Bureaucrat Admits Liberal Policies Caused Sub-Prime Meltdown
Written by Patrick Krey on January 23, 2009 – 12:47 pm -So, progressives, please stop blaming it on free-market capitalism and greed. You’re just embarassing yourselves.
From The Independent Institute’s awesome blog, The Beacon:
In an insightful interview, Fannie Mae’s first Chief Credit Officer, Edward Pinto, corroborates our Research Fellow Stan Liebowitz’s Independent Policy Report, Anatomy of a Train Wreck: Causes of the Mortgage Meltdown. Interviewed by Chip Hanlon, President of Delta Global Advisors, Pinto discusses how the affordable housing/lending lobby chipped away at lending standards until there were none, creating a gigantic and nonviable financial bubble that has triggered a global recession. Click here for more…
Tags: acorn, big government, capitalism, laissez faire, sub-prime fiasco
Posted in National, Obama BS Update |
January 24th, 2009 at 1:57 pm
There is plenty of blame to go around, and one can count on those who have an agenda to single out their favorite scapegoat, usually “wall street greed”, or “Fannie and Freddie lending to minorities”. Most of these narratives are overly simplistic and misleading, bordering on propaganda.
Having stated that, the credit meltdown did begin with securitised sub prime loans, which originated from subprime lenders (like Countrywide) and were transferred to the books of investment banks (like Bear Sterns). At this stage, Fannie and Freddie had only an indirect role in that they drove house prices up by making borrowing cheaper; with the resulting upward price momentum driving reckless borrowing and lending.
As noted in the interview, Fannie and Freddie were leveraged to insane levels, and weren’t in a position to withstand a large credit shock.
The problem with the narrative that blames Fannie and Freddie, is that the riskiest of loans originated with private lenders, then repackaged and sold to whoever would hold them (usually investment banks). The investment banks want to hold risky assets because they want to earn better returns than the risk free rate (treasuries). So they buy in on them. But if the yields on these assets drop too much (because everyone is bidding them up), then they need to leverage heavily to make good money. Then the yields drop more (because everyone is in on a big leveraged position) and you have a credit bubble. But this is only possible if everyone is getting in heavily on the same side of the same trade. The kind of compensation awarded to the bankers should require that they do something better than leveraging into whatever trade appears to have upward momentum.
So at the very least, the subprime collapse could not have happened without considerable help from the banks and the subprime lending industry.
As for weak underwriting, the most obvious explanation for weak underwriting standards was that the loan originator had no incentive to ensure that the loan would be repaid. Complex securitisation requires careful due diligence and transparency, so that everyone understands what is being bought and sold.
January 24th, 2009 at 6:50 pm
If you back up a few steps before the sub prime lending started, you will find the root causes. 1. The FED flooding the banks with cheap money that they needed to lend out quickly. 2. Regulations such as the Community Reinvestment Act which blackmailed banks into writing mortgages for people with a poor credit history.
Yes, some banks did take advantage of the conditions and went a bit overboard with bad lending practices, however, without being enabled by the government, it would not have happened.
January 25th, 2009 at 3:27 pm
(1), which I think of as “the libertarian narrative” is a solid argument. I don’t think it’s too much of a stretch to suggest that the Fed were the main cause of the housing bubble.
But I don’t really buy (2). Suppose that the CRA resulted in these borrowers getting access to better than market rate loans. Two things would happen:
(a) they would either need to keep those bad loans on their books, or sell them at a loss on the open market. The end result is that the supply of these “special” (in the sense of being better than market rate because of political constraints) loans would have been capped (by the capacity of the CRA-regulated institutions to offer loans at better-than-market value), and much like any other price control (for example, rent control, section 8), you would end up with rationing. The loans would be available, but there would be “waiting lists”, and other symptoms of supply not being able to match demand.
This didn’t happen; they were able to securitize the loans and resell them to investment banks who voluntarily lapped them up. There was no rationing, because the markets had a huge appetite for this credit risk.
(b) Those who weren’t CRA-regulated would have no incentive to try to compete. But this isn’t how it worked; the biggest subprime lenders weren’t CRA-regulated.