The following is an excellent discussion on the present financial crisis posted on PLANET (the academic urban planning listserv) for those who are still craving a way to sort out this mess.
Pattsi Petrie
While I am not an economist, some of my best friends are... I sent the
PLANET post (appended at end of this email) from Dan Immergluck (professor at Georgia Tech) to one of
them, with some incendiary provocations, after debating with him on this
topic last night. Thought I'd pass on his response, in case any of you can
help me beat him down...
Bruce Goldstein
Assistant Professor
----
Hi Bruce,
I enjoyed our discussion last night. I haven't given up all hope on you yet!
I didn't realize that it is blasphemy to disagree with the New York Times.
I regularly read another New York paper, the one from lower Manhattan.
Today's op/ed page in that paper weighs in on whether deregulation is the
The current Economist also has a good piece about the regulation of finance.
story_id=12373748
Here is an excerpt that echoes some of my points last night:
---
The trouble is that financial innovation did not occur in a vacuum but in
response to incentives created by governments. Many of the new- fangled
instruments became popular because they got around financial regulations,
such as rules on banks' capital adequacy. Banks created off-balance-sheet
vehicles because that allowed them to carry less capital. The market for
credit-default swaps enabled them to convert risky assets, which demand a
lot of capital, into supposedly safe ones, which do not.
Politicians also played a big part. America's housing market-the source of
the greatest excesses-has the government's fingerprints all over it.
Long before they were formally taken over, the two mortgage giants, Fannie
Mae and Freddie Mac, had an implicit government guarantee. As Charles
Calomiris of Columbia University and Peter Wallison of the American
Enterprise Institute have pointed out, one reason why the market for
subprime mortgages exploded after 2004 was that these institutions began
buying swathes of subprime mortgages because of a political edict to expand
the financing of "affordable housing".
---
As for the CRA article, I agree that CRA itself is probably not ground zero
here. It does make for a good poster-child and is perhaps used in an
exaggerated way by conservatives. I don't know the dollar amount of CRA
loans, but think it is a small slice of the total mortgage market.
However, none of this means that Frannie/Freddie were irrelevant in the
discussion of how we got into this mess. I also did not find the article's
arguments to be very convincing.
The argument that CRA was around since 1977 and therefore cannot be blamed
for a 2008 problem is a red herring. CRA was modified several times over
the years, so the relevant question is what impact those reforms had. In
addition, the introduction of new mortgage products in recent years can give
life to latent problems. As an analogy, a psychopath with a gun is more
dangerous than one without a gun. If he shoots someone, is it the gun's
fault? Should all guns be banned?
Guns, and alternative mortgages, serve a valuable purpose but can be quite
destructive when used improperly. What may be a good regulation at one time
can have serious unintended consequences later on if it doesn't adapt with
the times.
Your article neglects to mention that a change to the CRA law meant Frannie
and Freddie could satisfy their affordable housing obligations by instead
buying subprime mortgages (see the WSJ article). Beginning around 2004,
Frannie/Freddie drastically scaled up the size and risk of their mortgage
positions under pressure from Congress. This took place under the watch of
their own regulator, OFHEO, and in the face of warnings from Fed Chairman
Greenspan (and many others). In 2005, Greenspan told Congress:
"If Fannie and Freddie continue to grow, continue to have the low capital
that they have, continue to engage in the dynamic hedging of their
portfolios, which they need to do for interest rate risk aversion, they
potentially create ever-growing potential systemic risk down the road. We
are placing the total financial system of the future at a substantial risk."
Finally, as a UNC alum I find it interesting that the "Center for Community
Capital" has zero researchers from the econ dept or b-school.
I guess the CCC is left-leaning and the b-school is more conservative.
Since every worthwhile debate has two sides, see the link below for a
summary of both sides of the CRA debate:
ancial_crisis
Cheers,
(Name redacted)
-----Original Message-----
From: Planning Educators Electronic Mail Network
[mailto:PLANET@LISTSERV.BUFFALO.EDU] On Behalf Of Immergluck, Daniel W
Sent: Wednesday, October 15, 2008 11:46 AM
To: PLANET@LISTSERV.BUFFALO.EDU
Subject: more on blaming mortgage crisis on CRA...NYTimes
The CRA-as-cause story is apparently getting continued or increasing play.
And a bill to repeal the law has been introduced.
Congrats to Roberto Quercia of UNC for having impact on this -- see NYT
editorial below.
The study to which i believe the editorial refers, Risky Borrowers or Risky
Mortgages?, is on the Center for Community Capital's website.
Dan Immergluck
October 15, 2008
New York Times
Editorial
Misplaced Blame
In recent weeks, Republicans in Congress have been blaming a lot of things,
besides themselves, for the subprime mortgage debacle. And many of these
same Republicans have long wanted to abolish the Community Reinvestment Act,
a landmark law that helped to rebuild some of the nation's most desolate
communities by requiring banks to lend, invest and open branches in
low-income areas that had historically been written off.
These two goals have converged in a new attempt to blame the law for the
financial crisis.
The act, passed in 1977, is one of the most successful community
revitalization programs in the country's history. According to a recent
report by the National Community Reinvestment Coalition, an advocacy group
in Washington, the act has encouraged lenders to invest more than $4.5
trillion in minority and low-income areas.
This money helped to remake devastated neighborhoods like the South Bronx,
helping to finance new housing and businesses. It has helped provide
essential services in such neighborhoods, including medical centers and
housing for the elderly and disabled - projects that the private sector too
often refused to back.
But you can hardly pick up a newspaper or turn on the television these days
without hearing critics argue that the act created the current mess we're in
by forcing banks to lend to people in poor areas who were bad credit risks.
Representative Steve King of Iowa has introduced legislation that would
repeal the act.
The charges do not hold up. First, how could a 30-plus-year-old law be
responsible for a crisis that has occurred only in recent years? Then
there's the fact that the regulatory guidance issued under the reinvestment
act and other banking laws actually impose restraints on the riskiest kinds
of subprime lending.
In addition, subprime lending was not driven by banks, which are covered by
the act. Rather, most subprime lending was driven by independent mortgage
lending companies, which the act does not cover, and, to a lesser extent, by
bank affiliates and subsidiaries that are not fully covered by the act. By
some estimates, nonbank lenders and bank affiliates and subsidiaries may
have originated 75 percent or more of the riskiest subprime loans.
A study released this week by the Center for Community Capital at the
University of North Carolina in Chapel Hill shows that people of similar
financial profiles were three to five times more likely to default when they
received high-priced subprime mortgages than when they got bank loans made
under the Community Reinvestment Act.
If you're just going to copy and paste, at least format it a bit before you release this to the rest of us. You've done this same thing several times, and it makes it very hard to read anything you post.
-----
At some point we have to trust the government. - redstatewannabe on 2008-06-12 at 1:14pm
Cosign. I took one look at it and decided to move on.
In addition, subprime lending was not driven by banks, which are covered bythe act. Rather, most subprime lending was driven by independent mortgagelending companies, which the act does not cover, and, to a lesser extent, bybank affiliates and subsidiaries that are not fully covered by the act. Bysome estimates, nonbank lenders and bank affiliates and subsidiaries mayhave originated 75 percent or more of the riskiest subprime loans
I thought you made very strong arguments pattsi.
In answer to the above statement, the real question isn't who originated the loan but who purchased and held the mortgages. Mortgage brokers get a commission and then sell off the risk. Why not make a loan for whatever a purchaser like Fannie is willing to buy from you?
Folks, I did format this before posting. When I previewed the post, it looks perfect. When it posted, it all ran together. We have had this discussion previously and no one has come up with a solution how to solve such a problem. Obviously, I would not post something so it would be unreadable. This just does not make sense or helpful for those who participant on the blog. IP when the election is over, maybe you could take a moment to help those of us less technologically talented to better understand how to prevent what happened to this post. And I would appreciate it if I am given the benefit of the doubt that the post might possibly not have looked like this when previewed.
Pattsi Petrie
"IP when the election is over, maybe you could take a moment to help those of us less technologically talented to better understand how to prevent what happened to this post."
Right now the WYSIWYG software we use sucks. When the election is over, I need to either find time to fix the site, find someone else to fix it, or shut it down.
I am sure that David G. would be glad to assist in fixing any problems you have.
It appears that your copy-paste from Eudora is probably the culprit. There seems to be some XHTML compliance issues with Drupal's tag filtering and WYSIWYG editors.
Pattsi - is your input format the "Filtered HTML"?
Try copying the email into Text Editor (with word wrap disabled in Text Editor), then copying the text in Text Editor and pasting it here. That should strip all of these tags.
My thanks to ThoughtPolice for the suggestion that I have now tried resulting in a much improved and readable presentation.
Pattsi Petrie
"Allowing banks and securities firms to affiliate under the same holding company has had no effect on the current financial crisis. None of the investment banks that have gotten into trouble -- Bear, Lehman, Merrill, Goldman or Morgan Stanley -- were affiliated with commercial banks. And none of the banks that have major securities affiliates -- Citibank, Bank of America, and J.P. Morgan Chase, to name a few -- are among the banks that have thus far encountered serious financial problems. Indeed, the ability of these banks to diversify into nonbanking activities has been a source of their strength."
I think I've heard that before. ; )
from WSJ.com article:
"If Sen. Obama were truly looking for a kind of deregulation that might be responsible for the current financial crisis, he need only look back to 1998, when the Clinton administration ruled that Fannie Mae and Freddie Mac could satisfy their affordable housing obligations by purchasing subprime mortgages. This ultimately made it possible for Fannie and Freddie to add a trillion dollars in junk loans to their balance sheets. This led to their own collapse, and to the development of a market in these mortgages that is the source of the financial crisis we are wrestling with today."
There would be no financial crisis if this didn't happen.
"The trouble is that financial innovation did not occur in a vacuum but in response to incentives created by governments."
"As Charles Calomiris of Columbia University and Peter Wallison of the American Enterprise Institute have pointed out, one reason why the market for subprime mortgages exploded after 2004 was that these institutions began buying swathes of subprime mortgages because of a political edict to expand the financing of "affordable housing" ."
Who are these guys? They are saying the same thing we've been saying since the start of this. Experts?
Before subprime mortgages exploded after 2004, at least people tried doing something about it. They were ingored.
B for Business is apparently talking to himself now, and he's still not very convincing.
B - guess what? It was deregulation and privatization that caused this whole mess and everyone in the country knows it. You can post all the rebuttals you want, public opinion is already pretty well set on this one. It wasn't loans to the poor and minorities. It wasn't Big Government messing around with the markets. It was the market forces at work: greed gone bad.
We were told to trust the market and the market would take care of us. It was a lie, and people are losing their nest eggs as a result. Posting that CSPAN video one. more. time. isn't really going to change any of that.
"It was deregulation and privatization that caused this whole mess and everyone in the country knows it."
Since you say so, it must be correct.
"We were told to trust the market and the market would take care of us."
The market did take care of us. It addressed the issue of subprime mortgages just as it should have. If there were no issues today, there would be something wrong. The market confirmed that subprime mortgages can cause a system-wide meltdown, just like the good guys said back in 2004 just before the subprime market went nuts.
"Posting that CSPAN video one. more. time. isn't really going to change any of that."
Maybe you are correct and the government was not messing around with the markets. We'll just take your word for it. My personal favorite is that is was "Bush's policies" as Pelosi stated.
"You can post all the rebuttals you want, public opinion is already pretty well set on this one."
I agree. I suspect the majority of the public doesn't even know what Fannie/Freddie are or what they do. Only 6 in 100 kids from the chicago public school system go on to earn a college degree. At least all of them understand the word "greed".
Ah yes, the "stupid Americans" train of thought. We're all much too dumb to understand the intricacies of the economy. We should just trust Republicans and conservatives to handle it all for us. After all, they've done a bang up job so far.
If it makes you feel better, I think Americans have learned a pretty important lesson about economics in the last couple of weeks. Mainly, that the market will chew you up and spit you out in a heartbeat without even thinking twice. If Americans are stupid it is only because they believed that putting their nest eggs in a the NYSE was a good idea. And that idea was sold to them by neoliberal Chicago school economists who said it was the safest long-term bet for retirement savings.
It isn't. Any time you make money for doing nothing you are taking a very big risk. You're right that America might have been too stupid to realize the risks. But I think they've learned an important lesson about the fundamentals of capitalism. And hopefully they won't be fooled again.
"If it makes you feel better, I think Americans have learned a pretty important lesson about economics in the last couple of weeks."
What makes me feel better is my confidence that the players on both sides know that the subprime mortgage initiative caused this mess and it unlikely to happen again for another generation or so.
What makes me feel crappy is that politicians will continue to use the back door so long as people demonstrate they will buy into the CEO and oil company propoganda. I personally wish the dems would use the front door, and if the dems want subsidized housing, let's just write a check. We can agree to disagree, but it's much better than forcing a poison pill to the housing market that is certainly going to get spit out sooner or later. Then the speaker of the house simply says something stupid like "Bush's policies".
Boon is going to argue capitalism when discussing "government-backed" securities. Where do you start? : )
Boon is going to argue capitalism when discussing "government-backed" securities. Where do you start? : )
I don't know what "argue capitalism" means, but I think you're implying that I think capitalism is bad. On the contrary, I love capitalism. But it is what it is: a system designed to create winners and losers. I am arguing that the neoliberals are the ones who have tried to create a fake capitalism, where there are no risks involved. They have told us over and over and over again that investing in the stock market is a good way to achieve the American Dream. Just take that $100K you have sitting in savings, or T-Bills or whatever and give it to us. We'll turn it into $500K in twenty years and you don't have to do a thing!
This same logic is what led the government to "reform" Fannie Mae and create Freddie Mac as players in the private sector. Even though, I will point out again, F&F cannot logically be blamed for the sub-prime mess:
Your argument rests on the foundation that Fannie and Freddie and the CRA were the major motivators behind subprime lending. As you've repeatedly claimed, if the investment banks made a bad loan they didn't care because F&F would just buy it. Thus, this is not a problem of deregulation of the financial sector. It is a problem of government interference in the market. And what we then logically need is less government interference.
But F&F accounted for less that 25% of all the subprime loans. Their unregulated competitors handed out subprimes like a clown handing out balloons at a birthday party, accounting for over 75% of all the subprime loans on the market. As for the CRA ...
I think you are right that government doesn't have a place in the markets. But the data does not support your conclusions that F&F and the CRA are to blame for this crisis. Deregulation and greedy bankers are to blame. You are essentially trying to cling to the "safe capitalism" definition that has led us into this mess. Mainly that capitalism is a benign system that works for everyone if it is just left alone. That is simply not true. Capitalism is a cut-throat system that throws people overboard without empathy or compassion. That doesn't make it a bad system. It just makes it what it really is: really, really risky. And not something that the Average Joe should even consider playing with if he wants a safe investment.
Everytime you try to pin the blame on the government you are really moving us away from a rational, grown up understanding of capitalism and economics. Again capitalism isn't bad. It is just very poorly understood. I think this crisis is the best teaching tool the American People could have. Lesson learned.
Your argument rests on the foundation that Fannie and Freddie and the CRA were the major motivators behind subprime lending.
Boon, your argument that deregulation is the cause of the financial crisis also rests on the foundation that F&F were the major players. What other examples of deregulation do you have? GLB - the act that didn't (de)regulate the failed companies?
Just a month ago you were pointing at F&F as "proof" that deregulation caused the failure of the markets, and now you're mocking conservatives for being myopic in only analyzing F&F.
"Your argument rests on the foundation that Fannie and Freddie and the CRA were the major motivators behind subprime lending."
These government-backed entities accounted for 25-50% of the subprime loans and they are not the major motivators? I would disgree, especially when Fannie/Freddie are looked at to ensure market stability.
http://www.economist.com/blogs/freeexchange/2008/10/crisis_roundtable_more_fannie.cfm
"The existance of a large single buyer of such securities (especially one markets belived could not fail) likely enabled the subprime market to grow in the manner it did."
"Even more troubling, commenter Eric Deichmann points us to evidence that Fannie and Freddie were a major purchaser of securities that contained subprime debt—the exact sort of debt Fannie and Freddie were never meant to hold."
Emphasis: Fannie/Freddie exists to ensure this kind of thing doesn't happen and they accounted for 25%-50% of the sub-prime loans during the boom.
"Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble."
Who are the unregulated players and what deregulation would have prevented this? We've asked over and over again. Are you claiming that a lack of regulation is what caused this or a specific instance of deregulation? Because if remember correctly, there were people pushing for stricter regulations in response to a growing sub-prime mess. They were ingored. (Hint: CSpan Video)
These government-backed entities accounted for 25-50% of the subprime loans and they are not the major motivators? I would disgree, especially when Fannie/Freddie are looked at to ensure market stability.
Goal posts, consider yourselves moved. We've gone from the cause of the crash to "major motivators". What's next?
Who are the unregulated players and what deregulation would have prevented this? We've asked over and over again.
Yes, of course - you want a detailed list of every company that failed and exhaustive explanations of how individual deregulations impacted each company's demise. If I write that for you I might as well make it my dissertation for an econ degree out of the UI campus.
At this point in trying to understand what happened you have to ask some basic questions. Why, for example, did subprime loans exist in the first place? For starters you have to look at the Depository Institutions Deregulation and Monetary Control Act from 1980, which premepted state interest rate caps. Next you have to explore the Alternative Mortgage Transaction Parity Act from 1983 (I think).
Nice.
Next move on to the Tax Reform Act of 1986 which worked to increase the demand for mortgage debt by allowing the interest on mortgages to be deducted, but disallowed the deduction of interest on consumer debt. Thus you have the low-interest rate refinancing craze that contributed to a lot of the defaulting.
Should I go on?
As I have said about a million times now, this is an extremely complicated and intricate issue. Simply saying "Fannie and Freddie did it!" doesn't come close to explaining anything. Even worse is the emphasis on the CRA, which is so bloody irrelevant that even the mention of the CRA makes me suspicious about the motives there.
The easy answer and the simple but accurate analysis is that this has been a long time coming. It is a bi-partisan issue, both Ds and Rs have pushed the neoliberal gospel for decades now. It is not about which party screwed things up, and it is not about some CSPAN video where someone was calling for a relatively minor regulatory change. This is about a culture of economic stupidity. Deregulating markets can create short-term wealthy but it is a recipe for long-term disaster. That is the lesson we need to learn from this whole mess.
Hey B - I posted a long response to your last comment yesterday but the system cued it "for moderation". This was right before my access to commenting was completely denied.
Maybe I had too many links?
"Hey B - I posted a long response to your last comment yesterday but the system cued it "for moderation". This was right before my access to commenting was completely denied."
Maybe the sytem realized it was just too liberal. j/k : ) Seriously, I don't know what to tell you.
"Hey B - I posted a long response to your last comment yesterday but the system cued it "for moderation". This was right before my access to commenting was completely denied.
Maybe I had too many links?"
I just released it. Three or more links usually is the culprit. Sorry about that.
<bump>
One would think that after all the complaints about not getting specific enough concerning deregulation, my October 16 comment would merit at least a token response.
If not, that's fine. I'll just assume I've won the point again, as was so clear with the CRA.
Cheers!
"If not, that's fine. I'll just assume I've won the point again, as was so clear with the CRA."
I've been taking it easy from blogging this weekend Boon and haven't been giving this thread a whole lot of thought. If you want some credit, I'll humor you....
"Prior to the passage of AMTPA, banks were barred from making anything but the conventional fixed-rate, amortizing mortgages. AMPTA lifted those restrictions, giving birth to all the new and exotic mortgages that have so many borrowers in hot water today. For instance:...."
This has merit and backs up your own argument about deregulation being the cause of this. Congratulations. It was even relevant. That said, I don't think making these types of loans is bad so long as people can afford them.
Before I knew that you had a post in moderation, I had even posted my Credit Default Swaps post in order to provide readers with actual examples of "deregulation" that I thought might be relevent to the discussion because they had been lacking.
When I get back to reading the IP regularly this coming week, I'm going to look into the laws that made it legal for banks to make a profit and give you some more ammunition.
Assuming that you won your point? Don't get too carried away. You don't win just because you were actually able to make one. : )