Help the Housing Market By Giving More Bad Loans?

[_cinepro]

You still don't get it do you?

I have no idea why this is so difficult for you to grasp. Here, let me dumb it down further for you. There are several groups of people who were involved in the Housing Crisis.

Borrowers:

A. Poorer folks.
B. Minorities.
C. Middle-class folks.
D. Wealthier folks.

Lenders:

E. Government lenders.
F. Private lenders.


Now the Right Wing immediately started blaming those who fall into categories A, B and E.

Thank you for dumbing it down, but I think you've hit rock bottom so please don't attempt to go any lower.

Instead of trying to break up the bubble and crash into players, I think economist Jeff Holt does a great job explaining the four key factors that led all the players to participate in the bubble:

http://www.uvu.edu/woodbury/jbi/volume8 ... Bubble.pdf

1. Low mortgage interest rates - (primarily a result of an influx of Chinese, Japanese, and other money into the US economy).

2. Low short-term interest rates - they encouraged the use of Adjustable-Rate Mortgages (ARM) and encouraged leveraging.

3. Relaxed standards for mortgage loans - brought about by "new governmental policies aimed at fostering an increase in home-ownership rates among lower-income households, greater competition in the mortgage loan market, the increasing securitization of home mortgage debt, and the irrational exuberance that engulfed all parties involved in the mortgage lending process."

4. "Irrational Exuberance" - "All the participants who contributed to the housing bubble (government regulators, mortgage lenders, investment bankers, credit rating agencies, foreign investors, insurance companies, and home buyers) acted on the assumption that home prices would continue to rise."

Wouldn't it be ironic if we tried to solve the problems caused by the housing crash by trying to implement those four factors again? And while three of the key factors are fairly easy to replicate, how does one encourage "irrational exuberance"? If the government or Wall Street wanted to foster "irrational exuberance" to get a bubble going again, what could they do?

[_Analytics]

Thank you for dumbing it down, but I think you've hit rock bottom so please don't attempt to go any lower.

Instead of trying to break up the bubble and crash into players, I think economist Jeff Holt does a great job explaining the four key factors that led all the players to participate in the bubble:

http://www.uvu.edu/woodbury/jbi/volume8 ... Bubble.pdf

1. Low mortgage interest rates - (primarily a result of an influx of Chinese, Japanese, and other money into the US economy).

2. Low short-term interest rates...

A large truck was driving down a country road. A sports car was behind him, and couldn’t pass. So, the sports car pulled off onto a side road to try and get to his destination faster. He was speeding, texting, and a little drunk when he got into a car wreck.

So, there were three key factors that caused the car wreck:
1- The truck driving down the country road was driving too slow
2- The country road didn’t have a passing lane
3- The driver of the sports car was speeding, texting, and a little drunk

I hope you see the point. Low interest rates didn't cause the bubble. Fannie Mae didn't force consumers to bid-up the prices of houses in the suburbs. The Fed didn't force people to take out ARMs. The CRA didn't force the Chinese and Japanese to loan money backed by Alt-A loans.

Low interest rates were part of the economic environment at the time, but that doesn't force people to respond with bad decisions.

The air that filled the bubble was the capital provided by the free market. That capital and consumers’ willingness to borrow it are the only things needed to fully explain what happened.

Blaming the interest rate environment is like blaming the truck that was slowing down traffic on the country road.

[_subgenius]

Thank you for dumbing it down, but I think you've hit rock bottom so please don't attempt to go any lower.

Instead of trying to break up the bubble and crash into players, I think economist Jeff Holt does a great job explaining the four key factors that led all the players to participate in the bubble:

http://www.uvu.edu/woodbury/jbi/volume8 ... Bubble.pdf

1. Low mortgage interest rates - (primarily a result of an influx of Chinese, Japanese, and other money into the US economy).

2. Low short-term interest rates...

A large truck was driving down a country road. A sports car was behind him, and couldn’t pass. So, the sports car pulled off onto a side road to try and get to his destination faster. He was speeding, texting, and a little drunk when he got into a car wreck.

So, there were three key factors that caused the car wreck:
1- The truck driving down the country road was driving too slow
2- The country road didn’t have a passing lane
3- The driver of the sports car was speeding, texting, and a little drunk

I hope you see the point. Low interest rates didn't cause the bubble. Fannie Mae didn't force consumers to bid-up the prices of houses in the suburbs. The Fed didn't force people to take out ARMs. The CRA didn't force the Chinese and Japanese to loan money backed by Alt-A loans.

Low interest rates were part of the economic environment at the time, but that doesn't force people to respond with bad decisions.

The air that filled the bubble was the capital provided by the free market. That capital and consumers’ willingness to borrow it are the only things needed to fully explain what happened.

Blaming the interest rate environment is like blaming the truck that was slowing down traffic on the country road.

in reality #3 is completely at fault from a liability position.

[_Analytics]

in reality #3 is completely at fault from a liability position.

Exactly!

And by the same logic, the investors who purchased trillions of dollars of sub-prime mortgage-backed securities are completely* at fault for the financial crisis--the capital they willingly pumped into the system was the air that filled the bubble.

________________________________________
*Well, almost completely. The investors couldn't have pulled it off without the help of investment banks and mortgage brokers, as well as the consumers they duped into taking out loans they couldn’t afford to purchase houses that cost more than they were worth.

[_cinepro]

I hope you see the point. Low interest rates didn't cause the bubble. Fannie Mae didn't force consumers to bid-up the prices of houses in the suburbs. The Fed didn't force people to take out ARMs. The CRA didn't force the Chinese and Japanese to loan money backed by Alt-A loans.

Low interest rates were part of the economic environment at the time, but that doesn't force people to respond with bad decisions.

The air that filled the bubble was the capital provided by the free market. That capital and consumers’ willingness to borrow it are the only things needed to fully explain what happened.

Blaming the interest rate environment is like blaming the truck that was slowing down traffic on the country road.

I'm operating on the assumption that there is a difference between "blaming" something and acknowledging that something was a factor.

If we take out the low interest rates, doesn't that impact the environment for borrowing and lending?

The Economist just had an article on this very subject:

http://www.economist.com/news/briefing/ ... y-have-yet

Excessively low rates help to create bubbles because they allow investors to ignore the cost of financing and concentrate on the capital gains if their strategy works; they let people forget risk and focus too much on reward. Encouraging the revival of a property market in the doldrums risks creating a boom that will simply lead to another bust. Bubbles may not have emerged yet. But if they do, the eventual task of returning to normal monetary policy will be made even more complicated.

But the best indicator that low interest rates aren't enough to single-handedly cause a bubble is that we've had crazy-low interest rates for the last five years and, in spite of their best efforts, the interested parties just can't seem to get that dang bubble inflating again.

They're obviously working on the lower lending standards again, so they just need to figure out how to get the "irrational exuberance" back. I suspect we'll be hearing more and more about how "housing is back!" and "real estate won't be going down in the future!"

[_Analytics]

I'm operating on the assumption that there is a difference between "blaming" something and acknowledging that something was a factor.

If we take out the low interest rates, doesn't that impact the environment for borrowing and lending?

Yes, the environment impacts decisions, but it doesn’t cause people to make bad decisions.

The Economist just had an article on this very subject…

But the best indicator that low interest rates aren't enough to single-handedly cause a bubble is that we've had crazy-low interest rates for the last five years and, in spite of their best efforts, the interested parties just can't seem to get that dang bubble inflating again.

They aren’t trying to get the dang bubble inflated again—they are merely trying to get unemployment below, say, 7%.

They're obviously working on the lower lending standards again, so they just need to figure out how to get the "irrational exuberance" back. I suspect we'll be hearing more and more about how "housing is back!" and "real estate won't be going down in the future!"

Just because they are “working on lowering lending standards” doesn’t mean they are working on lowering them anywhere near as low as they were before.

Will the exuberance in the markets for sub-prime mortgages come back? Absolutely, positively not. Institutional investors are simply not going to fund it.

[_cinepro]

Will the exuberance in the markets for sub-prime mortgages come back? Absolutely, positively not. Institutional investors are simply not going to fund it.

Would they if the government assumed the risk?

[_Analytics]

Will the exuberance in the markets for sub-prime mortgages come back? Absolutely, positively not. Institutional investors are simply not going to fund it.

Would they if the government assumed the risk?

Yes.