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I would comment more on these:

1. Charles Goodhart writes,

Let me start by recalling that this is the third version of a quasi-automatic market mechanism for limiting bank losses and facilitating bank resolution that has been proposed in the US. The first two both failed.

The first, which had some considerable success for many decades up until the 1930s, was the imposition of double liability on shareholders. Quite why this was rejected in the 1930s, and why academics have not proposed its reintroduction, (rather than the more complex CoCo scheme), are not entirely clear.

Read the whole thing.

2. The New York Times writes,

no one -- not investors, not regulators, not even bankers themselves -- knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe's already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks -- which appear to hold more than half of that $2.6 trillion in debt -- nearly stopped lending money to one another.

Sounds like more plumbing problems (remember the clogged financial system of two years ago, that Paulson was going to fix by buying up mortgage assets?).

3. Edmund L. Andrews writes,

It's true that Fannie and Freddie jumped into the muck with born-again enthusiasm. Here is an excellent account of that by David Hilzenrath in the Washington Post in 2008. But as Hilzenrath vividly documented, the quasi-government behemoths weren't pushing their private sector rivals to roll the dice. They were late to the craps table and desperately trying to make up for lost time.

One could take these same facts and describe them as the private sector bailing out of subprime before it started to go bad, with Freddie and Fannie jumping in at that point. Note that the real hockey stick of home prices took off in 2006, as Fannie and Freddie were "trying to make up for lost time."

But it is pointless to try to make such an interpretation. There is no questioning His Holiness, the infallible one. As Andrews explains, you're a racist if you think that government housing policy had anything to do with bad mortgages. And that's the clinching argument.

All pointers from Mark Thoma. I am still working through my Thoma backlog.

Comments and Sharing

COMMENTS (8 to date)
david writes:

re: 3. But that was not the interpretation that was originally forwarded, and you know it.

It's somewhat troubling when the goalposts move but the conclusion stays the same, but let's suppose that the argument is valid. You're still disingenuous if you pretend that the vast majority people who push this point don't have some unsubtle and odious motivations.

AaronG writes:

Has anyone put together the data of when and how much non-agency CMO were purchased by Fannie & Freddie? They were late to the game in securitizing the worst loans, but they were also using their ability to get ultra-cheap financing to purchase the private securitizations.

mulp writes:

To say regulation doesn't work based on the past decade is like saying condoms don't work based on a number of years of using new condoms every time, but then using a new one a week to save money, and then arguing that the sperm know better, and ending condom use all together. The pregnancies after reducing the use of condoms are used as proof condoms don't work.

They following people have been blamed:
- the poor without assets or incomes borrowing money they can't possibly repay

Well, most banks were prohibited from making such loans by Federal regulation, and they made most of the loans until the 70s on the basis of protecting the Fed bank insurer. Most States prohibited such loans as predatory for voter protection.

The privatizing of Fannie Mae by separating insurance from finance (put in Ginnie Mae) made it boring, so in the 80s, it was allowed to offer insurance and create securities, but with less/different regulation. This was done to create a much larger private mortgage insurance industry, and Fannie Mae was argued to be private.

Progressively, lending to people without sufficient income and assets increased, but the blatant cases could be modified or reversed by a court as a violation of laws prohibiting predatory lending or common law imprudence or fraud by the lender.

In 2000, credit insurance was completely deregulated - just call the credit insurance policy a credit default swap and now no capital reserves are required, and you can now insure/bet on losses that you don't experience, violating at least five centuries of insurance industry common moral hazard law.

In 2004, State law prohibiting predatory lending was overridden in court by the Bush administration making lending to the poor with no income and no assets legal because the Federal government did not prohibit it.

- bond buyers like pension funds, money market funds, banks buying based on ratings agencies

The regulations in effect until the 70s required banks hold capital that was in cash or backed by the full faith and credit of the government, like Treasuries, or Ginnie Mae insured debt.

But that limited the role of private mortgage insurance and private bonds secured by mortgages. So, to get the government out of insuring debt, in 1982, Congress decreed that a high rating by Moody or Standard and Poor made the debt equal to that insured by the full faith and credit of the government - and as private insurers and banks were involved, this was getting government out of finance and into the hands of the wiser and safer private capital markets.

So, it is absurd to say that the Eccles system of mortgage finance built on government insured debt given to borrowers with actual documented income and assets made affordable by extending repayment over decades doesn't work because the current system based on insurance backed by no capital securing debt issued to borrowers with no income or assets on terms they absolutely can't afford proves Eccles was wrong.

John Thacker writes:


Your comment is very vague, so I can't tell which side of the argument you're referring to. I can easily imagine someone making that charge of any side.

It seems to me like a lot of people are talking past each other. Some people want to argue about whether the crisis was "mostly" the fault of private or public. That's interesting, but I think it's more relevant to talk about whether government action and policy made the problem better or worse. After all, if you're in a hole, you want to stop digging. Even those who are quick to put most of the blame on the private sector admit that Fannie and Freddie made things worse. Yet it seems like all the proposed financial reforms don't deal with them at all.

John Thacker writes:
They following people have been blamed: - the poor without assets or incomes borrowing money they can't possibly repay

Mulp, I don't know that people are blaming the *people* so much as the acts of lending. When you describe such lending as "predatory lending," as say it should have been prohibited, aren't you blaming the lending just as much?

If you're going to say that "banks should not have lent to these people and there should have been laws against it," it seems to me to be fruitless to spend a lot of time arguing about who to "blame." It takes two parties to lend money; in many cases the lender is out a lot more than someone who lived in a house that they otherwise couldn't afford and was foreclosed on. They might not be all that much worse off, if at all, than if they had rented the whole time.

david writes:

@John Thacker

My point applies to both people on the right who complain that their undoubtedly purer arguments aren't being taken seriously because theirs sound too similar to arguments forwarded by racist wingnuts, and then blame it on the other side, and equivalently to people on the left who do the same. Except with different wingnuts.

The US has politicians and pundits who engage in elaborate dog-whistling; that's the reality and we just have to deal. And so if someone happens to favor a policy that just so happens to disproportionately impact minority groups, he's going to have to explain very carefully what those motives are and firmly disentangle himself from the people making similar statements for, sadly, far more transparent reasons. Otherwise he's walking like a duck and quacking like a duck, so it's reasonable to call him a duck.

Steve Sailer writes:

Dear Mulp:

Thanks, most informative.

"In 2004, State law prohibiting predatory lending was overridden in court by the Bush administration making lending to the poor with no income and no assets legal because the Federal government did not prohibit it."

Please let me know what this 2004 case was so I can learn more about it.

Lord writes:

Re: 3, F&F never securitized the worst loans because they weren't permitted to buy them. They could only buy the safest tranche of Wall Street schlock. While they were 40% of the market in 2003, this fell in subsequent years as the private sector went whole hog for them, so if anything they were fortunate getting out when they did. Banning them from buying anything Wall Street sells would be good starting point for reform. If Wall Street is selling it, you don't want it.

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