The Cause of the Financial Crisis (dart)

[_Trevor]

Theodore Seto, law professor at Loyola in LA:

Some have tried to blame teaser-rates on the Community Reinvestment Act of 1977, which encouraged lending to minorities and lower income Americans. But that act only applied to commercial banks. A majority of this crisis’s teaser-rate loans were made by unregulated originators not subject to the act. More fundamentally, there is no evidence the present crisis started in 1977. Teaser-rate mortgages first became widespread after Mr. Bush took office in 2001.

[_Analytics]

Theodore Seto, law professor at Loyola in LA:

Some have tried to blame teaser-rates on the Community Reinvestment Act of 1977, which encouraged lending to minorities and lower income Americans. But that act only applied to commercial banks. A majority of this crisis’s teaser-rate loans were made by unregulated originators not subject to the act. More fundamentally, there is no evidence the present crisis started in 1977. Teaser-rate mortgages first became widespread after Mr. Bush took office in 2001.

Excellent quote.

Figuring out a way to responsibly extend credit to lower-income people and maintain a profitable, sound company has always been a tough balancing act. It's totally true that Congress has asked the GSEs to do some tough things, and that with hindsight, they haven't always found the ideal balance. It's totally true that falling off the rope would be an expensive thing for the government, and hence, strong oversight is needed.

However, just because the reality of the GSE business exposes them to certain risks doesn't mean the GSEs caused this particular crisis.

[_beastie]

Analytics -

What do you think the best solution is?

[_Analytics]

Analytics -

What do you think the best solution is?

The economist in me thinks that the government should stay out of the correction and let the market do its thing. Let ailing companies go bankrupt. If government capital needs to be pumped into the market, pump it into the smart strong companies by purchasing, say, preferred stock. Let the weak companies fail.

The opportunist in me sees how much cash Warren Buffet is throwing into some of these firms right now, and it confirms my belief that for cooler heads, it is a great time to invest. If the so-called bailout were handled in a way that is truly about adding liquidity to the market and not simply purchasing bonds for more than they are worth in order to “bail out” the suckers who are holding them, then I think the government could make some serious profit off of a $700 billion investment. If the government enters the market, shouldn’t making a profit be a main goal? What the government ought to do is let the treasury buy some of these distressed assets, and give the treasury traders bonuses to the extent their trades make profit for the government. Wouldn’t that be a happy ending? What a trip! The government makes hundreds of billions in profits off of this mess and pays out a few hundred million in bonuses to the government reps who made it happen! That’s the capitalistic way of addressing the liquidity problem while giving the treasury proper incentives to keep the U.S. taxpayers best interests in mind.

[_dartagnan]

Holy crap, I just now saw this thread.

Give me a day or so to respond. I gotta get back into this mode of thought. Just know that Analytics and I are not that far apart on this issue, except on one of the fundamental causes of the crisis.

[_Analytics]

Holy crap, I just now saw this thread.

Give me a day or so to respond. I gotta get back into this mode of thought. Just know that Analytics and I are not that far apart on this issue, except on one of the fundamental causes of the crisis.

I'm glad you are coming around to my way of thinking. Tell me what you are still confused about, and I'll get you straightened out yet!

[_Analytics]

Holy crap, I just now saw this thread.

Give me a day or so to respond. I gotta get back into this mode of thought. Just know that Analytics and I are not that far apart on this issue, except on one of the fundamental causes of the crisis.

Are you ready to cry uncle?

[_dartagnan]

Game time is over, my team won, so I'm a happy camper. That's good news for you analytics, because I'm going to be charitable:

Which 160 economists think "the problem from the beginning was letting government have a hand in the matter to begin with?"

Here is a link with a letter signed by about 160 economists which is against the new law. Is that the one you are referring to?

The letter says absolutely nothing about them thinking that the problem is the government having a hand in this. Since the government wasn't even involved in the private-label MBS's or the OTC credit default swaps, blaming government involvement in the sub-prime mortgage/economic-system meltdown doesn't even make sense.

You really ought to spend less time reading blogs of people who are either ignorant or are trying to mislead you and more time reading what educated people have to say on the matter.

Analytics, didn't I tell you to hold on to your horses, and that I would be with you soon enough? Your arrogance is only matched by your own belligerence, and at least stupid is how you should feel after reading what's below. I mean if you really think I have been reading up on "uneducated" blogs then you're only showing how unfamiliar you are with the controversy amongst economists.

There was a petition signed by 166 economists urging the Congress not to pass a bail out bill and then there was another petition signed by over 100 economists urging the contrary (that number has probably increased from teh other day). What this shows is that, evidently, there are plenty of highly educated people disagreeing with one another over the causes of the current crisis, which would be expected to anyone who knows anything about economics. It isn't an exact science. Predicting accurate economic forecasts is only slightly more reliable than a weather forecast. Explaining past economic phenomenon has resulted in the same cornucopia of various opinions.

But never fear.

While silly, yet reputable, economists disagree with one another and continue to disagree respectfully, no one should disagree with our resident armchair "economist," analytics, who says he has "proved" everything beyond a doubt, lest he be an ignoramus!

Now as far as government being the primary cause of this problem, which is why analytics called me an "uneducated ignoramus," please allow me to direct your attentions to uneducated ignoramus' who have helped "mislead" me to this conclusion:

Uneducated Ignoramus #1

Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.

"The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government...

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending."

Please note that the article above, written by a reputable economist whose name appears on the petition, refers directly to the petition of economists I initially referred to, so its reasonable to assume his reasoning would be similar to that shared by the other 165 economists who joined together for the same cause. But let's move to what Analytics would only consider to be uneducated ignoramus #2:

Thomas J. DiLorenzo professor of economics at Loyola College in Maryland said,
The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers.

Uneducated ignoramus #3, writing to his liberal friends who wanted to blame deregulation:

Steven Horwitz, Economics Professor at St. Lawrence University:
"Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms' benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn't rig a new regulatory process in their favor."

Uneducated ignoramus #4:

Greg Mankiw, professor of Economics at Harvard said,

Indeed, the problem goes back at least as far as the Johnson administration, which helped set up a housing finance system that was always fundamentally flawed. If Senator Obama really wants to transcend partisan politics, as he would sometimes have us believe, he might want to give a slightly more balanced view of the history of how this all started. He also might want to take note that the Bush administration warned about some of these problems five years ago and had its reform efforts stymied by prominent members of Senator Obama's own party."

Uneducated ignoramus #5 comes from Stanford, apparently another institute of lower learning:

Stanford economist Thomas Sowell said,

"Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis. Among the Congressional "leaders" invited to the White House to devise a bailout "solution" are the very people who have for years created the risks that have now come home to roost. Five years ago, Barney Frank vouched for the "soundness" of Fannie Mae and Freddie Mac, and said "I do not see" any "possibility of serious financial losses to the treasury."

And then there is uneducated ignoramus #6:

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at AEI:

"The Democrats are wrong in claiming that financial services deregulation is to blame for the current financial crisis--if anything, the financial sector has seen increased regulation since the savings and loan collapse in the 1980s. The lax supervision of Fannie Mae and Freddie Mac, which Republicans sought to strengthen in 2005, is the true culprit of this financial crisis." -

So attack me all you want. But ask yourself if my view is supported by educated economists. In the meantime, consider also the possibility that analytics doesn't really know everything, no matter what his ego claims to have "proved."

PS: I was planning to put more time in responding to your previous attacks on my, based on our disagreement on one single issue out of five (the other four I agreed with!). Give me another day or two, or don't. I've got a full plate and it is the football weekend, so this really isn't a priority right now. I threw up the above because you seemed to need a little crow for now.

[_Analytics]

Game time is over, my team won, so I'm a happy camper.

Congratulations!

There was a petition signed by 166 economists urging the Congress not to pass a bail out bill and then there was another petition signed by over 100 economists urging the contrary (that number has probably increased from the other day). What this shows is that, evidently, there are plenty of highly educated people disagreeing with one another over the causes of the current crisis, which would be expected to anyone who knows anything about economics.

Actually, what it shows is that there are plenty of highly educated people disagreeing about what should be done about the current crisis.

While silly, yet reputable, economists disagree with one another and continue to disagree respectfully, no one should disagree with our resident armchair "economist," analytics, who says he has "proved" everything beyond a doubt, lest he be an ignoramus!

In the context in an informal debate, I have essentially proven that corruption at Fannie Mae and Freddie Mac was not a cause of the crisis.

Just because I've proven that one thing doesn't mean that I've proven everything beyond a doubt.

Please note that the article above, written by a reputable economist whose name appears on the petition, refers directly to the petition of economists I initially referred to, so its reasonable to assume his reasoning would be similar to that shared by the other 165 economists who joined together for the same cause.

Let me get this straight. You think that since 166 economists agree that the bailout proposal was a bad way to handle the crisis, it's reasonable to assume they agree on what caused the crisis?

Reading this is supposed to make me feel stupid?

[_dartagnan]

Actually, what it shows is that there are plenty of highly educated people disagreeing about what should be done about the current crisis.

Of course, but I have already presented several examples of reputable economists who support what I have been saying. As you saw, economists disagree on the causes as well. We have been discussing the causes have we not? Miron is clearly of the opinion that the biggest problem is the government's role. When I said this you expressed contempt and attacked me for speaking ignorantly. Miron is one of many economists I have read that has been instrumental in molding my own view the way has, and continues to evolve.

In the context in an informal debate, I have essentially proven that corruption at Fannie Mae and Freddie Mac was not a cause of the crisis.

There are many causes and I never denied this. I now see where you took one of my statement's out of context and drew the wrong inference. I was squabbling more with others about Palin on that thread so I didn't pay much attention to your quibbling. But having gone back I realize you misread what I said.

When I said, "Virtually every economist acknowledges that this was a result of the political pressures from Washington," you seemed to think I was speaking of the cause of the crisis. But I was referring to the previous sentence: "Poorer folks have always been trying to buy homes, but only in recent years did the banks hedge on redling to help minorities with less than stellar credit, 'qualify' for loans."

So yes, lower interest rates played a role, but interest rates won't make an otherwise unqualified buyer, suddenly "qualified" in the eyes of the bank. There is still something awry going on in the loan office. Here is a post written by someone named "Suzy" on another forum:

I am an economist by training and spent 25 years in the banking industry. I have personally sat in loan committee meetings and had bank examiners demand that we "not discriminate against low and moderate income borrowers". Never mind that the reason they are low and moderate income in the first place is their inability to make good financial decisions...like establishing a steady work history, paying bills on time, living within their means, obeying the law, buying insurance to guard against catastrophic illness or property loss, (women) having multiple children with multiple men. and on, and on.

The CRA was well intentioned, and lawmakers from both sides of the aisle rightly noted the positive effects that homeownership can have on a society. The problem was, these middle and upper class lawmakers made the erroneous assumption that if you put poor people in houses, they would suddenly start behaving like financially responsible middle class people. All of a sudden lawnmowers would replace lottery tickets and backyard barbeques would take the place of drive by shootings. Alas, these hopes for change were empty promises as they always are, and borrowers who had to get their down payments from "third party non-profit agencies" (by the way, someone always makes a profit, otherwise why are they in it) had nothing to fall back on when the hot water heater broke or the roof leaked. The houses fell into disrepair and by the time the foreclosure papers were posted, the occupants and hopes of any recovery by the lender long gone. But the originating lender didn't care...the loan had been sold, not their problem any more!

There is more blame to go around...mortgage companies and builders soon realized there was money being printed and there sprung up companies that specialized in getting subprime borrowers into low cost (and low quality) housing. You probably heard them advertising on the radio and saw the ads in the Sunday paper. Did you ever wonder what kind of people would need a no-doc loan? And who would be stupid enough to make such a loan? I think we all know the answer to that now...the ultimate lender was of course Fannie Mae or Freddie Mac, the original loan having long since been sold by the originating bank. All that bad paper, and Franklin Raines out the back door with his suitcase full of money...

The democrats had been doing everything they could to make housing more affordable for poorer folks and they had also been instrumental in pressuring banks to be more "diverse" in their lending practices. Without irresponsible people going beyond their means, there would have been no outrageous increase in defaulted mortgages.

Fundamental to the overall problem is government's involvement. Earlier I mentioned the explosion of minority homeowners and you seemed to think I didn't have any data to back that up. I provided statistics proving my point and you said something like, "OK, I'll take your word for it." Now you claim I've read nothing but "uneducated" bloggers. Can you at least admit you were wrong on this as well?

Let me get this straight. You think that since 166 economists agree that the bailout proposal was a bad way to handle the crisis, it's reasonable to assume they agree on what caused the crisis?

I said that 166 economists disagreed with the bailout and I read an article discussing this petition and it was written by one of the more reputable economists in the world. In this article he explains why it happened. His explanation was government's involvement. I simply inferred from this that this was something the other 165 agreed with. I could be wrong, but I don't see any evidence to the contrary.