministic metrics to segmented regimes that are predictable, risky, and uncertain regimes.

  12. The actual push for increases in lending, came from private interests, not government. Just another way for the extreme right to justify the plunder of the masses. Blame the government.

  13. Did the other nations with house price bubbles repeal Glass-Steagall too?

    There is no compelling single-bullet theory for the crisis, and the slide show sells short Rajan’s point on this matter. People need to read Rajan’s book and not the Cliff Notes version or the Straw Man version.

    It’s clear that global capital imbalances created a lot of reserves searching for yield. With the US risk-free rate held low for so long, MBS seemed like a relatively safe but higher yielding alternative – and it WAS, until risk became systemic.

    But the availability of those MBS was in no small part facilitated by Fannie and Freddie. Those TWO firms had more than 50% of market share in MBS issuance in every year except for 2005 and 2006. But in those years they still ranked #1 and #2 in market share, with Countrywide in a DISTANT third place. In fact, F&F had a greater market share than the top 10 private issuers combined!

    The argument that GSEs were fading away at the height of the crisis is 100% fact-free. It’s a left-wing “narrative” about a right-wing “narrative.”

    F&F didn’t pioneer the idea of MBS, but they were clearly the market leaders and demonstrated the profit model for others. The only reason they lost market share at all was because they were embroiled in an accounting scandal. Congress scolded them for falling behind!

    But over many years Fannie and Freddie bought ENORMOUS quantities of loans and MBS from loan originators. These purchases provided the funds for originating more loans. Guess who the number one seller of loans and MBS to Fannie and Freddie was? COUNTRYWIDE!

    Fannie and Freddie were feeding the “originate to distribute” model of loan production. If you’re originating a loan, but you’re bearing no risks of default because Fannie is buying it, then you don’t need to be concerned about petty trifles like credit quality. EVEN IF F&F bought only the highest quality, best documented loans, their purchases provided the funding for the origination of LOWER QUALITY loans. If GSEs took the cream, commercial banks got all the milk.

    House prices in the US began to outpace general inflation in 1995/1996, at PRECISELY the time when our government began a big push for greater home ownership – a policy goal supported by two successive presidents and most members of Congress.

    A “bubble” results from mutually reinforcing expectations of price appreciation. When there is cheap and plentiful credit available, and affordable terms, people walk into an Open House, armed and dangerous with a loaded pre-approval letter. As long as people thought house prices were going to rise, it was always rational to bid all you could bring to the table. The bubble does NOT begin with its widest spread from fundamentals (2006) but at the point when those unsustainable expectations begin to build – that was in 1995/1996.

    Fannie and Freddie aren’t the only GSEs. The Federal Home Loan Banks provided a significant funding source for banks to originate loans.

    Fannie and Freddie were never big players in buying subprime loans, but that’s a red herring. They were the main supporters of buying in the WHOLE market for housing, driving up aggregate house prices. The housing market doesn’t care what interest rate or terms an offerer is paying – only what price they are willing to pay. A prime borrower and a subprime borrower and a neg-am borrower all get the same pre-approval letters showing the same maximum loan amount.

    The bubble wasn’t caused or broken by subprime borrowers – they were merely the weakest points on the surface of the bubble. They did, however, add to the size of the bubble because subprime loans allowed more potential buyers to bid up prices.

    It was the “affordable” mortgage products created by Clinton’s HUD that contributed to the bubble. Products like neg-am and interest-only loans permitted people to buy more house than they could really afford, and they bid up home prices.

    We have an enormous Housing Industrial Complex in this country: Fannie, Freddie, Ginnie, FHLBs, HUD, FHA, VA, mortgage interest deductions, tax credits, CRA, etc.

    CRA was not big enough to be a “cause” of the crisis, but it certainly was part of it. When banks were lending money for houses like crazy to non-minorities, they would have had to justify why they weren’t keeping pace with lending to minorities. Worse, it inflicted pain on the very people it was designed to help. Minorities have suffered proportionately worse from foreclosure than others.

    The market was essentially bifurcated, with greater house price appreciation among low-priced homes than higher priced homes. CRA, FHA loans, and affordable mortgage products helped millions of low-income people buy homes they could not have otherwise afforded. When the bubble burst, it was THEIR jobs that were lost first. And THEIR homes lost the most value afterward. You killed them with kindness.

    The global search for yield inflated house prices in most countries, but other nations with strong home ownership incentives (or renting disincentives) suffered a similar fate as us.

    Trillions of dollars of capital were poured into residential and commercial real estate INSTEAD of productive investment in technology and human capital. And we wonder why labor productivity and real wages have declined in the past 15 years?

    Yes, there have been past house price bubbles in the absence of Fannie and Freddie, but each asset price bubble had its own causes and participants. To say F&F and government policy in general had nothing to do with THIS bubble is crazy.

  14. You didn’t understand a word he said.

    People face a buy vs. rent decision. Or, for current renters, they face a buy vs. continue renting decision.

    Government incentives DISTORTED the buy vs. rent decision for millions of people.

    Fannie and Freddie purchases of loans provided liquidity, reduced funding costs, and facilitated a lapse in lending standards.

    Fannie and Freddie purchases of MBS provided more liquidity and lowered funding costs.

    Federal Home Loan Banks provided readily accessible sources of funding loans.

    The FHA and VA provide low-down and no-down loans for buyers.

    HUD’s housing initiative included relaxing rules for subprime lending, Alt-A loans, IO, and Option ARMS. On the margin, this made the availability of credit easier.

    The mortgage interest deduction reduces the cost of borrowing.

    Prolonged low interest rates from monetary policy reduced the federal funds rate, and thus all funding costs.

    So, you see, the “property rights” given to renters consisted of a broad spectrum of incentives, credits, and subsidies that returned a BUY result from their buy vs. rent decision.

    To the extent that renters made rational choices based on subsidies, they are not at fault. But to the extent that they bought houses with unrealistic expectations of house price appreciation, or used loan products that had to be refinanced in a few years, they bear FULL BLAME for their poor decisions. Blaming stupid buyers doesn’t reduce the blame of stupid bankers.

    Government’s filthy fingerprints were all over this murder weapon.

  15. Well said, but what I am afraid is lost is the fundamental premise that “uncertainty” is different from rather than a higher degree of “risk.” MBSes comprised of no-money down, NINJA loans that are marked-to-model are uncertain. These investments have to be contractually insured and cannot be hedged because of noncorrelative data. Or as Taleb is fond of saying “correlation is charlatanism” — lacking his scope of research, I settle for the weaker contrapositive proposition. Therefore much of the activity that presumed positive and negative cash flow correlation via derivatives was flawed. See the following excerpt from an earlier response to Mr. Huizer.

    Boyko: […] The bright-line drivers that differentiate risk from uncertainty are juxtaposed in terms of financial (cash flow and mark valuations) and operationally bought (unsolicited or marketing department/salary driven) versus sold (solicited or sales department/commission driven). Thus, uncertain investments would have negative cash flow, marked-to-model valuations, and products that are sold. For a more detailed explanation see: “Best Fit for Best Practice Governance” http://www.sfomag.com/article.aspx?ID=1281&issueID=c that posits that disclosure of the underlying economic environment randomness as either determinate or indeterminate is a precondition for effective capital market governance. The current “one-size-fits-all” legacy approach is obsolete and requires continual updating to accommodate capital market complexities. I argue that trying to reconcile the informational discontinuities of determinate and indeterminate domains in a one-size-fits-all regulatory regime is analogous to having one motor vehicle code for the US and UK.

    Huizer: A Lehman liquidation should teach people that segmenting trades into discrete (and one-dimensional?) boxes is unworkable.

    Boyko: That is why I argue that it is not scale (TBTF), but TRTR (Too-random-to-regulate) or as you put it “Too-Hot-To-Handle that should be the focus of the regulatory effort. It is also why I believe that the legacy, one-size-fits-all deterministic system is toxic and irreparable. Ergo the title of the book “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361

    To be fair to Messrs Huizer and Johnson their views represent accepted wisdom.

  16. Silly.

    I understand the GSEs are very large entitities.

    But if you think that the loss of 40% of their market share during the housing boom somehow equates to them being a contributing factor to the housing boom, I am at a loss for words.

    And if you think the CRA, which saw less mortgages during the boom than before the boom, was a contributing factor, I do not know how to respond.

    Perhaps if you understood that the vast majority of the current delinquencies and foreclosures were originated by the investment banks like Countrywide, your eyes might open.

    And I need someone to explain to me how the Fed rate was a factor, when the European Central Bank rate was two to four times higher during the same time span and the exact same thing happened.

    Maybe it is just me, but I have two sources that appeared in both the US and Europe(investment banks) during the boom. I think that should be more than sufficient to figure out the main cause.

    Unless of course your ideology does not allow it.

  17. Oh, by the way.

    MBSs were present in Europe.

    If you need any more info than that, you do not understand.

  18. Can a dead man take out a loan and repay it? According to loan originators, they can surely afford the loan if the lending standards are non-existent. Repaying the loan would be an issue. Excuse my sarcasm. Yeah, let’s blame the poor. The poorly dead.

    As I understand it, Fannie and Freddie got into to the MBS game late for subprime loans because their standards didn’t allow them to roll the dice early on. Naturally when they did matters got worse. But it was out of control long before then. The private MBS and finance industry somehow convinced everyone that the loose lending practices were socially acceptable and normal market practice. In fact, if you weren’t on board you were somehow not with it. You know, smart people in phantom finance design can’t be wrong about their fuzzy math. Gotta love the psychology driving the bubble.

  19. I think the following frames the ‘macro-cause’ exceptionally well:

    The segments below are from a paper which is here:

    “(1) Y=(C+I+G)+XM”

    “Where Y is the value of domestic output at full employment, (C+I+G) is domestic expenditure, and XM is Net Exports (Exports – Imports). During the Boom, both consumption (C) and government spending (G) increased at a rate greater than domestic income (Y). So, for Investment (I) to increase, from a starting position of full employment, net exports (XM) had to decline by at least as much. That is (holding constant domestic income)”

    “(2) ΔI+ ΔXM≤ 0”

    “The bubble required that total domestic expenditure exceed the value of domestic output, which required, in turn, an increase in the trade deficit.”

    (this is from the conclusion):
    “There is little doubt that increased financial sector leverage –from 20x capital to 30x capital from 2000 – 2007 – contributed to, and resulted from, an underestimation of risk that fueled the frenzy of lending, as did all sorts of other contingent circumstances. But the underlying, indispensable factor driving the low rates and increasing the capital available, appears to have been the massive increase in offshore capital inflows. Bernanke and Paulson were correct to identify the Asian savings glut as the locus causes of the bubble.”

    In other words, excess liquidity, or too much reliance on investment and financial services to facilitate growth, had influence on the entire system.

  20. I, as a former Executive Director of the World Bank, wanting to really understand what had happened even took all the courses (and passed them) needed to license myself as a real estate agent and a mortgage broker in the US (Maryland). I must say that, besides from participating in the generally excessive support of home-ownership, like the tax deductibility of interest paid on home loans does, Fannie Mae had absolutely nothing to do with causing this crisis… in fact they were just another victim.

    I know the conservatives blame Fannie Mae, trying to hide the shame they should feel for not having said anything about the bank regulators interfering in the market with their capital requirements based on the risk perceived, ex-ante, by the credit rating agencies… just as the progressives love to blame the bankers in order to hide the shame they should feel about how those same capital requirements discriminated against those who already were discriminated by having to pay higher interest rates, because of being perceived, ex-ante, as being more “risky” by the credit rating agencies.

    Please may I remind you of seeing the video and helping me to voice the message

  21. I am ignorant of the history of fannie and freddie but one thing i know is that they were private companies before they went public–i want to know, were these companies owned by the same people who own the privaely held US Federal Reserve Corporation?

    Also, I would like to point out that the deal with an FHA loan is that the lender gets complete immunity from and default risk and since these loans are sold back to fannie and freddie, that risk is again, backed by the govenment. So, although an FHA may be good for some, it is still riskyy for others and for those who end up not making it, the property and any equity gets put back to the bank with all the loan covered by our govenment (we the people and the taxes we pay pay this obligation). I just wonder who is really winning on this deal? Surely some of the people with FHA loans have made it and are benefiting from home ownership but i wonder what the real cost is? I hope someone out there will start looking at these numbers and let us all know…if the same people who brought us the federal reserve brought us fannie and freddie, it can not be good.

  22. BTW


    The Huffingtonpost has done some investigative reporting to find that primary dealers and their affiliate hedge funds are using the fed window
    to borrow at 0.0-0.25% to make a leveraged buyout (buying tax notes across America) from distressed owners across America– a government sanctioned grab at the gold of the heartland…and these were the entities that were toosacredtofail and will be receiving a fresh batch of blood (another trillion$ or two) from QE2 (quantitative easing).

    Would it have been so bad to have been told honestly in the fall of 2008 that our federal reserve system was failed and that the treasury was taking it over to create a facility to make sure the US citizen would have no worries over their deposits, and offer a 3% refinance loan to all people who were distressed and unable to get refinancing on a loan that they probably didn’t even understand to begin with?

    9 trillion dollars is missing in a special purpose vehicle (SPV or SPE) at the fed, Enron style,

  23. Simon, thanks. I must be spending way too much time reading books and articles on the crisis, but I have to say that I could have written your article. Who in the name of God are these Republicans trying to convince of their apparent sorcery (trying to make gold out of lead or at least convince us that it’s possible). They obviously don’t spend much time doing independent research or listen to more than each other’s voices. Their views are not only distorted, but completely and utterly insane, and that’s being polite. For all of the reasons you gave, but mainly due to unlimited purchasing of law makers and regulators, the Wall Street boys ran up a mighty house of cards, only to watch it collapse. Let’s face it, they’d be selling pencils on the corner if they hadn’t bought enough clout to get a bailout from the three hundred million people who loath them so heartily.

    The NCIC is a sham. It is just another committee formed to provide a rational to allow the thievery to continue. There have been hundreds of such committess formed over that past decades, and they have become incredibly effective at spreading massive disinformation in the name of fact finding. It’s high time our citizens looked in the mirror at the smuck staring back and ask if they want more of the same or the alternative — a revolutionary movement to take back their democracy from the plutocrats and oligarchs who feed them manure and charge them to do so.

  24. @Six ounces:

    I think i generally agree with this. The US had an unusual combination of factors stimulating “home ownership” (see the last para for a not on this): the most generous interest deduction regime I know (where would home equity loans be deductible..), a high level of gvt intervention to make home loans securitizable, and very low interest rates. In addition there has been a long tradition of inappropriate business practices in this area (collusion between S&Ls and developers for instance). Finally, nowhere else do people have the right to walk away from a mortgaged property.

    But bubbles occur everywhere. For instance in Australia (in many ways diametrically opposed to the US in terms of stimulus factors) house prices have risen by over 50% during the past 10 years. But interest is not deductible, securitization is minimal and landing standards are pretty high; There is no Fanny/Freddy/Ginnie like gvt support; interest rates are a multiple of US ones: if you have negative equity you still have to pay and if you cannot pay and the property is foreclosed, you may become personally bankrupt, which carries all sorts of social and financial penalties. In most European countries mortgage interest is not or only partially deductible and at similar levels as in the US. Default carries the same penalties as in Australia. The pattern of occurrence of real estate bubbles in the EU appears to be unrelated to differences in deductibility of interest, presence of “investment banking/securitization” and legal sanctions for defaulters. One form of securitization is quite popular in Europe: “covered bonds” but that is very different from CMOs, more bank-issued bonds collateralized by portfolios of whole loans.

    So I think that it is a bit too easy to blame this disaster on a single factor. Probably it has something to do with the US being less able than other countries (look at the way Ireland and Spain are handling their bank bail outs, and even then Ireland deserves severe criticism, but at least they are wiping out the banks’ shareholders, and they adopt policies that are extremely unpopular) to protect the “property rights of the state” against all kinds of entrepreneurial types who take advantages of free options. These types capture (mainly) financial institutions and mon in the blind spot of regulators (who are constantly harassed by lobbyists from both sides of the house and often also at state level). That then leads to situations where the gvt steps in and covers all or part of the damage incurred by depositors etc, while the entrepreneurial types (not all of them are so lucky of course) have left the scene long before and are probably developing the next con game. It is as if US society wants to profit from capitalism but expects the state to protect the losers if the losses have an event nature (less so if the losses are dispersed and not connected to a specific event: compare the manufacturing workers losing jobs to Ruritania slowly because of free trade to the clients of bailed out banks who tend to receive far more that their FDIC entitlement).

    As to Glass Steagall: that was unique to the US, many countries had regulation-induced specialization, but this was unique. However, the repeal of it happened when it had already become obsolete and was widely circumvented by bank holding companies.

    Finally: Given the unique US bankruptcy aspects, a highly leveraged US home-owner (with little or no equity based on market prices), who can walk away from his debt by abandoning his house, is in fact someone with the low investment risk of a renter (who should normally also not be able to afford to buy because of that lack of equity) , combined with the residual rights of an owner. That is how I understand the “giving property rights to renters”. I wonder what would be harder in US politics: more gun control or making homeowners fully responsible for their debts, no matter how little the house is worth..

  25. Per,

    The public wants to have their cake and eat it and unfortunately the state of ignorance that they are (kept?) in does not allow them to make politicians accountable for the damage they do. But you are right of course.

  26. And as any good interest rate man will tell you, the usury tax laws that were repealed in the 79-80’s has now mushroomed to bibical per-portions. And all that goes with it.

  27. You could lend at quite reasonable rates, for instance obtaining a 1 percent margin on the loan, no usury at all, but, nonetheless, if the regulators allow you to leverage your capital as a bank 62.5 to 1, as they do in the case of lending to triple-A rated clients, then that 1 percent margin turns into a “usury return” of 62.5 percent on capital… the type of return that humongous bonuses are made of. http://bit.ly/c66DLp

  28. With the $400 I have in my account a regulator is going to times that by 62.5 so I can do what with the extra$. I have a hard time just gettin the food money from my trustee all these years.

  29. And what about the regulators who wetted the appetite of the banks by allowing them to leverage over 60 times on this type of securities… is that not intellectual fraud?

  30. @ EMichael

    “But in stopping a fraud such as this in the future, the important thing is to understand the sectors most responsible, Investment banks and rating companies.”

    Key to your proposition is determining what your standard for “fraud” is? At issue is the legal term Scienter that refers to intent or knowledge of wrongdoing. This means that an offending party has knowledge of the “wrongness” of an act or event prior to committing it.

    If there is complexity, there is uncertainty. As there are innate complexities in the capital markets, the element of “uncertainty” always will be a part of complex adaptive systems.

    By what standard and when one can know something is wrong in an underlying economic environment that is inherently “unknowable?” How do you know in an inherently unknowable environment to prove your allegation?

    Furthermore, can deterministic metrics be used effectively and efficiently to govern indeterminate investments (e.g. no-money down, NINJA MBSs that are marked to model)? Absent a structural segmentation into predictable, risky, and uncertain regimes, noncorrelative information results.

  31. Wow! Simon’s piece is good, but the Punch and Judy show, whacking the party on the left, then whacking the party on the right, is surreal. There is plenty enough corruption to go around. It is a swamp.

    At the same time, it is as though Simon’s doing an analysis of angels dancing on the head of a pin to understand the mess.

    The mess started with the well-intentioned Community Reinvestment Act. Simple.
    Bankers were “forced” to make loans to people they did not trust to repay them. Those bankers didn’t want to “hold” such “hot paper.” It was merd!

    So, over time, a housing bubble ensues where one doesn’t have to worry about credit worthiness because the value of the property is increasing so fast… default will not matter…..

    ….anyway, the government is insuring all those merd loans….

    ….plus, Wall Street can package merd and gumdrops, and heaven knows what else, and sell it on the sub-prime market (and make a pretty commission penny).

    There is plenty of corruption and culpability – and greed! – all around. The dominoes fell one after the other, and on and on. This is not hard to understand. At the same time, it never would have happened if banks had not been forced to make mortgage loans to persons they did not believe were reasonable risks. That was the beginning, the first domino. Creative greed took off from there.

    ………Lady in Red

  32. Well, in this area. I can tell you that fraud was committed(using your “legal term Scienter that refers to intent or knowledge of wrongdoing”) by every single investment bank.

    Every single one of them knew that their sub-prime mortgages were not worthy of AAA ratings. Anyone with any financial background at all can tell you that when you ignore DTI and LTV by whatever method the resulting loan cannot be given a prime interest rate and perform.

    Then they multiplied that fraud by paying the ratings agencies to ignore the fraud. And the ratings agencies(some employees of which showed their knowledge of the fraud) were also guilty.

    There were certainly groups who did not know they were engaging in fraud. But the investment banks and the ratings companies were certainly not among them.

  33. Absolutely. As your video clearly shows, the profit was in leveraging “good paper”.

    What investment banks did was fraudulently supply lots and lots of “good paper” that they knew was not good paper.

    They created their own demand.

  34. If you think the CRA was in any way, shape or form responsible for the bubble, you need to get out more.

    There are many, many reputable sources that put that lie in its proper place. Obviously you have ignored the ones already linked in here. Here is another:

    Click to access 20081203_analysis.pdf

    And if that is too detalied for you, ask yourself one simple question:

    Can a bubble be caused in the 2000’s by a program that had continuously lost market share from 1993 through the 2000s until at the height of the bubble it has lost around 30% of its market share?

    Click to access n08-2_park.pdf

  35. Republican spin from the Lady in Red: “it never would have happened if banks had not been forced to make mortgage loans to persons”

  36. I understand your point, but you can create a credit matrix(even for “indeterminate investments) that will then lead you to a fee and interest structure to insure a profit.

    I could do it in auto finance(and did for twenty years)but mortgages would beyond me, but certainly not beyond others. Geez, I had credit levels that we knew would result in a repossession rate of 15%. You just price them higher.

    Something the investment banks refused to do(eventhough they knew it) cause demand would go down along with their leverage.

  37. I suppose, with enough layers of complexity slathered
    on, we could blame the importation of Great Pyrenees
    dogs for the crash. It makes no sense, but….

    Worked the other way, why would CRA *not* cause a
    problem? Lending fair and square to all, regardless
    of race, creed, etc. is one thing: lending to folk
    who don’t meet the mortgage loan standards is another….. Is that Republican? …smile.

    I’m not excusing the greedy exploitation of CRA
    from every facet possible, but CRA was the first domino.

    There is no justification for legislating a
    requirement to make bad loans. Dumb.

    (Of course, now, I have no idea how to dig out of
    cesspool of Potemkin phony economics, balance sheets…) ….Lady in Red

  38. @ EMichael

    Is it the shortage of:

    1. Securities laws?
    2. Securities lawyers? and/or
    3. Provable cases?

    that is stopping you class action suit?

    Have the strength of your convictions.

  39. @ EMichael

    “but you can create a credit matrix (even for “indeterminate investments) that will then lead you to a fee and interest structure to insure a profit”

    What you are suggesting is that uncertainty is a riskier form of risk that is a matter of degree rather than different. Uncertainty is different. It cannot be measured or bounded. The information does not correlate (see Taleb: “Fooled by Randomness” where he argues correlation is charlatanism). As with breast cancer, given today’s medicine it is not so much whether you have cancerous tumor in the breast (risk) as whether the breast cancer has metastasized (uncertainty).

  40. Thank you earle! And while all this is going on, banks borrow at 0.25% and Newt G.is proposing legislation to let states go bankrupt so all the munibond holders can get their GM style place in the line…

    all of Washington seems to demonize helping the states, when if congress would enact emergency measures to allow states to borrow at the bank rates, alot would be solved–why are banks more important than our state’s solvency? We all need to demannd the corrupt compliance in Washington with the privately held federal reserve and all their agents that is, the toobigtofail sacred banks.

  41. This is more or less distraction and redirections to lead the “narrative” that you linked

    The questions that need to be answered have nothing to do with this white washed propaganda blaming the victims. This was pumped from the start as a cover to obscure abusive derivative distortions which fed off of the sub-prime criminal base of predator lending schemes and asset based three card monty among speculators.
    Now it is being repeated as a political “BIG LIE” as a send off to austerity policies that will promote more strip mining of the lower income subclass of the Economy and make them totally defenseless against poverty desperation and the “invisible hand” of monetary monopoly.

    The question that should be raised about the deficit and the debt gap? How much is being hidden offshore and elsewhere to evade legitimate taxes!


    January 17, 2011 — Dean Henderson

    “The utilization of Eurodollar offshore bank accounts by the super-rich costs cash-strapped governments around the world trillions of dollars in annual revenue. In 1963 the Eurodollar market was worth around $148 million. By 1982 it was worth $2 trillion, while the US M-1 money supply stood at $442 billion.

    In 1950 US corporations footed 26% of the total US tax bill. By 1990 they were covering only 9%, contributing to massive budget deficits and the current $14 trillion US debt. In 2009 corporate leviathans such as Bank of America, General Electric and Exxon Mobil paid no US federal taxes. Exxon’s net profit for that year was over $45 billion. It utilized subsidiaries in the British Crown-controlled Bahamas, Bermuda and Cayman Islands to dodge the IRS.”

    Do some home work on that instead of the ruins of what is left of the sub-prime pump and dump swindle churn that left real assets in a false economy of debt, default and despair.

    Let’s get the real figures on the tax evasion happening while everyone knows it…but it is “Too Hot To Acknowledge” (THTA) openly (let alone do something about it!).

  42. Every time I raise my broker, I come up empty handed. Damned if we do, and damned if we don’t.

  43. SO: Government influence in the U.S. housing market is acknowledged. In fact, many of the programs you mention have been around since the mid-1930’s. But I’m not following the argument that these same programs, ones that fueled decades of prosperity, somehow morphed into the primary cause of all our woes. That’s too simplistic an explanation for a systemic crisis of global proportion.

  44. That is some interesting stuff about the Rock. I can only wonder about the shooting star that got away, to sue another some other day. And the repercushions that can occur from being overly leveraged.

  45. THE CATO Institute has been aggressively after the assets of the GSEs for more than a decade (http://www.cato.org/pub_display.php?pub_id=6047) . GSEs hold or pool approximately $5 trillion worth of mortgages If anyone recalls, Paulson first made a direct stab at this on the first impulse of the September 2008 financial collapse, but backed off at the blatant and obvious opportunism it implied. The current storm is an attempt once again to get those assets in a private pool in what would be called a fire sale feeding frenzy in any other country. The AGONIST did a very nice summary report that places both the politics and the economics of this Commission Report in great and tidy perspective:


    “Enough Democrats on the Commission have spoken up that we see what is really happening. The Democrats who run the Commission are using fact-based arguments and reality-based research to determine what happened during the financial crisis. The Republican minority members are all theologians using a faith-based approach that says government is evil and fundamentally at fault here, the market is all-pure and all-wise, and the “financial industry” is certainly not to blame.”


    “As reported by one of the Democratic Commission members, Brooksley Born, the Republicans demanded but failed to get the Commission to remove all references in the final report to “Wall Street” and “shadow banking”. Sure enough, you will not find these phrases in the Republican 13-page document issued yesterday, which is a fantasy statement that complies with Republican theology on the markets, but conforms very little to a realistic view of what happened during the credit crisis. We should definitely pay attention to the Republican statement, not for what it says about the financial crisis, but for what it says about the state of the Republican Party.”


    “The narrative that the GSEs are the source of all the financial problems began with Republican intellectuals like Rush Limbaugh and Sean Hannity, but it dovetails nicely with economic orthodoxy”


    “At the height of the bubble, it was Wall Street which destroyed what was left of credit standards in the housing market.
    What About the Shadow Banking System?
    You have to be blind, dumb, or maliciously misleading to miss the contribution of Wall Street to the housing bubble and the financial crisis. The Republicans compound their damage by denying that something called the shadow banking system even existed.”

    The article is rich in detail and is worth the trouble of reading at full length. Highly recommended reading.


  46. Bruce,

    In 2006, IIRC, 28% of US-based MNCs paid no corporate income taxes. (I don’t remember though where that info came from?)

  47. I would suggest you observe the current lawsuits just being started up by different investors. The cases will be easily proven.

    Unfortunately(in the sense of justice), the banks have a lot of lawyers, and very good lawyers. They will delay and delay the proceedings until finally the investors will settle down the road for pennies on the dollar with, of course, no confession of fraud by the banks.

    You are even seeing it now,

    In terms of laws, there are plenty available to prosecute the guilty. And I think the Obama administration is well aware of that fact.

    I can guarantee the re-election of Obama in 2012. No one could even come close to him if he let loose his AG and prosecuted the obvious fraud.

    An attack on Wall Street would bring him the votes from every Dem, every Independent, and even some Republicans.

    Even the loss os all Wall Street campaign money would be unimportant. People would love to blame Wall Street and the rating companies for the recession. If they were not even the real villians(and they are), they would still love it.

    Sad part is, I think he is well aware of that fact. And has chosen to ignore it since such an action would destroy the banking system in the US and Europe.

    There is no major bank on either continent that could survive if they were forced to take back their fraudently issued bonds. Not one.

    The investors who have taken legal action against Wall Street will be delayed, and delayed and delayed and then finally settle for pennies on the dollar in 5-10 years.

    Meanwhile, the government(with the peoples’ money) will continue to insure tha banks make profits and gradually erase the problem thorugh foreclosures.

    And in a decade or two, everything will be all right.

    Too big to fail.

  48. I disagree about the uncertainty thing. It is bounded.

    Only everyone could have “breast cancer has metastasized”.

  49. “There is no justification for legislating a
    requirement to make bad loans.”

    And you think the CRA does that?

    Guess again.

    Might be the worst application of the domino theory since Vietnam.

  50. Come on, Fannie Mae made you do it. It was the money that made you do, all of us, the money made all of us do it. Top to bottom. CRA was a crack in am old system, but then THE MONEY got into the game and everything changed.

  51. The CRA’s became accessories in the creation of the crisis as the bank regulators, playing risk managers, set the capital requirements of the banks based on the credit ratings and arbitrarily allowed banks to leverage 62.5 to 1 as long as there was a triple-A rating involved. The crisis although somewhat different would have occurred even if the credit ratings were absolutely correct because the system layered a new bias in favor of the triple-As on top of the favorable bias that good credit ratings already produce in the market.

  52. Even if it is true that uncertainty made it somehow impossible to determine risk(and I disagree), that is not the point.

    The point is that the investment banks knew that “(e.g. no-money down, NINJA MBSs that are marked to model)? were not going to perform anywhere near prime loans.

    As you say, maybe they were not able to determine how risky they were, but they knew they did not deserve the rating they gave them.

  53. Not the money. It is how the money was allowed to be used.

    I think people seem to think mortgage backed securities were the problem. They weren’t.

    I think people seem to think sub prime mortgage backed securities were the problem. They weren’t.

    The problem was sub prime mortgage backed securities being priced and sold as AAA mortgage backed securities, and then leveraged as AAA.

  54. Last week, Forbes magazine published what the top U.S. corporations paid in taxes last year. “Most egregious,” Forbes notes, is General Electric, which “generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.” Big Oil giant Exxon Mobil, which last year reported a record $45.2 billion profit, paid the most taxes of any corporation, but none of it went to the IRS:

    Exxon tries to limit the tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi. No wonder that of $15 billion in income taxes last year, Exxon paid none of it to Uncle Sam, and has tens of billions in earnings permanently reinvested overseas.

    Mother Jones’ Adam Weinstein notes that, despite benefiting from corporate welfare in the U.S., Exxon complains about paying high taxes, claiming that it threatens energy innovation research. Pat Garofalo at the Wonk Room notes that big corporations’ tax shelter practices similar to Exxon’s shift a $100 billion annual tax burden onto U.S. taxpayers. In fact, in 2008, the Government Accountability Office found that “two out of every three United States corporations paid no federal income taxes from 1998 through 2005.”


  55. bonnelle,

    I agree with your assertion that the “money” had a wide ranging affect. However, I think it is critical to understand that the system’s growth is dependent on excessive and unsustainable gains from lending and etc. Bubbles are in fact a signal of a dependence on artificial economic activity that is occurring globally.

    Capital formation is constrained by purchasing-power but this simple understanding leads to a distribution of wealth dictate that is not allowed by an imbalance of political influence and corruption. If blame were to be assigned honestly, it would be the global investment-class that is far and away the most culpable because that is the group with nearly all of the power, they make-up the rules and ignore that which benefits others. But the investment-class includes a much larger percentage of key populations than what is commonly considered to be at fault.

    It is though the shift from production-based economies to investment-based economies that is the lasting and difficult problem to solve. Although, the problem is simple in economic terms, productivity gains merely need to be channeled to those at the bottom instead of those at the top, but… in political terms, wealth distribution will only worsen as the investment-classes of the ‘advanced’ nations become increasingly consolidated as voting blocs with common economic interests, this is why the two parties in the US are becoming more and more similar, the two parties continually shift to accommodate concentrating influence.

    Conflict is the only solution, as always. At some point, the working-class in at least one of the G-5 nations will unite, and in nations like the US, foreign foes will take advantage of this turmoil and hostility will follow from all sides. Discontent is on the rise nearly everywhere.

    The entire framework is flawed in countless ways.

  56. A real problem here stems from credit rating agencys like Jefferies, putting whatever rating suited their interests. And in being the middlemen, in aiding and abetting criminal actitivies (ie: check cashing scemes) as long as they are the benificiaries of such activities.

  57. “If blame were to be assigned honestly, it would be the global investment-class that is far and away the most culpable because that is the group with nearly all of the power, they make-up the rules and ignore that which benefits others. But the investment-class includes a much larger percentage of key populations than what is commonly considered to be at fault.”

    Now lets look at the global investment class, they came to our Wall Street Investment Bank and want AAA rated securities. What they got has turned out to be much less and who is at fault for these rating will be told over the next decade or two.

  58. “I think people seem to think sub prime mortgage backed securities were the problem. They weren’t.
    The problem was sub prime mortgage backed securities being priced and sold as AAA mortgage backed securities, and then leveraged as AAA.”

    Right, without the possibility of obtaining a AAA rating and that would morph a subprime mortgage into a security that could be leveraged by the banks many times there would not have been one single badly awarded mortgage to the subprime sector… No mortgage originator would invest a penny of its own money in badly awarded mortgages.

  59. It seems to me it should be easy to find out which banks originated the bad mortgages(and second mortgages) simply by going through the foreclosed properties. I have seen some in terms of who is servicing the loans now, which is not the same thing at all.

    But somehow I cannot find any kind of decent report with those numbers.

    My mind is certainly made up in terms of the real villians, but that information would be the only piece that could possibly change my mind. Or it would probably stop the “blame the government, not the free market” insanity of the “housing bubble deniers”.

    If anyone can find such info, please let me know.

  60. Reading the blogosphere on the state of American politics and economics can be depressing.

    One moment of light I’ve found is a recent decision by Vermont to be the first State to adopt a single payer healthcare system. They hired a Harvard professor, Dr. Hsaio to present three models for the Vermont legislature to consider. Dr. Hsaio said he designed the Taiwanese universal health care system based on the :) Canadian system but made it better. For those who have time, here’s a link I found to Dr. Hsaio’s presentation to the Vermont Legislature.

    I’ve just started to view it. I’m sure it will be good.


    With apologies to Simon Johnson if I’ve hijacked his this thread.

  61. @ EMichael
    I’ll start with these well known names : Exxon, Shell, BP, Newmont Mining, Barrick Gold, Arch Coal, GE, just to name a few, use (access, through grandfathered leases well into the 2200nd century) the Governments land basically rent free! Besides not paying any taxes, surprised? The U.S. Dept. of Agriculture clearly (specifies) states that 34pc/plus of all land in the United States is owned by the U.S. Government.
    PS. Mineral and Management, ???, Pays squat in royalties,… pathetic!

  62. hehe

    Hey, the analogy is almost perfect.

    Both sets seem obsessed with taking actual numbers, facts and figures and attempts to make them meaningless by spouting some piece of ideology that, while it may even be true, has no bearing whatsoever on the actual numbers, facts and figures.


    It snowed in DC last winter so climate change isn’t happening.

    The government prohibits redlining, so the CRA caused the housing bubble.

    What else can you call them?

    On a “family” website anyway? :)

  63. @tippygolden “The AAA credit rating has proven to be a fraud. So what are the folks at Basel up to now?

    Let us begin by acknowledging that AAA credit ratings cannot always be right even if there is no fraud involved.

    Therefore the fraud was foremost of an intellectual nature, against common-sense, and committed by the regulators who arrogantly took upon themselves the responsibility of substituting as risk-managers for the banks and market and quiet arbitrarily decided what risk-weights were to go with what credit rating.

    It was pure silliness from the regulators to give such importance to perceived risk when everyone of them should know that, according to what is taught in bank-regulations 101, it is really the risks that are not perceived that are truly dangerous and capable of turning into systemic risks.

    What now? The regulators, those who failed as risk-managers in handling some simple risks of defaults … are exceeding in their arrogance and are now set to tackle even much more God-like events like pro-cyclicality. God help us! http://bit.ly/c66DLp

  64. Anonymous,

    You are taking what I said too narrowly. The problem extends back and beyond AAA rated securities. The bubbles and the corruption are symptoms. The illness can be traced back to a systemic flaw that has to do with Bretton Woods II, reserve currency status, fiat currency and etc. (a gold standard is not the solution though).

    The study that I provided a link to above is a good starting point although its authors give Chinese ‘mercantilism’ far too much weight. But they do have the accounting identities correct as did Bernanke and Paulson. The macro on this is not in dispute and it makes the cause pretty simple. Global labor values are trending down as rising productivity is being channeled to investors and this is causing excess liquidity which in turn is causing bubbles. Bubbles are not possible unless there is excess investment capital in the system, simple stuff!

    If, for example, there had not been a housing bubble in the US, the excess liquidity would have caused more of a bubble elsewhere (except if used for development). Not necessarily in the US, but somewhere, and it is all connected. Without the housing bubble there would have probably been more of a ‘spillover’ effect like that being caused now by QEII. Blaming ‘banksters’ or ‘deadbeats’ is merely an attempt to pretend that we have nothing more than a ‘few bad apples’ when in fact the system is flawed.

    The system does however allow some nations to prosper at the expense of other nations and so… the effort to blame, whether it be directed at financiers, deadbeats, or mercantilism, or who-whatever, is an effort to salvage a neocolonialist advantage through a period of what is certain to be detrimental for at least some nations. Blaming ‘a few bad apples’ is an attempt to ignore wealth distribution issues at both the individual and the national levels. Propaganda!

  65. “Bubbles are not possible unless there is excess investment capital in the system, simple stuff!”

    With a free-market that could perhaps be true but, with an intrusive regulatory system that allow banks to blow unlimitedly to public sector rated AAA; 62 times for each dollar of capital at whatever private is rated AAA; but only 12 times for each dollar when they blow at small businesses and entrepreneurs, you have both bubbles and underserved sectors even with excessive investment capital system in the system… simple truth!!!

  66. Per,

    Naturally, leverage plays a very significant role. But, that doesn’t change the fact that the problem is an inability to facilitate enough growth to maintain a pace that stays ahead of the adverse feedback loops, or that maintains the standard of living and etc. If, in other words, less leverage had been been maintained over the past decade or so, growth rates would have been substandard, the system is inefficient due to excessive reliance on the service sector as opposed to the production sector. Or, it is also correct to say that too much human capital is coming from the service sector, as opposed to the productive sectors other than financial services. This leads to the conclusion that the Marginal Utility theory is wrong, although, this version is just complicated enough to avoid public scrutiny. But the MUT is in fact at the center of the problem, one banker simply can not be worth hundreds of productive workers. One mediocre economist can not be worth more than several competent carpenters and so on, unless of course one believes that the MUT is correct, but it is not correct. And yet the very people who are able to understand this are the very people who benefit from ignoring the rather obvious flaws in the theory.

  67. Re: @ EMichael

    “Memo to banks, you are toast”
    Ref: Khalid al [Al] Mansour reportedly the financial advisor to the wealthiest Saudi prince in the world, Alwaleed bin Tatal. Prince bin`Tatal is the second [2nd] largest shareholder behind Rupert Murdock who owns News Corp. It doesn’t end there? Saudi Prince Alwaleed bin`Tatal is the biggest individual (investor) shareholder of CitiGroup (C), and is very,very fond of President Obama through Khalid al`Mansour?

    PS. As I write the “Deep Six” are abandoning their “Prop Trading Platforms” (In-House Investment Mezz.?) – shadow bagging em like unspoiled [such a delicious oxymoron) carrion left over from yester`years ghost hunt, tomorrow?

  68. “One mediocre economist cannot be worth more than several competent carpenters”

    Oh they sure can, if for instance a global regulator lends his full supports to the incompetent economists and opposes the competent carpenters… just like the regulators supported those perceived as having a low risk and who because of that already were favored with lower interest rates by the market; and opposed those perceived as being riskier, like the small businesses or entrepreneurs, who because of that already were forced to pay higher interests…

  69. “Flatlanders” as in the ones that forfitted their feelings on the battle field. Eaiser, than candy from a baby.

  70. @ earl, florida, six ounces, rayllove. EMichael, et.al.

    No-money down, negative cash flow, NINJA MBSs that are marked-to-model valuations are uncertain securities. Paying AAA-risk valuations for uncertain cash flows is non-correlative activity that is the result of conflating risk and uncertainty.

    Whenever you treat to different conditions as though they were the same, bad things happen. Conflation of risk and uncertainty encumbered the market’s price discovery mechanism that resulted in the boom-bust bubble.

    Absent the segmentation of the legacy, one-size-fits-all deterministic governance metrics into predictable, risky, and uncertain regime, the troubling trend of larger and more frequent crashes will result.

  71. Bill Clinton lowered the bar for ‘poor’ people to take on huge amounts of debt back in 1999 … take a look at the NY Times article from Sept 30th written by Steven A Holmes entitled ‘Fannie Mae Eases Credit to Aid Mortgage Lending’ … I rest my case.

  72. Another timeline – Savings and Loan debacle

    then Enron sucking the $$$ out of modernizing electrical grid

    then Health Insurance Companies sucking the $$$ out of hospitals and clinics and education

    then the full blown cancer of financial services

    and finally, the same monkey brains are now housed in D.C. area in high tech constructions where, thanks to the Patriot Act, they will have total control – just like Stalin had – lists of citizens and citiezen’s “business” brought to him for his red pen to “eliminate” all those citizens smarter than him – corporate management didn’t invent that schtick – Stalin did…

    Martha Stewart went to jail for lying, basically, about what her bank account “pin” number was to the “FBI” – but of course they had the right to ask her for it, right?

    Not sure why they spent so much $$$ building the Large Haldron Collider to find the “God Particle” when it is clear that in their “religion” the God Particle is money!

    The “Middle Class” in USA was attacked. So whatever happens now in the way of engagement with the “enronistas” – from peaceful lying on the internet to “economic disobedience”, to proving that war lords and drug lords indeed have a “fragile” global economy when that economy rests on the foundation of empty houses and dismantled infrastructure systems – from energy to health to sewers and pot holes….where’s the “wealth”?

  73. Are we not back to postulating about how many angels
    can dance on the head of a pin, gentlefolk?

    Would not the problem be solved with some simple —
    say reimposiition of Glass-Stegall? — adjustments and
    some needed enforcement? Are we not contemplating
    the invention of a ridiculous virtual Rube Goldberg

    Another possibility would be to ask (?) bankers to take an oath of poverty, to make their responsibilities vis a vis the public a sacred trust,
    like priests. Remove all the money lust from the

    In *my* book, a banker, even a good one, would never
    be worth even close to three artisan carpenters.

    …Lady in Red

  74. You seem to have rested your case without linking to any kind of actual numbers of such loans. Or their performance. Or their bearing on the bubble. Or ______(fill in the blank).

  75. The wealth is in the hands of the few, just as Stalin goals turned his country mens hair black, todays wealthy want to purge the “cancers” out of society in every way. You may have been caught in a time warp, where the ability to advance ones country is limited by the allure of easy money.

  76. The conventional wisdom that prevailed for an entire generation was that real estate would always appreciate, so you couldn’t lose even if you found a buyer who stood very little change of every paying off the loan. The idea was to move property as possible, and seize back the bad properties for a resell — at a profit, as the asset was expected to continuously appreciate. Operating TARP with 100 cents on the dollar instead of revaluing at a more appropriate market value would increase the number of upside-down mortgages and increase the percentage of buyers who would walk away. The policy makers are making this up as they plod forward — hoping that another shock doesn’t come too soon.

    Too much QE will drive up commodities subject to speculation. Too little and the economy stagnates, confidence falters, and the current batch of elected and appointed officials will be turned out on the street. For Obama it is all about trying to steer down the middle, but he gets his information from Wall Street devotees, and so his posture is decidedly ‘street-friendly.’

  77. The Vermont legislators who are moving ahead with a singlepayer healthcare system are a moment of light in the often depressing state of political debate in the United States. Dr. Hsaio is a treasure. These are decent people and the more power to them.

  78. “Another possibility would be to ask (?) bankers to take an oath of poverty, to make their responsibilities vis a vis the public a sacred trust, like priests.”

    Sorry, this won’t work, it’s ridiculous.

  79. @ Lady in Red

    Could I dare say: “Three Banker’s equate to nothing less than the worth of an ounce of salty-sweat on a French-Canadian carpenters, brow?” :-)

  80. Bankers doing what and French-Canadian carpenters doing what?

    One banker doing his job right financing the provider of the next generation of jobs might be worth millions of French-Canadian carpenters making cabinets nobody wants.

  81. I generally agree with you Rien. The global search for yield does more to explain global asset price bubbles than anything else. Of course, after taking into account this global phenomenon you have to look at country-specific factors which either led to or contributed to a house price bubble.

    Some countries didn’t have a bubble at all. Why?

    Why did the US bubble collapse but Australia’s is going strong?

    How does Spain’s housing policy differ from US policy?

    I’m merely stating that there are a great many country specific factors in the US which contributed to OUR crisis. Imprudent government policies were a major cause of that.

    To the extent that imprudent policies fired up wanton disregard for prudent financial management, misaligned incentives, enhanced principle-agent, moral hazard, and adverse selection, and overheated people with greed, we’re all to blame.

  82. Remember kids, in order to maintain an untenable position, you have to be actively ignorant.
    Stephen Colbert

  83. You’re at a loss for words because you’re at a loss of facts.

    The housing boom lasted at least ten years, not three.

    Fannie and Freddie had a 70% market share of MBS in 2003. By 2006 that had dropped to 40%, but overall MBS issuance declined nearly 25% during that time. Nevertheless, as I said, they remained #1 and #2. Fannie had 22.3% of the market. Freddie had 17.6% of the market. Countrywide was in third place with only 7.5% of the market.

    You see, this is called COMPETITION. Entry into an industry generally happens when there are enormous profits. As I said, the GSEs demonstrated the profit potential for everyone else. And the ONLY reason they retreated was because of their accounting scandals, not because they had suddenly found Jesus and decided issuing MBS was bad.

    By 2007, Fannie and Freddie – just two firms – again had the majority of MBS issuance at 62.1%. A two-year probation hardly dismisses their culpability in funding obscene mortgage growth!

    In 2007, F&F held more MBS on their books than all 8000 commercial banks in the US combined. They held more MBS than all securities dealers, insurance companies, and pension funds combined. Along with FHLBs, F&F held more MBS than all foreign entities combined.

    That’s TWO firms with all that market power and influence over the housing market!

    With CRA, again you are restricting “the boom” to 3 years rather than 10. There were more than a trillion dollars of CRA related loans from 1996 to 2001. During the height of the crisis, house prices became way too high for low income borrowers. And many people who COULD have got a CRA covered loan from a community bank found it more advantageous to get a loan from a large scale lender like Countrywide which was not subject to CRA. But the top seller of mortgages to Fannie and Freddie was COUNTRYWIDE. So, you see, F&F were funding these loans to poor people after all.

    The Fed Funds rate was a factor because it is the index rate for practically every other rate. Another index rate is the 10-year CMT which was kept low for too long by the Fed. When risk-free treasuries are paying almost nothing, MBS seemed like an attractive alternative. They had higher yields, seemingly diversified risk, and had the same risk weight for financial institution capital as treasuries. So banks bought and held MBS and foreigners purchased MBS which drove up demand for mortgages to back them. This increased the supply of loans and thus made rates lower and credit terms easier.

    As I said, several times, Countrywide was the number 1 securitizer of Fannie and Freddie ARMs. They securitized $30.7 billion in 2007 alone for the GSEs. The next two top securitizers for the GSEs were Washington Mutual and Indy Mac. Sound familiar? The #5 securitizer was Lehman Brothers. Sound familiar?

    You’re the one blinded by ideology EMichael. You simply can’t grok how interconnected the large banks were with the mortgage giants Fannie and Freddie and how the entire FIRE sector was supported by government policy.

    Who do you think is paying for all the defaulting Fannie, Freddie, Ginnie, FHA, and VA loans, Sparky? The US taxpayers!

    Oh, BTW, Europe had housing bubbles too because of MBS and permissive housing policies.

  84. Grow up and stop letting people spoon feed you bad information.

    Loans which Fannie and Freddie would buy are called “conforming” mortgages. Many, but not all subprime mortgages were non-conforming. However, Clinton’s HUD began to give Fannie and Freddie “affordable housing credits” for purchasing MBS backed by subprime loans. If you remember, Clinton served BEFORE 2001.

    Later, F&F relaxed their credit standards and bought subprime directly at the behest of Congress and President Bush’s housing goals. The purpose was to expand home ownership for minorities, specifically Hispanics.

    As I said before, the credit quality of F&F purchased loans didn’t matter. If a bank originates several conforming loans and sells them to F&F, they get funds from which they can lend to ANYONE. What matters for aggregate house prices is TOTAL demand, not just the relative number of prime and subprime borrowers. Prime borrowing was ALWAYS the vast majority of the market.

    The bubble was caused by expectations of increasing house prices. House prices were inflated from easy credit, low cost loans, and affordable terms. It created a bidding cycle. For flippers, it was a profit opportunity. For homesteaders, it was “buy now or be priced out.”

    Subprime was part of the crisis, adding fuel to the price fire at low, intermediate, and even high price ranges. But the TOTAL demand of prime and subprime borrowers created the price bubble. Subprime borrowers were just the first ones to default because they had the least secure jobs and the flimsiest financial positions.

    It was NOT a subprime crisis. It was a government-made “affordable housing” crisis.

  85. Re: @ Six Ounces___Australia is on *China’s, “Most Favored Trading (sound familiar?) Nation Partner List”! They are “Dirt-Rich”, so to say, and humongous geographic per gratis. *(They certainly can use some help today with the flooding, USA?)*
    Spain’s housing requires a minimum 40pc down payment – no hurky-jerky nefarious “American Made Only” loop-holes for subprime, etc., etc,…? Ironically the Vatican helps, go figure?

  86. No, Sophie, the Federal Reserve Banks are owned by its member banks who have nontradable shares.

    Fannie and Freddie were publicly-traded firms. You could own stock in them or buy their bonds.

    Indeed, the FHA loans are guaranteed by the taxpayers. However, borrowers pay an upfront insurance fee and annual insurance premiums. In prior years, the FHA had insurance surpluses which were taken away by Congress and spent. But with rising defaults, the FHA is now losing money. The HUD secretary recently begged Congress to make up the $600 million shortfall and they told him to go to hell. The FHA also insures Reverse Mortgages which are also currently losing money because the houses backing the loans have lost so much value.

    Ultimately, taxpayers are on the hook for all these subsidies, guarantees, incentives, and programs.

    If a bank sells an FHA loan to Fannie, Freddie, or Ginnie, they are doing so to pocket the fee income, avoid interest rate risk, or gain liquidity. The loans are already largely guaranteed, so the loss given default is small.

    FHA loan defaults are rising, so yes these borrowers are suffering by being induced to buy at a very bad time at too high a price. However FHA loans have been a major source of funds for people buying low-priced homes now. But FHA just raised their fees and tightened credit standards.

    Hope that answers your questions.

  87. Isn’t there a definition of insanity…. Doing the same thing, expecting different results…?

    We “select” for bankers among the worst, most egocentric, greediest of us and assume we can rein them in, somehow. It’s like trying to control a fusion reaction: there will never be enough “scotch tape.” Thus, it is important to flow with a clear understanding of what “is” and work with that.

    Both the problem creating the crash and the possible solutions can be simple, straightforward.

    Instead, we allow our world to be hijacked both by the eraser-chewing philosopher/economists and by the greedy bankers.

    Possibly, we should try something simple, yet different? Some heretofore “outside the box” thinking, possibly? ….at a high level, not down in the weeds….? ….Lady in Red

  88. Please tell us where you got your informations from. The MBS that really got the US and Europe into trouble were primarily those awarded 2004 on… and Europe did not have a European MBS disaster… though the lost a lot on the trillion of dollars they invested in US MBS following the AAAs.

  89. Simon, I’ve noticed that your postings have become more and more politicized in the past few months. I used to read your ideas and even if I disagreed, never felt you were arguing for or against a given political party out of rote or reflex. But suggesting that the FCIC Republicans blame the financial crisis on poor people is disengenuous and building a snake to kill a snake. There are plenty of honest intellectual disagreements to have about the financial crisis, its causes, and ways to prevent one from happening again without resorting to this type of low political discourse. You’re better than that Simon!

  90. I do not disagree with what you say, but question where you put your emphasis. Aggregate considerations such as TBTF are vapor targets that cloud critical analysis. Much like the drug problem, I believe that the subprime problem was demand driven, cheap housing and higher AAA yields for baby boomer retirees.

    Once again, I believe it is in the margin that provides answers to the subprime problem. To affect the market you only have to affect the margin. The margin of the housing market was affected by giving property rights to renters that increased the demand at the margin. No-money down mortgages provided the lure of a free-ride which also increased demand. Conflating risk and uncertainty resulted in a price discovery problem where financially engineered, uncertain MBSs (negative cash-flow investments that were marked-to-model) were priced as AAA risk.

    The boom-bust cycle that followed was inevitable. So long as you conflate risk and uncertainty in a deterministic one-size-fits-all governance regime, the troubling trend of larger and more frequent economic dislocations will continue.

  91. Both the comment and the citation are worthy, I would like to add a simple phrase:

    whether by your design or the design of others matters not.

  92. @ Lady in Red___”Isn’t there a definition of insanity….Doing the same thing, expecting different results…?”

    Indeed, you’ve hit the nail on the head, but it’s a hard nut to crack? I’m talking about the near century old manifesto that’s totally arcane, period! Yes, I’m talking about the “Bank of International Settlements (BIS)” created in 1928, and implemented in 1929. Don’t you find it strange that the U.S. Banks, and Foreign Banks (Central Banks?) throughout the world use it as a “Fiscal (Disciplinary) Bible”! Questioned by none…and as far in the future as one can see?

    The “Financial Modernization Act”, better known as a one-legged tripod – the “Three Amigo’s” who co-sponsored this travesty being Gramm-Leach-Biley Act (7/30/99), and actually turning this myopic complimented panoply with the advent of “The Commodities Future Modernization Act (CFMA/ 2000)” for our financial pleasure?

    I ask you this? If we can change laws of the past, supposedly beyond their usefullness (so to say?)…why can’t we nullify this 90 year old opaque foreign bureaucracy pos, mired in “Oligarchy Excretion” in the United States of America, and use our own rules? Answer me? Why!

    “Insanity – does it lead by example – or is it leashed to yesterdays’ anxieties too be led by ones inept consciousness – once an unknown entity fastfoward into morrows dreams realizing sanity is just another word for redundant futility – rotting away fevorishly where nightmares occasionally stood guard”?

    Ref: The Timeline: “The Bank of International Settlements (BIS)” {[Pg. 10/20/50/100] / [1920-2011]}

  93. Any Congressman or Senator with the foggiest idea of bank regulations, something that should be required in order to have the right to legislate on banking regulations, must be aware that the Basel Accord, the Basel Committee and the Financial Stability Board play an essential role in the regulations of the US banks. If so how can anyone explain that in the more than 2000 pages of the Dodd-Frank Act, the Basel Accord, the Basel Committee and the Financial Stability Board, are not mentioned even once?

  94. Chinese investment in MBS is part of the “global capital imbalances” and “search for yield” I was talking about. Lots of countries bought our MBS, but maybe I should have made the China point to provide some added texture to my argument.

    Spain’s onerous rent control policies makes houses a very poor investment choice. Consequently the home ownership rate in Spain is about 80%. This is the government “disincentive” I was talking about.

    I don’t generally approve of rent control or housing subsidies, but IF we are going to subsidize home purchases, we shouldn’t be giving tax breaks for vacation homes and investment homes.

  95. I got my information from Inside Mortgage Finance.

    If you think that the “MBS awarded 2004 on” was the problem, then you have no idea what a bubble is or what systematic risk is.

    It was not a particular set of bad loans that did in the housing and financial markets. It was ALL the building and lending and buying from 1996 through 2007 that did it.

    ALL of the house prices were inflated by mutually reinforcing expectations of house price appreciation. It wasn’t just subprime MBS that had problems, but ALL MBS.

    In the peak year, only 15% of mortgages were subprime. About 15% of subprime loans went into foreclosure. How does 2.25% of all mortgages going into foreclosure send shock waves through the whole system? It doesn’t!

    The housing crisis was from too many homes being built, too much credit being granted, and too many buyers making a BUY decision under the false assumption of growing house prices and refi opportunities.

    MBS is usually a safe investment. Even subprime MBS is safe if the price is right. But when you and I and everyone else are all making BUY decisions on a false premise, our individual decisions affect the JOINT probability that we will default. That’s when the risk of an MBS pool is no longer diversified, but systematic.

  96. Yes, gentlemen. Precisely.

    Two thousand pages of the Dodd-Frank Act and no one acts ashamed, embarrassed by that….? We have become a nation run amuk.

    For every new law, we should require the repeal of at least five old ones.

    We need to stop tinkering and begin slashing and simplifying. Today is death by a thousand cuts.

    Most important, we need to address the extent to which the wrong mentality –
    the most devious and mendacious – are attracted to the world of finance. We will never be as cunning and corrupt as they are. They are winning the chess game.

    One banker should equal no less than three finish carpenters. Period.

    Matt Tiabbi wrote the sad story of Jefferson County, Alabama last year. Their new $250 million sewer system ran up a banker-infested tab now exceeding $2 BILLION!


    ….legally! ….Lady in Red

  97. Thank you Six Ounces but prior to being a public, Fannie and Freddie were private companies.

    Regardless of the ownership of the Federal Reserve Shares, the toobigtofail( not the run of the mill smaller banks even if they are member banks) can borrow for nothing (0.0-0.25%) and leverage and trade proprietary playbooks written by the president’s working group all in the name of saving the country…and we are talking about municipalities failing because the interest on their working capital will break their backs when the loans are reset…Congress could allow the states to borrow at the same low rate as the toosacredtofail banks if indeed it was in the interest of our politicians to work on behalf of their constituents instead of only the owners of the federal reserve and it’s largest affiliates.

  98. “Off with their heads” said the Queen of Hearts.

    The Queen of Hearts is the embodiment of ungovernable passions, a blind and aimless Fury, but the Red Queen is a Fury of another sort, cold and calm, she creates all sorts of mischief, wrote Lewis Caroll.

  99. Among the commenters on this list, I am among those who holds the most vitriolic sentiments with regard to both the Democratic and Republican parties.

    I think you are wrong about Simon here. While this post is primarily about Republican misdeeds, his posts are frequently critical of the Democrats as well. While I find his commentary to be perhaps over-restrained, I think he is pretty even-handed with respect to the two major parties.

    I wish I could say the same about James. My impression is that he rarely says anything negative about the Democrats, and on most issues is squarely in their camp.

    Just my impressions–I haven’t been keeping track.

  100. Talking about Middle Class in USA – not sheikhs in arabia

    Gates, Jobs, Oracle of Omaha…they don’t get up in front of a million people, call them stupid and claim that their “bank” is doing god’s work

    Stalin was not a Russian – he was from Georgia.

  101. “But the MUT is in fact at the center of the problem, one banker simply can not be worth hundreds of productive workers. One mediocre economist can not be worth more than several competent carpenters and so on, unless of course one believes that the MUT is correct, but it is not correct. And yet the very people who are able to understand this are the very people who benefit from ignoring the rather obvious flaws in the theory.”

    FIAT MONEY + MUT = Believing your own made up crap

    More misery for others = More money for ME ME ME

    The absolute math formula of the monkey brain

  102. This two-party stuff is an illusion. Don’t buy into it. (That’s my advice.) If you watch what they do, rather than paying attention to what they say, you’ll see that we don’t have two parties at all. We’ve got the ruling party.

    The Lady in Red correctly accuses the bankers and financiers of mendacity. But they are not the only ones. Far from it. We’ve got the oil/gas/coal people. We’ve got the major manufacturers, like GE and Koch Industries. We’ve got the captured academics and the intentionally incompetent regulators.

    We’ve got the class war that has been ever-so-successfully waged by the top 1 percent against the other 99. (Where would they BE without the other 99 percent? Why do at least 98 percent never even consider this question?)

    But I digress. The one thing we don’t have is any political opposition to the ruling class. At all. Whatsoever.

  103. The monkey brains are winning. I suggest stopping the monkey brains by ending their bullsh*t “Federal Reserve” cartel, and restoring the money supply to the constituted government, where it belongs.

    I could do amazing things, too, with my own printing press in the basement, but I’m far evolved beyond believing fiat money and its’ secondary reinforcers are the be-all-and-end-all of being human.

  104. I resort back to what I have been saying, that the middle class is becomeing ever more, a slave to money. And if some have their way, possibly the rich too.

  105. I would be careful of whom you call an “intentionally incompetent regulators” you may find yourself to either be one, in bed with one, or controled by one. I would not want to be any of those, And your 1% class war scenero is actually a 3% , and 96% are unaware of this. Now are YOU still among the 1%ers?
    Or Just where do you fit in?

  106. Well, apparently with someone who calls himself Henry the 8th responding to my remarks, I am the canary in the coalmine.

  107. @Carla

    I entirely agree that the two-party stuff is an illusion. My comment was not intended to imply otherwise. Rather, I was responding to Sam33’s statement that Simon was picking on Republicans but sparing Democrats. My impression is that’s just untrue.

    Whether there is any real difference between Republicans and Democrats is a different question–one on which you and I apparently concur that the answer is negative.

  108. @Per, again: maybe I failed to be clear. In my mind, intentionally incompetent regulators are in a different (and much worse) category than regulators who are simply not competent.

    On the other hand, the incompentence of regulators, intentional or otherwise, does not excuse the behavior of all the other actors, including, but not limited to, bankers, energy magnates, other big corporations, and captured academics.

    And of course, we do have poor people. I know everybody loves to dump on them, but guess what? They didn’t cause this crisis and they certainly haven’t been bailed out.

  109. “Calvinims that says if a man’s in the gutter that’s God’s plan and if you help him out of it, you are interfering with Divine Order. The reverse, of course, is that if you are filthy rich, you deserve it because that’s God’s plan for YOU, and it you make your gazillions on the backs of others, that, too is ok. God is smiling.”

    Not everything that monkey brains claim is “religion” actually IS “religion” in the eon-old settled definition of “religion” – religion as an acknowledgement that if there is a God, then that God is sovereign.

    These kinds of “religionists” live and breathe to put people in the gutter – they are predators.

    They also cannot conceive of a civilization that is free from all forms of slavery.

    And the bottom line is this – you, the collective you, do NOT have a PERSONAL moral obligation to believe their made-up crap.

    And in a hard-earned civilization where people have agreed to a “rule of law” that protects the individual against force and fraud

    then YOU have an ethical duty to demand that the “calvinists” step off the stage of history so that history can actually continue to progress.

    With the Patriot Act, they deleted 1,000 years of settled law – Habeus Corpus.

    Repeat after me, “They are NUTZ.”

  110. When you say “intentionally incompetent” you are referring to them as being smart and devious. The way I see them and what they did and do in the Basel Committee I cannot swear about them being devious but I do know for sure they are dumb… as they keep digging themselves and us deeper in the hole they know does not serve them either.

  111. Possibly — do you think? — the problem, our financial crises, could be caused by sunspots?

    What a relief to absolve GS and the others, Barney
    and Chris, the CRA and Freddie and Fannie. And Bernake and Greenspan, not to mention Krugman and his decades of dithering tripe. What a relief: sunspots!

    From the NYtimes:

    Updated: Jan. 25, 2011

    The Financial Crisis Inquiry Commission was created in 2009 by Congress as a bipartisan panel that would investigate the causes of the country’s financial meltdown, much as the 9/11 Commission examined the background of the attacks.

    A majority of the panel concluded that the 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street.

    In its final report, the commission casts a wide net of blame, faulting the administrations of Bill Clinton and George W. Bush, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

    Like the 9/11 Commission, the panel prepared its report as a book, in the hope that it would have greater impact by reading a wider audience. But unlike the 9/11 Commission, the financial panel split along partisan lines.

    Of the 10 commission members, only the 6 appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent; a fourth Republican, Peter J. Wallison, a former Treasury official and White House counsel to President Ronald Reagan, has written a dissent, calling government policies to promote homeownership the primary culprit for the crisis.

    Along with partisan disagreements, the commissioners themselves acknowledged that the panel was hampered by a haphazard approach and a lack of time and resources. In early 2010 the panel’s executive director stepped aside and a top investigator resigned, frustrated by delays in assembling a staff.

    The commission’s potential for impact on policy was unclear, since Congress has already adopted a financial regulatory reform bill. The panel referred a handful of cases to the Justice Department for investigations that could lead to civil cases involving securities violations.

    The report seems aimed at shaping future debate over the crisis. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions. “If we accept this notion, it will happen again.”

    The panel’s chairman was Phil Angelides, a Democrat and a former California state treasurer who unsuccessfully tried to unseat Gov. Arnold Schwarzenegger in 2006. The Republican vice-chairman was Bill Thomas, a fellow Californian and former congressman who was once the chairman of the Ways and Means Committee.

    The commission struggled not only with partisan conflicts but with the size of its task: examining and explaining a crisis whose complex and often technical causes continue to befuddle ordinary Americans.

    Democrats likened the new panel to the Pecora hearings, which were a series of hearings conducted by the Senate Banking Committee in 1932 to examine the causes of the 1929 stock market crash and which led to major reforms like the Glass-Steagall Act, which separated investment banks and commercial banks.

    While the majority report accuses several financial institutions of greed, ineptitude, or both, some of its most grave conclusions concern government failings, with embarrassing implications for both political parties.

    The report itself finds fault with two Fed chairmen: Alan Greenspan, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response. It criticizes Mr. Greenspan for advocating financial deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as “the prime example” of government negligence.

    It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to go bankrupt in September 2008, for example, after earlier bailing out another bank, Bear Stearns, with help from the Fed — “added to the uncertainty and panic in the financial markets.”

    Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly it turned out — that the subprime meltdown would be contained, as the report notes.

    Democrats also come under fire. The 2000 decision to shield over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term is called “a key turning point in the march toward the financial crisis.”

    Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now President Obama’s Treasury secretary, also comes under criticism; the report finds that the New York Fed “could have clamped down” on excesses by Citigroup in the lead-up to the crisis and, just a month before Lehman’s collapse, was “still seeking information” on the vulnerabilities from Lehman’s exposure to more than 900,000 derivatives contracts.

    The report is likely to reignite debate over the outsize influence of Wall Street; it says that regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions.

    The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession “created increased risks” but were not chiefly to blame. It says that Fannie Mae and Freddie Mac, the mortgage finance giants, “contributed to the crisis but were not a primary cause.” And in a finding likely to upset conservatives, it says that “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.

    And, of course: “aggressive homeownership goals”
    were not “major” culprits, causing the crisis.
    (Certainly, a “goal” is rarely a “cause” of anything and increased homeownership is a laudable “goal.” Who would NOT support that? Ah, the devil is in the details: it is the merde that was created by the “goal” that stimulated the evil crafty little minds of Wall Street wanting to “protect” banks from all that merde….. esp. after “industry” began skimming quality loans off the top with lower interest Jumbo Loans…. Wall Street to the rescue!

    Remember: The “homeownership goal” did not create the crisis. But, Wall Street would not have had the opportunity to create the subprime mess if the govt had never forced banks to make unwise loans.

    This is simple, folk. ….Lady in Red

  112. @ Lady in Red

    I would agree that the analysis is simple if the proper metaphysics are established. Where the difficulties arise is when improper diagnosis leads to misdirected policy solutions. To correct misguided policy, three questions must be asked.

    First, is the capital market OK as is? If so, then why troubling trend of larger and more frequent crashes. To illustrate, the Crash of 1987 experienced a $1trillion decline of wealth. Fourteen years later, in 2001, the Dot-com Crash witnessed a decline of wealth of $4 trillion. Seven years later, in 2008, the Subprime Crash saw an $8 trillion decline of wealth. I argue that this underlying trend is caused by the conflation of risk and uncertainty resulting in non-correlative information. Bottom line is that bad data mined by bad tools result in bad policy.

    Second, is the market inefficient indicating that reform is a matter of degree to know what to do better? The one-size-fits-all, deterministic governance regime remains in force with smaller sized and less leveraged financial firms. This requires ignoring systemic complexity. For if there is complexity, there is uncertainty. How can one-size-fits-all, deterministic metrics govern both risk and uncertainty? It would be like having a single policy for governing driving in the US and the UK?

    Lastly, is the capital market ineffective (broke) needing fundamental restructuring in a matter of knowing what to do differently? I argue for the need to segment too-random-to-regulate (TRTR not TBTF) into predictable, risky, and uncertain regimes. If Citigroup’s one-size-fits-all financial supermarket could not cross-sell, then policymakers cannot cross-regulate non-correlative information. To paraphrase Mr. Einstein, the consistent applications of inefficient metrics in an attempt to remedy an ineffective system is insane.

  113. This has all the rements of a physiactric misdiagonis of the 80’s, compounded into economic misdiagonis of today. Many are so far behind the 8 ball, it now is difficult to determine where one went wrong and what to do about it. It is the essiential dog chaseing its own tail. Or maybe Einstiens premise was wrong and many just refused to believe it.

  114. I know for sure what went wrong… in just one (though a bit long) sentence.

    Bank regulators stopped being regulators and with immense hubris had a go at being risk-managers for the world, toying around with their arbitrary and regressive risk-weights that allocated different capital requirements for banks, depending on the perceived risk of their clients, as if the perceived risk is what matters.

  115. No, Sophie, banks cannot borrow at 0-0.25% to fund asset growth. The fed funds rate is for overnight loans of reserves from OTHER BANKS. This is a liquidity tool, not a funding source.

    Banks have to pay much higher than 0.25% for their core and non-core liabilities. They aren’t making many new loans, so that income is down. Securities at the long end pay 3-4%, but those entail interest rate risk. Short term securities pay much less.

    Consequently, bank net interest margins are near record lows. They have risen about 8 basis points in the last three quarters from one-time repricing of liabilities.

    Bank earnings are up ONLY because they are reducing provisions for loan losses. This could be a very bad thing if loan losses pick up again. With house prices falling again in many areas, and businesses struggling for customers, there is a good chance loan losses will rise again.

    The crisis ain’t over. We won’t be out of the woods for two more years, if and only if recovery continues at the current pace.

  116. That is extremely difficult to say, all the measures I know of to promote progress have met with stiff resistance, and more. Only time and luck have the answer there. But I would imagine that numerous bankruptcys among the elite are the answer to the resistance. Then new laws, a proven new education system, congress people that MUST do their own taxes to be elected, (making the tax system for all easier) and a host of other painful choices are the long term answers. In the short term a balance of the scales of justice is needed to calm the financial markets edgey future.

  117. @ 99 red ballons

    “new laws, a proven new education system, congress people that MUST do their own taxes to be elected, (making the tax system for all easier) and a host of other painful choices are the long term answers. In the short term a balance of the scales of justice is needed to calm the financial markets edgey future.”

    In dealing with the development of the Ukrainian Capital market, I was guided by Joe Stiglitz’s concept to prioritize the “timing and sequence” of components to be implemented. In other words “what cards to be played in what order.” A wish list is nice, but the implementation of the components that you listed depends upon whether your current perception of the status of the capital market is OK as is, inefficient in need to make the legacy system do things better, or ineffective requiring things to be done differently. Absent such structure, its hard to differentiate activity from achievement.

  118. Yes i’m certain that it is, (achievement -vs- activity) anyone can act on a clowns behalf, and be paid handsomely for it, but, get back to the efficiency -vs- resources equasion and I can tell your age. And even know that you have not seen the light of the sky for any more than say @50 years.

  119. “But, Wall Street would not have had the opportunity to create the subprime mess if the govt had never forced banks to make unwise loans.

    This is simple, folk. ….Lady in Red”

    Third or fourth request.

    Please let me know how many unwise loans the banks were forced to make.

    I have seen nothing, nor in 30 years in finance(mostly sub prime) of my life have I ever experenced that forcing. Combine that with 30 years of mortgage bank compliance experence from my wife who has never experienced that forcing.

    Anecdotal I know. But one would think if such forcing occurred the numbers would be available.

    And please do not link some article where someone says banks are bieng forced and/or silly things like Reno prosecuted 13 cases in the 90’s on behalf of the CRA.

    Numbers and facts. Not ideology.

  120. I’m a foreclosure investor with 25 years experience. For those who believe it was a problem of excess government regulation (CRA, Fannie/Freddie) I suggest you buy a free, 3-day trial from foreclosureradar.com. Then search the listings in CA, NV, OR, WA and compare the foreclosure in CRA areas vs the general population. Also note who the lenders are on the most egregious loans, ie., the ones that have loan balances that are more than double the properties current value. You will find all the evidence you need to convince you that the greatest excesses –BY FAR–occurred in private label loans (not Fannie/Freddie) and in suburban and rural areas not governed by the declining share of CRA lending.

  121. Jeff,

    I will try it. But it will have no effect on the “housing bubble deniers”.

    They will continue to blame government policies like the CRA, or the Fed rate, or the man in the moon regardless of what kind of facts and/or figures they are provided.

    They want it to be that way because they do not want to believe that the free market(sic) did it to the US and Europe.

    And none of them. Not one, will ever be able to find one single fact or figure to back up their belief.

  122. And when they realized their “mistake”, they did not waste a second of hesitation in CREATING the loss of 7 million “jobs” in 3 months in the REAL economy in order to extract all the equity from the people who were not “under water”…Patriot Act goons supplied the list.

    People have the paperwork to prove all this.

    The very FACT that our Wrecking Crew’s Eliza Doolittle Commander in Chief completely ignored the “sacrifice” already enforced on the Middle Class – the MASSIVE THEFT of the REAL economy – was the final curtain coming down on the land of illusion.

    Seven billion diapers a day to process – no risk?

    It’s clear that throwing 2 billion a week into processing 7 billion diapers is a more valuable pair of mittens than being in the Kyber Pass….

    Rocks – that’s the sell – “precious rocks”.

  123. “But, Wall Street would not have had the opportunity to create the subprime mess if the govt had never forced banks to make unwise loans”

    Yes that is of course wrong! The truth though is that Wall Street would not have had the opportunity to create the subprime mess if the bank regulators in the Basel Committee with such hubris had not decided to interfere in the market and play risk-managers for the world, authorizing for instance a 60 to 1 bank capital leverage, or more, just because an operation happened to be associated with a triple-A. Had the maximum leverage of banks been the same as that which is required when lending to small businesses and entrepreneurs, a quite rational 12 to 1, the super subprime mess would not have happened.

  124. Absolutely, Fannie-Freddie ended up mostly as victims when, at quite a late stage, they so foolishly gave in and bought securities collateralized with lousily awarded mortgages by private bandit originators, just because of the quite traditional nonsense of not wanting to lose market share, even when market have gone bananas.

  125. Just TWO crappy banks that held more mortgages and MBS than ALL OTHER 8,000 US FINANCIAL INSTITUTIONS COMBINED.

    Just two more crappy banks that had only a 2% capital requirement rather than 6 or 8% like other financial institutions.

    Just two more crappy banks that always had an implicit bailout guarantee and dedicated mandates to fund mortgages, regardless of economic conditions.

    Now they are two crappier, public owned banks buying up the toxic assets – the original “bad bank” idea of TARP, spreading the blame, the shame, and the pain to all the taxpayers, many of whom didn’t drink the housing flavor aid.

    Per Kurowski, I’ve already shown you the data that Fannie and Freddie were, even when they lost market share, the #1 and #2 MBS issuer. I gave you the source. But you’re still singing your tune that F&F were AWOL at the peak because believing otherwise would make your head explode in cognitive dissonance. If you can’t afford a subscription to Inside Mortgage Finance to read the data I gave you, then you don’t contribute enough to GDP to have earned the right of an informed opinion.

    But go to the FHFA website – data on mortgage originations is free there.

  126. @ Six Ounces

    Your data is a valuable contribution, but in order to format the data to construct information from which to achieve predictive capability and at the expense of sounding Monty Hall, which capital market curtain:

    1.Is the capital market OK as is?.

    2.Is the market inefficient indicating that reform is a matter of degree to know what to do better?

    3.Is the capital market ineffective (broke) needing fundamental repair in a matter of knowing what to do differently?

    Otherwise endless nuance sufferes from data overload.

  127. “If you can’t afford a subscription to Inside Mortgage Finance to read the data I gave you, then you don’t contribute enough to GDP to have earned the right of an informed opinion.”… Silly!

    Again the badly awarded mortgages from mid 2004 to mid 2007 that created the crisis, were neither originated nor packed into the securities who wrongly received triple-A ratings.

    F&F as so many commited the mistakes of buying some of these securities… and in that sense indeed as more experienced they should indeed have known better.

  128. “Just TWO crappy banks that held more mortgages and MBS than ALL OTHER 8,000 US FINANCIAL INSTITUTIONS COMBINED”

    That is totally irrelevant. What is relevant is who originated, repacked and held the lousy awarded mortages.

  129. The Crisis of Credit Visualized

    Cato, you will see how the greed progressed through the system, please watch.

  130. The Crisis of Credit Visualized

    Jeff, This short clip say’s it all, Please forward to everyone so we don’t forget the Who~What~Why of the credit crisis.

  131. Bonelle… yes it is a very good video… unfortunately somewhat incomplete.

    When they therein speak about the explosion in the demand for these CDOs and that these suddenly end up massively on the balance sheet of banks (which is really why they end up hurting taxpayers) that was because with Basel II June 2004 the bank regulators (and SEC) authorized the bank to leverage their capital 62.5 to 1 when holding these “AAA” rated securities.

    If they add that and the timeline to the video then it would indeed explain the origin of the “subprime” crisis.

  132. And their performance level?

    Should we care about F&F’s prime mortgages when they were not the problem?

  133. Indeed worry about F&F in general terms as an important part of the exagerated favorable treatment of house-ownership… and of the moral risk issues involved in having the goverment guaranteeing its debts… just do not mix them up as a first line responsible for this crisis.

  134. “Again the badly awarded mortgages from mid 2004 to mid 2007 that created the crisis”

    You simply don’t understand the meaning of the word “bubble” as it relates to finance. You ought to stick to bubble gum.

  135. You’re as dense as a person gets.

    As I’ve said, numerous times, crappy mortgages made up only a small percentage of all mortgages, and not all of those defaulted.

    It was ALL mortgages, prime and subprime, doc and no doc, SSN and ITIN, fixed and variable, that inflated house prices. And the cycle of expectations of higher house prices in the future kept up the buying and the bidding.

    The subprime and the “affordable” mortgages enabled people with poorer credit and lower incomes to bid on equal terms with prime, 20% down borrowers. So they certainly helped fuel prices and expectations. But many people with prime credit CHOSE subprime loans for their affordability features and conservation of their savings. Most of these “subprime” loans are still performing.

    With Fannie and Freddie buying trillions in mortgages, banks were being provided the funds to make increasingly risky loans, not merely moving down the credit ladder but making loans which had a higher probability of being upside-down in the future because of peaking prices.

    When Fannie and Freddie reduced the standards for their conforming mortgages, and as high-volume lenders like Countrywide originated and sold loans to F&F, and as more loans were originated, the average credit quality, particularly relative to higher prices, HAD to decline. But that’s ALWAYS true at the peak of any bubble. The marginal buyers are ALWAYS the lowest credit quality or worst price-performers, buy definition.

    The massive volume of F&F purchases of loans had EVERYTHING to do with fueling the bubble. And it wouldn’t have mattered whether they lowered their standards or not. The money they gave to banks when they bought loans provided the funding for risky subprime loans, construction loans, commercial real estate loans, and commercial and industrial loans. That’s why the CRE crisis followed on the heels of the mortgage crisis.

    It’s the substitution principle. For example, if you give money to a bum on a street corner, he will buy minimal essentials and spend any surplus on booze and cigarettes. But even if you give him a healthy meal, it simply replaces the funds he would have used for food, freeing up more money for booze and cigarettes.

    The analogy, though, uses an in-kind transfer. In reality, when F&F bought a conforming loan, the banks received CASH which could be used for ANY purpose. Even if Fannie and Freddie bought ONLY pristine loans, they were funding the lending of riskier, higher-yielding loans. Because bank cost of funds were going up, in order to maintain profit margins they had to make higher-yielding (and often riskier) loans. Get it now?

    Without Fannie and Freddie buying trillions in loans and MBS, and FHLBs lending to banks to fund loans, banks would have lost the sources of funds to continue lending. The bubble either never would have inflated or would have broken earlier.

    MBS issuance peaked in 2003, so MBS was becoming a diminishing source of funding for loan growth in the years that followed.

  136. YES, they WERE the problem.

    The vast majority of all loans originated in the past decade were prime, conforming loans.

    Only a small percentage of loans were subprime/affordable, and only a small percentage of those defaulted. The vast majority of SUBPRIME loans are still performing assets, dummy!

    It is the TOTAL VOLUME off loans originated during the 00’s that caused the price bubble. The subprime and affordable mortgages certainly enabled some borrowers to compete on terms they couldn’t otherwise afford, but that expanded the crisis – it didn’t create it.

    Bubbles can form in the COMPLETE ABSENCE of leverage. We’ve had gasoline price bubbles without anyone taking out loans to buy gasoline!

    Bubbles can form with pristine lending standards. As long as people expect prices to rise, they’ll continue to buy.

    The subprime and affordable mortgage products made the bubble WORSE. They didn’t create the bubble.

    Fannie and Freddie had a 25% market share of loans and MBS in 1990. By 2003 that had grown to 45%. They were pouring fuel onto the fire.

  137. “MBS issuance peaked in 2003, so MBS was becoming a diminishing source of funding for loan growth in the years that followed.”

    I rest my case… about how much you know. Go on chewing you gum. Cheers.

  138. @ Six Ounces

    Much of what you say has merit, but I believe an agreed upon starting point is needed to formulate data into information. Which of the following three positions (or provide your selected alternative) would you choose as a stating point from which to begin analysis.

    First, is the capital market OK as is? If so, then why troubling trend of larger and more frequent crashes. To illustrate, the Crash of 1987 experienced a $1trillion decline of wealth. Fourteen years later, in 2001, the Dot-com Crash witnessed a decline of wealth of $4 trillion. Seven years later, in 2008, the Subprime Crash saw an $8 trillion decline of wealth. I argue that this underlying trend is caused by the conflation of risk and uncertainty resulting in non-correlative information. Bottom line is that bad data mined by bad tools result in bad policy.
    Second, is the market inefficient (not working well) indicating that reform is a matter of degree to know what to do better? The one-size-fits-all, deterministic governance regime remains in force with smaller sized and less leveraged financial firms.

    This requires ignoring systemic complexity. For if there is complexity, there is uncertainty. How can one-size-fits-all, deterministic metrics govern both risk and uncertainty? It would be like having a single policy for governing driving in the US and the UK?

    Lastly, is the capital market ineffective (not working) needing fundamental restructuring in a matter of knowing what to do differently? I argue for the need to segment too-random-to-regulate (TRTR not TBTF) into predictable, risky, and uncertain regimes. If Citigroup’s one-size-fits-all financial supermarket could not cross-sell, then policymakers cannot cross-regulate non-correlative information.

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