Secret Combinations and the Sheep Who Love Them

[_Droopy]

Its a good time to be reminded, yet again, of just where the present economic meltdown began, and why.

Wall Street's Gullible Occupiers

By PETER J. WALLISON

The protesters have been sold a bill of goods. Reckless government policies, not private greed, brought about the housing bubble and resulting financial crisis.

There is no mystery where the Occupy Wall Street movement came from: It is an offspring of the same false narrative about the causes of the financial crisis that exculpated the government and brought us the Dodd-Frank Act. According to this story, the financial crisis and ensuing deep recession was caused by a reckless private sector driven by greed and insufficiently regulated. It is no wonder that people who hear this tale repeated endlessly in the media turn on Wall Street to express their frustration with the current conditions in the economy.

Their anger should be directed at those who developed and supported the federal government's housing policies that were responsible for the financial crisis.

The Occupy Wall Street protesters in New York appear unfocused and disorganized. WSJ's Hilke Schellmann takes a peek into the inner workings of the organization and how it is trying to manage communal living in a public space.

Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.

Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.

Research by Edward Pinto, a former chief credit officer of Fannie Mae (now a colleague of mine at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments.

Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from.
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Mary O'Grady and Mary Kissel on how New York's economy and budget depend on Wall Street.

The huge government investment in subprime mortgages achieved its purpose. Home ownership in the U.S. increased to 69% from 65% (where it had been for 30 years). But it also led to the biggest housing bubble in American history. This bubble, which lasted from 1997 to 2007, also created a huge private market for mortgage-backed securities (MBS) based on pools of subprime loans.

As housing bubbles grow, rising prices suppress delinquencies and defaults. People who could not meet their mortgage obligations could refinance or sell, because their houses were now worth more.

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Associated Press

Millionaire rap mogul Russell Simmons (center) joins the anti-Wall Street protests.

Accordingly, by the mid-2000s, investors had begun to notice that securities based on subprime mortgages were producing the high yields, but not showing the large number of defaults, that are usually associated with subprime loans. This triggered strong investor demand for these securities, causing the growth of the first significant private market for MBS based on subprime and other risky mortgages.

By 2008, Mr. Pinto has shown, this market consisted of about 7.8 million subprime loans, somewhat less than one-third of the 27 million that were then outstanding. The private financial sector must certainly share some blame for the financial crisis, but it cannot fairly be accused of causing that crisis when only a small minority of subprime and other risky mortgages outstanding in 2008 were the result of that private activity.

When the bubble deflated in 2007, an unprecedented number of weak mortgages went into default, driving down housing prices throughout the U.S. and throwing Fannie and Freddie into insolvency. Seeing these sudden losses, investors fled from the market for privately issued MBS, and mark-to-market accounting required banks and others to write down the value of their mortgage-backed assets to the distress levels in a market that now had few buyers. This raised questions about the solvency and liquidity of the largest financial institutions and began a period of great investor anxiety.

The government's rescue of Bear Stearns in March 2008 temporarily calmed the market. But it created significant moral hazard: Market participants were led to believe that the government would rescue all large financial institutions. When Lehman Brothers was allowed to fail in September, investors panicked. They withdrew their funds from the institutions that held large amounts of privately issued MBS, causing banks and others—such as investment banks, finance companies and insurers—to hoard cash against the risk of further withdrawals. Their refusal to lend to one another in these conditions froze credit markets, bringing on what we now call the financial crisis.

The narrative that came out of these events—largely propagated by government officials and accepted by a credulous media—was that the private sector's greed and risk-taking caused the financial crisis and the government's policies were not responsible. This narrative stimulated the punitive Dodd-Frank Act—fittingly named after Congress's two key supporters of the government's destructive housing policies. It also gave us the occupiers of Wall Street.

http://online.wsj.com/article/SB1000142 ... on_LEADTop

[_Buffalo]

Droopy's favorite fragrance must be Obsession for Men.

[_Tarski]

"Secret Combinations and the Sheep Who Love Them"

Such an ironic choice of title for a Mormon.



As for the blame for the economic meltdown, one must consider who might have the money and infuence to obtain the best spin meisters. Certainly not the victims on the street.

One need only turn on the TV to find out what the economically elite want us to believe. (It's never their fault of course).

[_moksha]

From the title, I thought Droopy might be going off on some unfounded Mormon rant. Nevermind.

[_NorthboundZax]

wow - an american enterprise institute associate writing for the Wall Street Journal doesn't have anything good to say about the Occupy Wall Street movement. Who would've thunk?


On a totally unrelated note, I recently came across this interesting quote:

One of the great evils with which our own nation is menaced at the present time is the wonderful growth of wealth in the hands of a comparatively few individuals. The very liberties for which our fathers contended so steadfastly and courageously, and which they bequeathed to us as a priceless legacy, are endangered by the monstrous power which this accumulation of wealth gives to a few individuals and a few powerful corporations.

-- Proclamation of the first presidency and twelve apostles, 1875

[_Droopy]

wow - an american enterprise institute associate writing for the Wall Street Journal doesn't have anything good to say about the Occupy Wall Street movement. Who would've thunk?


On a totally unrelated note, I recently came across this interesting quote:

One of the great evils with which our own nation is menaced at the present time is the wonderful growth of wealth in the hands of a comparatively few individuals. The very liberties for which our fathers contended so steadfastly and courageously, and which they bequeathed to us as a priceless legacy, are endangered by the monstrous power which this accumulation of wealth gives to a few individuals and a few powerful corporations.

-- Proclamation of the first presidency and twelve apostles, 1875

Taking note of the general intellectual vacuity that (as expected) would suffice as observations and responses to this post, It should be noted that the context of the First Presidency statement above is in all likelihood in reference to the great railroad trusts and a few other early monopoly interests that grew up in that latter part of the 19th century as the Industrial Revolution proceeded, and which was, at that time, still in its early youth. Those trusts and monopolies could not have existed as they did without the connivance and support of the state, which is why free market, rule of law based democratic capitalism is the ideal sought by the early Founders of the nation and the ideal of most contemporary conservatives and certainly, libertarians. "Capitalism" by itself, extracted from the framework of ordered liberty, strictly limited government, freedom of contract and the Judeo-Christian morality that is the foundation of of healthy, productive human relations, and understood as simply the ability to amass wealth is sterile.

It should be noted that the principles of Church welfare are founded upon the concept of economic self sufficiency and independence, for which "capitalism;" the amassing, saving, investing, and productive use of capital resources, is key. Vast concentrations of wealth can be dangerous, its true, but only when "corporate" and "crony" capitalism become normative as means of such wealth accumulation, and the state becomes a protector, guaranteer, and parasitic dependent upon that wealth, while at the same time, certain private interests who have become both economic and political entrepreneurs, feast upon the taxpayer subsidies, guarantees of taxpayer "bailouts" against incompetent management, uneconomic, politically contrived resource utilization, or union rapacity, and protection against indigenous or foreign competition that come to companies in return. By themselves, vast wealth in individual hands must be earned in the marketplace by serving others (providing things or services they want, of their own fee will to acquire by trading some of their own property for that good or service), and hence, the "rich" are utterly at the mercy of those they serve as to whether they will attain and be able to maintain their wealth. Vast wealth, at least in an otherwise free society, only becomes dangerous when it becomes enmeshed with the state and its motives and priorities, and corporations seek protection, subsidy, and access to political power through a symbiotic relationship with interventionist government.

Large concentrations of wealth in private hands have done much good for the world, just as, on occasion, when corrupted by enmeshment with a vast, intrusive nanny state and in relationship with politicians seeking the construction of personal fiefdoms and networks of bought and paid for supporters, it has worked evil (the present era is loaded with examples of this), but the conditions and context of such wealth are the concerns, not large concentrations of wealth in private hands per se. Otherwise, the Brethren here would have aimed their criticisms at Lehi, Abraham, Job, and others along with their contemporary concerns.