Books I Haven't Read 1: The Vision of the Annointed

[_Droopy]

Droopy lists a bunch of sources he says I relied upon and then accused me of cherry-picking. What the hell is he talking about? I don't recognize any of those links and nothing they say appears in anything I have posted in this thread. I suspect he is confusing me with socrates, but oh well. Droopy never has worked well under pressure.

Here are the sources, from your orginal thread, on the CRA, to which you linked:

Federal Reserve chairman Ben Bernanke stated: "Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties."

Republican FDIC Chairman Sheila Bair: “I want to give you my verdict on CRA: NOT guilty,"... "Point in fact,” she said, “only one in four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending. The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.” And “Let me ask you,” she proceeded. “Where in the CRA does it say to make loans to people who can’t afford to repay? Nowhere.” (http://www.usnews.com/money/blogs/the-h ... t-act.html).

Conservative economist and Federal Reserve governor Randall Kroszner, who was also an economic advisor to George Bush, said, "the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.” (http://blogs.wsj.com/economics/2008/12/ ... stment-act)

(Note: this is one of Kevin's favorite tactics, to label people like David Brooks or Ben Bernake as "conservatives." In any case, Thomas E. Woods agrees with him, in his book Meltdown, but reasonable people on the Right will disagree. I disagree with Woods, to a point, given the weight of the evidence. But Kevin can do nothing more than cobble together and drop names because he doesn't understand the economic theory involved and can't argue his case from first principles to point/counterpoint debate.

Republican Elizabeth A. Duke, a Governor on the Board of Governors of the Federal Reserve System, makes it clear that, "The CRA… is not designed to encourage high-risk lending or poor underwriting. Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis."(http://www.federalreserve.gov/newsevent ... 90216a.htm).

Comptroller of the Currency, John Dugan said in a speech at the Enterprise Annual Network Conference that “CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the market place.”

Similarly, a 2008 study by a law firm specializing in CRA compliance estimated that in the 15 most populous metropolitan areas, 84.3 percent of subprime loans in 2006 were made by financial institutions not governed by the CRA (http://www.traigerlaw.com/publications/ ... pdf#page=2)

Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, in a March 2008 speech criticized efforts to blame CRA lending for weaknesses in the mortgage market, stating...

Daniel Gross and Michael Barr may be the only two legitimately independent sources Kevin used (their competence to pronounce on the financial crisis is unknown, but one can give them the benefit of the doubt) in a body of sources that otherwise came soley from within government ((or from political entrepreneurs dependent on government, such as Traiger and Hinckly LLP) and the federal financial regulatory sector - the very center of the vortex from which emanated the present economic debacle.

[_Droopy]

And, in any case, there are other reasons to wish to see the CRA repealed:

http://www.cato.org/pubs/regulation/reg ... ck4-94.pdf

http://www.cato.org/pubs/policy_report/pr-ma-cr.html

And not all of Kroszner's libertarian colleagues agree with him on all points:

http://www.cato.org/pubs/bp/bp110.pdf

Note that the CRA ("exotic" loans) is understood as one major precipitating factor in the housing meltdown, but not the only one.

[_EAllusion]

Note that the CRA ("exotic" loans) is understood as one major precipitating factor in the housing meltdown, but not the only one.

What kind of passive voice is that? Is understood by whom? Everything I've read from mainstream economic sources regulates the CRA to a very minor role in the subprime lending debacle. The main driver I've seen come up time and time again is 1) a booming, very poorly understood mortgage backed securities/CDO market that incentivized lenders to lower standards because they could profit simply from selling the loans 2) a booming Chinese savings rate that drove speculation in #1. and 3) a highly leveraged credit default swap market on #1 that created massive debt obligations when it collapsed.

[_Socrates]

I should also point out that the original interstate highway system was not intend, except perhaps indirectly, to accelerate private economic activity. Its was part of the Cold War era preparations for a potential nuclear attack by the Soviet Union, in which massive quantities of military equipment and personal could be moved much more efficiently that previously. It would also assist in mass evacuations from large urban centers.

Military preparedness and defense are among the core functions of a legitimate state, and constitutionally, of the United States, but no one, no matter how supportive of the military they are, should make the mistake of thinking that any of its infrastructure represents real economic growth

That's how the Eisenhower Administration was able to 'sell' it to the American people. Only by telling Americans that it was defense-needed. However, all along the idea and impetus at the higher levels were to simply better connect this nation, its people and its commerce.

[_Socrates]

Note that the CRA ("exotic" loans) is understood as one major precipitating factor in the housing meltdown, but not the only one.

What kind of passive voice is that? Is understood by whom? Everything I've read from mainstream economic sources regulates the CRA to a very minor role in the subprime lending debacle. The main driver I've seen come up time and time again is 1) a booming, very poorly understood mortgage backed securities/CDO market that incentivized lenders to lower standards because they could profit simply from selling the loans 2) a booming Chinese savings rate that drove speculation in #1. and 3) a highly leveraged credit default swap market on #1 that created massive debt obligations when it collapsed.

I agree with EAllusion that the banking industry was able to leverage a financial whirlwind of deals and profits off of mortgages that contributed significantly to the collapse. This included the availability for capital investment in new construction projects beyond what was needed. The construction industry quickly overheated, and eventually collapsed when the first signs of demand for newly constructed, spec houses and offices waned.

However, had the viability of the mortgages themselves not been so thin in the first place, the banking sector whirlwind would not have collapsed as quickly--and perhaps not at all. It could have withstood more than a mild downturn in the demand. Borrowers not so strained would have been able to keep making payments, painfully and with sacrifice in other aspects of the lives financially, but the rate of foreclosures would not have taken such a heavy and quick toll. The CRA '77 did encourage a thinner viability of those mortgages and the borrowers' ability to pay them off. That weakness in the mortgages themselves began a domino effect that took down the real estate market and the mortgage market. With even a slight down turn in economic growth, many of these borrowers were unable to keep making their mortgage payments. This strained the entire mortgage market, and led to its collapse.

The longer I live, the more politically motivated high profile economists seem to be becoming. My own analysis is that they're just blind men looking at different parts of the elephant. I think the meltdown occurred because of the perfect storm of (a) the thinly viable mortgages encouraged by the CRA '77 (as amended), (b) the financial hubris that real estate values would simply continue on an upward, linear pattern, and (c) the greed of the banking sector, specifically the mortgage markets, that kept extending the ratios. In short, I think most economists are correct, each to some degree, and that the most accurate assessment can be drawn by taking parts of the analysis from each (those parts that make the most sense), and blending them into one, cohesive view of the situation.

[_EAllusion]

However, had the viability of the mortgages themselves not been so thin in the first place,

I'm not sure if you read what I just wrote properly. What I'm saying is that the massive subprime market bubble that happened primarily occurred because investors were buying mortgage-backed securities like candy. This allowed mortgage issuers (i.e. banks) to give loans to people with dubious credit with little risk because they could package them up and sell them to investors. A notable part of the reason why mortgage backed securities were so heavily overvalued (in retrospect) was the presence of Chinese capital flowing into the market trying to find lucrative, but safe places to park their money. And a notable part of why this lead to a broader collapse was not just because they were terrible assets to have, but because institutions like AIG were heavily leveraged on the stability of those assets via CDS's. In summary, the prime issue was a totally misplaced confidence in the quality of MBS/CDO's as an investment.

The incentive for subprime lending created by the CRA was a very minor factor as far as I gather from reading on the subject. The CRA had been around a long time and the sub-prime bubble was a recent phenomenon driven by investment. That's why I asked for clarification on the passive voice. I'm quite confident this is the mainstream view.

[_Analytics]

Sowell essentially said that in principle, of course government can create wealth, and the bridge story is an example of how it is possible. He totally conceded the point. He said that in practice the government rarely does create wealth, and went on a tangent about how in my example, the government would likely continue charging tolls after the project was paid for (which is a terribly bad point on his part in its own right). But he conceded the main point.

No he didn't, and if you understood basic economics, and Sowell's core, overall argument, you would not have misrepresented him in this way.

Sowell does not admit, any more than I do, that the creation of a bridge, or stature, or a court for midnight basketball, is the creation of new, net wealth and represents, in any sense, economic growth. To do that, he'd have to back off on this entire economic philosophy.

A bridge is wealth, and no one disagrees there. But it is not wealth creation in any real, net sense. It is the creation of wealth at one point, by the shifting and redistribution of capital resources from another point to that point. That is not wealth creation in any but a lexical sense.

If people like you will stop worshiping the state as your lord, god, and savior, cease your fear and loathing of individual liberty and unalienable rights, and do some serious reading in economics and political economy outside of Paul Krugman op-eds and pop Marxist screeds like Fast Food Nation, these elementary fallacies of logic and conceptualization could be dissipated.

Hi Droopy,

Are we trying to have a friendly, intellectual conversation here? If so, you might want to tone down the worshiping-the-state-as-your-lord-god-and-savior language.

I correctly remembered what Dr. Sowell said. His exact words were, “It is of course theoretically possible for government to create wealth.” See my new signature for a link to the reference.

If you’ll indulge me, let me explain what it means to “create wealth.” Creating wealth is the process of creating value. Bridges have value. If an entity builds a bridge, the question that needs to be addressed is how valuable is the bridge? If the bridge is more valuable than the money it took to construct it, then wealth was created.

For example, if I build a bridge with a million dollars and somebody offers to purchase it for three million dollars, then the bridge is worth three million dollars. In this case, I created two million in wealth by using a million dollars to build a three-million dollar bridge. Likewise, if the government collects a million dollars in taxes and uses it to build a bridge worth three million dollars, the government created two million dollars of wealth.

[_Analytics]

I'm not sure if you read what I just wrote properly. What I'm saying is that the massive subprime market bubble that happened primarily occurred because investors were buying mortgage-backed securities like candy. This allowed mortgage issuers (i.e. banks) to give loans to people with dubious credit with little risk because they could package them up and sell them to investors. A notable part of the reason why mortgage backed securities were so heavily overvalued (in retrospect) was the presence of Chinese capital flowing into the market trying to find lucrative, but safe places to park their money. And a notable part of why this lead to a broader collapse was not just because they were terrible assets to have, but because institutions like AIG were heavily leveraged on the stability of those assets via CDS's. In summary, the prime issue was a totally misplaced confidence in the quality of MBS/CDO's as an investment.

The incentive for subprime lending created by the CRA was a very minor factor as far as I gather from reading on the subject. The CRA had been around a long time and the sub-prime bubble was a recent phenomenon driven by investment. That's why I asked for clarification on the passive voice. I'm quite confident this is the mainstream view.

You are being too conservative in how you phrase this--the CRA wasn't a very minor factor--it was not a factor at all.

That quibble aside, you are right about the cause. Drilling down a little bit more, one practitioner told me that if he had to name a single cause it would be this: the people who priced the CMOs had a single fatal flaw in their models: they assumed house prices couldn’t go down. If they would have put into their pricing models the contingency that housing prices might go down, the whole scheme never would have gotten off the ground because the investors wouldn’t have provided the capital.

[_Droopy]

What kind of passive voice is that? Is understood by whom? Everything I've read from mainstream economic sources regulates the CRA to a very minor role in the subprime lending debacle. The main driver I've seen come up time and time again is 1) a booming, very poorly understood mortgage backed securities/CDO market that incentivized lenders to lower standards because they could profit simply from selling the loans 2) a booming Chinese savings rate that drove speculation in #1. and 3) a highly leveraged credit default swap market on #1 that created massive debt obligations when it collapsed.

Yes, I understand what "mainstream" here means.

You're out of the loop, so its no wonder debating you is an exercise in futility. Continue on, Delusion sopping up the broth spoon fed to you by the Ruling Class, while some of us continue to find joy and liberation in thinking for ourselves.

[_Analytics]

In my opinion, the single best essay on the cause of the financial crisis is The Financial Crisis and Lessons for Insurers, written by Dr. Robert W. Klein et. al. which is the result of a research project sponsored by the Casualty Actuarial Society, Canadian Institute of Actuaries, and the Society of Actuaries.

They conclude that “the primary cause of the crisis lay in the widely held belief that housing prices could not decline significantly on a national basis.”

They also list five secondary causes:

1) a complex and ultimately ineffective regulatory regime in the U.S.;

2) various incentive problems embedded in the originate-to-distribute model for securitization;

3) an over-reliance on credit ratings by market participants and regulators;

4) excessive faith in the Federal Reserve System; and

5) the subsidization of risktaking in home ownership embedded in various government policies.

Note the following:

The primary cause and three of the five secondary causes (2, 3, and 4), are various facets of the decisions of private-market investors.

The paper is skeptical that “fixing” the regulatory framework would prevent or mitigate the problems underlying the crisis (regarding secondary cause #1).

The subsidization of homeownership (in point 5) is talking about the implicit guarantees of Fannie and Freddie securities, and the tax deductibility of mortgage interest. I find it curious that the right-wing doesn’t complain about the government subsidizing debt through the mortgage interest tax deduction.