Arnold Kling  

Mortgage Securities and Porn Videos

Numeracy Watch... Future Scenarios for Economics...

Robert Shiller complains about groupthink among policymakers. He means that they didn't heed his warnings of a housing bubble.

My complaint is about the groupthink that says we really, really must revive the mortgage securities industry. Instead, I suggest thinking about it as if it were the porn video industry. Both of them were essentially nonexistent forty years ago, before video cassettes and before GNMA. Both are ubiquitous today.

Suppose that it were the porn video industry that had collapsed. Would we need to bail it out? I would argue otherwise. I mean, whatever people, er, accomplish by watching porn videos, they were able to accomplish it before there ever were porn videos.

Similarly with the mortgage securities industry. People were able to buy houses and finance them with mortgages before there were mortgage securities.

Ben Bernanke says otherwise.

Bernanke emphasized that during the financial crisis, very few mortgages have been issued that did not have implicit federal backing. This, Bernanke said, demonstrates the need for some government role in lending.

Maybe he has the causality reversed. Because Fannie and Freddie enjoy explicit Federal backing and essentially no capital requirements, they are able to drive ordinary banks out of the mortgage market.

Anyway, next time you hear Ben or Hank or Barney or some other leader proclaim the importance of the mortgage securities market, imagine that they were advocating the equivalent government support for the porn video industry.

Keep comments well within the bounds of taste, please.

Comments and Sharing

COMMENTS (19 to date)
Lord writes:

Like Dean Baker, I fail to see much difference between the implicit guarantees of the GSEs and those of the investment banks. If anything the GSEs probably had greater capital requirements given their lower risks as evidenced they were not the first to fail.

Arnold Kling writes:

In previous posts, I have linked to FDIC capital requirements and to academic papers that demonstrate that the GSE's were advantaged prior to being put into conservatorship. They are even more advantaged now.

MattYoung writes:

It is not groupthink, and as the discussion continues the real cause of neglect will be clear.

Eric Crampton writes:

I'll have to disagree with you here, Arnold. A reasonable case can be made for many positive externalities flowing from the porn industry. For starters, demand from porn consumers funds a lot of technological innovation that has spillover benefits for others. Network technologies like VHS, DVD, and the internet might well never have gotten going absent pornography consumers' early adoption. Consumer adoption of home-based internet would have been slowed by (I'd reckon) about a decade absent pornography. Would we be able to watch movies online if pornography hadn't ensured a fast internet connection to every home? It's doubtful. The collapse of the pornography industry could be much worse than the collapse of the mortgage securities industry, at least in the longer term.

Nevertheless, I'd still be very skeptical about any government proposals for a porn bailout were the porn industry to collapse. First, pornography has proven remarkably resilient to both demand-side (morality crusades busting shoppes selling product) and supply-side (AIDS) shocks, bouncing back nicely. Moreover, despite arguably being subject to even more piracy and theft of IP than any other creative industry, it continues to exist despite not really getting much help from the MPAA.

Second, I'd be seriously worried about the government becoming an equity-holder in the pornography industry. While the government might impose some efficiency-reducing mandates on the banking sector as the price of its equity stake, imagine the horrors that would be imposed on the pornography industry if the government got its hooks in! I'm sure I can leave the fleshing out of the argument as an exercise for the reader's imagination.

Ok, back to grading....

Nathan Smith writes:

Well, suppose porn videos comprised the majority of most people's net worth. Or rather, that they comprised more than 100% of the net worth of a large share of the population, with people buying porn videos on leverage. In that case, any change in the porn video market would have grave macroeconomic implications.

That may not be the reason, or not the only reason, that Bernanke is worried about it. But it's a good one.

Armchair writes:

[Comment removed for supplying false email address. Email the to request restoring this comment. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Gamut writes:

As near as I can tell, Nathan, the net worth of holders of this 'property' called mortgages is about balanced out by the real assets they are taken out for. I think what you meant to say was, "imagine nearly 100% of the population had bought porn industry stock in the hopes that the industry would grow for ever and they'd all make out like bandits".

To which I would say, "serves them right."

Gamut writes:

But then again, even that analogy isn't correct. Only those that borrowed money to buy porn stock would be in trouble; the ones that only bought as much porn as they needed to consume wouldn't really be hurt by the drop in paper value, aside from them not being able to use the stock as assets against more loans.

I think we're getting into the territory where this analogy no longer works.

LowcountryJoe writes:

Nathan, the government did not play favorites to the porn industry by legislating two favorable tax treatments to it and causing a misallocation of capital. For example it (the government) did not give it (the standard film industry, or competing asset classes) preferential capital gains exclusions and mortgage interest deductions. Therefore, the government, was the entity that created such a concentration of net worth in just one asset class, making the situation more grave than in may have needed to be in the first place. I'm not suggesting that a home as an asset would ever be a minority share of a household's net wealth but I am saying that stocks and even debt securities would be more widely owned if they enjoyed the same kinds of tax treatments that housing gets.

Gamut makes an excellent point about a housing 'crises' where no one need get too burned or conditions being so grave; housing will not fall to zero value and the majority of borrowing folks will choose to stay put and honor their mortgage contracts no matter what the economic picture is doing or causing on some people. Let the market sort it out without intervention by those that just want to do something for the sake of providing security to those that over-extended themselves. Those that over-extended themselves have got to feel some pain for a change; it's the only way they're going to learn from this.

Eric, it is rather funny to think of pornography piracy as being and intellectual property issue. Property yes, but intellectual?

Ostrich writes:

Well, let's see. In inflation adjusted terms, the Case Shiller national index has dropped 15% in its last four quarters. But it's still 44% above its level at the end of 1997 (which is the point at which house price inflation really accelerated). Meanwhile, Freddie Mac will buy mortgages written at 90% LTV, if I read their website right. I assume Fannie does the same.

Maybe no lender in his right mind (and who is actually responsible for the money he lends) will compete with this stuff.

The thrust of government policy seems to be to keep the game going. So the government, pursuing a policy that's pretty sure to fail, is underwriting yet more mortgages that will sink under water.

macquechoux writes:

I say drop the whole analogy argument. The question still remains: Do we still need the mortgage securities industry? Or perhaps a better way to phrase the question would be: Do we still need the mortgage securities industry as it is currently structured?

simon writes:


You are correct in pointing out that the experts need to question their primary assumption that the mortgage industry as currently structured needs to persist. I think that we should learn from this mess that it should not. It has caused more damage to more people than it ever has or will help. The fact that we shall all experience more pain in the short term if we do not intervene is a lame excuse. We are merely heaping upon future generations with debt obligations to hide the real losses. The Fed and Treasury should focus on the true cost benefit analysis and stop tinkering with what they do not understand. Our children owe nothing to the Fed and the Treasury. As a matter of fact the obligation is exactly reversed.

Alex writes:

Very interesting. Some of the more recent winners of the Nobel Prize for economics have been psychologists.

I must say though, a crisis in the financial sector has much, much more impact on the real economy than a crisis in any other industry. Finance is the heart and blood of a market economy.

Sam writes:

Since the GSE's do not and cannot (by law) originate loans they cannot "drive" banks out of the market. Securitization has led to some disintermediation, but the GSEs are not a substitute for banks. Moreover, banks have explicit backing as well, so the issue is the costs and benefits of the FDIC charter vs. the GSE charter for the two business mortgage business models (portfolio vs securitization). No offence, but reading your posts and others (such as Russ R to name one) on the GSEs has made it painfully clear very few people understand the mortgage markets and securitization. Perhaps that's why we are where we are.

Floccina writes:

In response to Ben Beranke I would say the problem that you point out could be solved in many ways the simplest being smaller cheaper houses and maybe even homes designed to be expanded.

BTW since FDIC replaces depositors vigilance shouldn't the FDIC threaten banks with loss of FIDIC insurance if they take too much risk. IMO in banking as well as health care I think that institutions the FDIC/Government and the insurance companies respectively need help from that customers. I do not see how they can ever get it right with the help of the many/ the customers.

Dr. T writes:

(Stealing the lead from above)

In response to Ben Beranke, I would say, "You are an idiot or a lunatic and should resign." The belief that the mortgage industry requires securities for survival should land him in a psych ward or a job training center for the mentally retarded. It scares me that the two most economically influential men in the government (Beranke and Paulson) appear to be wearing blinders and shutting down half their neurons. We need people who will put the economic state of the nation ahead of the interests of their buddies and former Wall Street peers.

[Doctor T: I think you mean Ben Bernanke, Chairman of the Federal Reserve? You keep mistyping his name. Please don't call people idiots or engage in name-calling on EconLog. We have a strict no ad-hominem remark policy. You have been a long-time commenter on EconLog, Please refresh your reading about our policies here and .here. Violating commenters will be moderated or banned.--Econlib Ed.]

Bob Murphy writes:

The real question is why the ratings agencies slapped a triple-X on so many videos that clearly did not deserve it.

(BTW Arnold, I don't know whether to hate you for such a cheap ploy at getting people to read the comments, or to hate myself for being unable to resist.)

Andrea writes:

OK, Bob wins best comment.

Stathis Kassios writes:

I would argue that the backing offered from the federal reserve was one of the main causes of the mortgage crisis because it was the negative incentive to drive lenders and bankers in risky decisions and unrational choices.

I also think that you don't need a bail out for the porno industry because this specific industry would totally survive in a similar crisis due to the power of its enhanced black market..

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