Compounding Errors

[daveon]

I let fly earlier at a Libertarian.  He responded and as I don't want to pollute Charlie's Blog with it.  I'll do it here :)

I do not intend to blame mortgage disaster on the poor, but on the deregulation pursued by politicians ignorant of economics in the name of home ownership for the poor. Granted the issue escalated to grave proportions because people were buying jumbo mortgage homes with no $ down and unreliable future earnings.

Seriously?  Seriously?  This is EXACTLY what I have a problem with, not just with Libertarians but with huge swathes of the largely American conservative right.

First: the mortgage market wasn't really deregulated, at least not in the way they're thinking.  Yes, the government backed certain mortgages to a certain point - but as I understand it you still had a loan acceptance process (Chris? You might be clearer on this than I) - you still had, frankly good loans to people who just wanted to own their own home, after we'd had a property boom that made it unlikely.

The issue escalated because the market OUTSIDE of the government regulated one, was just that. UNREGULATED.

There were no rules on who you could loan to, or what you could do with them.

To make matters worse, you could then take a massive spread bet on the loans succeeding AND make money off that.

But it wasn't just home loans, it was home refinancing - where you could take out loans on your property, on insane terms, with no valuation of the property to buy shit that the government in 2001 needed you to buy to deal with the fact there was a recession.

The rest is, as they say, history.

Now we're left with a seriously damaged credit market, a huge personal debt burden and a nasty mess to clean up.

The only thing that is certain, something that Hank Paulson and Tim Geithner knew back in 2008 - we haven't thrown anywhere near enough money at this crisis and the current "race to the bottom" in terms of who can be the most austere is a major fucking error that we'll sadly have to live through.

 

Comments

[frandowdsofa.livejournal.com]

I gave up trying to talk to them years ago, after a conversation with my first father in law. He had retired to a cabin in the North Woods of Wisconsin, and we were chatting about some of his neighbours who were survivalists. He maintained he would do just fine because he had some gold coins in a bank vault and everyone would always want gold - he'd be able to buy anything he wanted. After that I didn't bother listening to him again, it just made me ill.

[daveon.livejournal.com]

Reminds me of something I saw online around the Pacific Tsunami. Basically the guy was complaining about all this aid being sent. His "fixit" was to give them a $1000 each, cash, and let them get on with it.

I assume that they could have eaten the money...

[hal-obrien.livejournal.com]

There are a couple of problems with, "the deregulation pursued by politicians ignorant of economics..."

First, if the speaker is a US citizen, the speaker themselves is a politican. That's how the American system is designed. They can be an effective politician, or they can be an ineffective one, but not being one is not an option. If they're not a US citizen, I can't say - I don't have enough exposure to other countries' systems of governance.

Secondly, the speaker themselves appears to be ignorant of economics. So I suppose they're blaming themselves, and if so, fine. But I say they're ignorant mostly because of the problem pointed out in this post about the global housing bubble we just went through:

"For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

And if you can’t answer that, then what hope do we have that you will offer up empirical evidence that Fannie/Freddie/CRA caused this in light of the above?"

[daveon.livejournal.com]

I think the bit that most people miss is that it's not just poor people in Detroit who were able to get mortgages that otherwise they wouldn't have been able to afford. It was them too, and their neighbours and a bunch of people who don't look like they are poor.

Then there's Hank and Pam down the road who just got that really nifty 60" TV and the yacht and the cruise, and then...

In the UK, they started moving the qualifying incomes for mortgages into insanity levels because, well, if they hadn't then nobody could have afforded a bloody house and the market would have stalled years ago.

I've also noticed that the same people who come up with this dreck also have a hankering for the 1950s, while simultaneously forgetting that 50s tax rates were a "tad" higher than current ones.

[nmg.livejournal.com]

In the UK, they started moving the qualifying incomes for mortgages into insanity levels because, well, if they hadn't then nobody could have afforded a bloody house and the market would have stalled years ago.

Damned straight. I'm very glad that ias and I kept our income multiple low (to around 2.5) when some lenders were offering multiples above 5.

[daveon.livejournal.com]

When we bought our place in London we got a lot of pressure to borrow more than the 2x income we ended up borrowing. We've a small place but it was a mortgage we knew we could afford.

[chris-gerrib.livejournal.com]

We still have a loan acceptance process. In banks, this process tends to work because banks have credit departments, which essentially get paid to say "no" to loans.

Mortgage finance companies did not have credit departments. Since they were selling the loan before taking even one payment, there was no incentive to say no.

[daveon.livejournal.com]

As I understand the system, they reached the point where they were writing mortgage papers just to sell them with no thought about the loan itself or the risk, and in some cases they'd already sold them on before they were granted.

[undyingking.livejournal.com]

The whole idea of libertarians criticizing financial deregulation is one I find hard to get my head around.

[alexmc.livejournal.com]

Me too.

The problem as I see it is that it was too easy for people to take out unrealistic loans and the system encouraged this. Surely that is the libertarian ideal? Trust the individual.

I really don't understand American politics.

I'm not at all sure I understand what regulation would have helped prevent this lending.

[daveon.livejournal.com]

The simplest set would have been state mandated rules on mortgage lending criteria, such as they would have on lending under the US federal systems - or like we used to have run by the banks in the UK with 3x income etc...

The other major regulation could have been on the whole stinking ediface of Credit Default Swaps and just made it effectively illegal to insure against loss on risky financial vehicles. That alone would have made banks and traders a hell of lot more circumspect when it came to bundling and insuring mortgages.

[alexmc.livejournal.com]

I agree that CDS should be understood by the general public and maybe they should be banned but

> effectively illegal to insure against loss on risky financial vehicles.

that kind of results in all sorts of business insurance being illegal too - like insurance against your customers paying up

[daveon.livejournal.com]

I disagree. Insuring against loss for a service delivered is nothing like insuring against losing money in an investment vehicle where the value of your investment is a variable.

It's more akin to me taking out a policy against losing at poker on Saturday night rather than insuring that Blogs&Co stiff me on an invoice.