The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study.
I agree but Ritholz writes:Barry Ritholtz has a fine piece in the WaPo taking off from Michael Bloomberg’s recent venture into the rewriting of history. And I think Ritholtz’s Big Lie framework is just perfect.
After all, the way to understand the “Barney Frank did it” school of thought about the crisis is that it’s an attempt to turn a huge defeat for conservative ideas into a win. The reality of the financial crisis was that deregulation — which was part of a broader rightward shift in policies that played a large role in creating rapid growth in income inequality — led to an economic catastrophe of the kind that just didn’t happen during the 50 years or so when we had effective bank regulation.
So the right’s answer is to claim not just that the government did it, but that it caused the crisis by its attempts to reduce inequality! It’s kind of a masterstroke, in an evil way.
And I think it’s important to recognize the motives here. By all means let’s debunk the claims on substantive grounds, which Mike Konczal does very well. But they’ll just keep spouting these claims, and make up new ones, so you need to understand the fundamental bad faith that is driving the whole debate.
Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).There was also Bernanke's Global Savings Glut. Is there a problem with a system where low interest rates used to counter deflationary pressures cause bubbles? What if those low interest rates were used to invest in productive enterprises?
Gavyn Davies has a very good piece today offering another way to think about the euromess. I say “another way to think” advisedly — his analysis of the basics is, as far as I can tell, identical to mine, but he offers a different angle of approach that may be better than the route the rest of us have been taking. Here’s Davies:The euro problem can then be defined a finding a way (1) to finance these imbalances in the short run (2) end the imbalances over the medium run.It is normal to discuss the sovereign debt problem by focusing on the sustainability of public debt in the peripheral economies. But it can be more informative to view it as a balance of payments problem. Taken together, the four most troubled nations (Italy, Spain, Portugal and Greece) have a combined current account deficit of $183 billion. Most of this deficit is accounted for by the public sector deficits of these countries, since their private sectors are now roughly in financial balance. Offsetting these deficits, Germany has a current account surplus of $182 billion, or about 5 per cent of its GDP.
It’s also worth noting that we’re not talking about imbalances that have been going on forever.The internal imbalances of Europe are a recent development, coinciding with and almost surely caused in large part by the creation of the euro itself (GIPS is Greece, Italy, Portugal, Spain):
So how are these imbalances to be closed? European leaders have been completely unwilling to confront that question. Yesterday’s big Times piece offers a portrait of leaders — Trichet in particular — engaged in furious denial. It wasn’t just the insistence on Trichet’s part that no default could ever happen. The European Central Bank also went all in for the doctrine of expansionary austerity, aka belief in the confidence fairy.
And what Davies’s post drives home is that implicitly at least European leaders went in for the doctrine of immaculate transfer — in effect, they wanted to believe that the huge payments imbalances could be ended without major changes in relative prices.
So what’s happening instead is forced austerity in the deficit countries, not matched by expansionary policies elsewhere, in a low aggregate inflation environment — the ECB actually raised rates! — that makes adjustment almost impossible. The result is a eurozone headed for recession, and one in which a breakup of the euro itself is looking ever more possible.
Awesome.
Fannie and Freddie were late to the rush into junk mortgages. Most of the junk mortgages were securitzed by private issuers of mortgage backed securities, like Citigroup and Goldman Sachs. Fannie and Freddie got into this market in a big way in 2005 because they were losing market share.
It is likely that the Republican leadership knows these facts, or deliberately has opted not to know them, but blames Fannie and Freddie anyhow because they want to associate the downturn with liberal efforts to extend homeownership to low and moderate income people. This fits better with their political agenda rather than acknowledging that the main problem was greed and fraud perpetuated by major Wall Street banks (who were bailed out by taxpayers) and many lesser actors in the financial sector.Andrew Ross Sorkin writes about the two "zombie giants":
In other words, the sinkhole that is Fannie and Freddie -- Freddie just said it needed an additional $1.8 billion and the Congressional Budget Office says the combined companies could cost taxpayers $389 billion over the next decade -- is not a function of those firms making new loans that have gone bad, but the continued "bleeding," as Mr. Frank put it, from previous loans made before the crisis that are still going belly-up.
More important, shutting down Fannie and Freddie and having the private market step in, as politically popular a sound-bite as that may be, is economically unfeasible. For better or worse, Fannie, Freddie and Ginnie Mae were behind 98 percent of all mortgages in this country so far this year, according to the Mortgage Service News. Pulling the rug out from under them would be pulling the rug from under the entire housing market as it continues to struggle.Basically these two companies were nationalized and are currently part of the state or government. Yet people seem to dance around that fact in their terminology:
"I take offense at the idea that we’ve done nothing," he told me. Far from dragging its feet, he insisted, the government took the bold step of putting Fannie and Freddie into conservatorship in 2008. "There was no political fear to not do it"
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One of the more interesting ideas being floated is that the government-sponsored enterprises, Fannie and Freddie, would subsidize loans only for low-income families by lowering the size of a so-called conforming loan. At the moment, Fannie and Freddie are buying up single-family mortgages for up to $417,000, and in some high-cost areas as much as $729,750, clearly benefiting families that don’t need the subsidy.
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"Were the G.S.E.’s to cease buying mortgages or guaranteeing mortgage-backed securities, financing for buying homes today would be virtually nonexistent until the banks got back up on their feet. This would result in mortgage prices increasing, causing demand for housing to decrease, taking the value of homes even further down," Anthony Randazzo, director of economic research of the Reason Foundation, wrote in a letter to Mr. Geithner.Reason shouldn't be quoted on anything. It was their free market ideology that caused the Great Clusterfuck. Have they come to terms with this? No.