(I'm going to be off the air taking my wife for minor surgery Tuesday, so I'll get my digs in early/late depending on your time zone.)

CRA is certainly part of the problem, and Fannie and Freddie's willingness to buy the resulting junk paper amplified it.

However, let's not forget that loans to the unqualified poor, whether or not created by pressure on the loan writers, are only part of the root cause.

Have we forgotten all those cable shows like 'Flip This House', all the seminars promoting 'Get Rich In Real Estate' and the books and so on and on? Do you think the people following those strategies were putting 20% down? Qualified based on their incomes? Take a bet on how many of those loans have gone delinquent?

Know anyone who refinanced with a teaser rate, no qual variable and took equity money OUT to spend it? And is now far upside-down on the principal of that loan with respect to market value? Think they've got enough guts to stick it out, or will they walk away?

Trashing Freddie and Fannie for putting the implied faith and credit of the government behind that kind of trash is fair, and so is exposing the politicians that allowed them to get away with it, by quashing regulatory attempts

But dumping on the CRA >alone< is going it a bit rich. This was an equal opportunity fiasco on the borrowing side.

Agree with Tim, I saw no reference to people buying upper/mid-income homes with ARMS or short no-interest terms with the expectation of refinancing on the increased value of their "investment." There are maps of where the foreclosures are happenning and while Detroit and Memphis might have poverty-related foreclosures, by far the areas of the country with the most foreclosures are well-to-do.

The reality is that Republicans want people to be homeowners also.

"Know anyone who refinanced with a teaser rate, no qual variable and took equity money OUT to spend it?"

As a matter of fact, I do. The problem was, I thought they were just unusually stupid. I didn't realize this had become normal.

It was obvious even three years back that the housing bubble was real, and that there would be a crash. What's astonishing about all this is that the whole system has been allowed to come to a point of collapse, when years ago we knew this was coming.

My own family, we don't have anything in the stock market. We've put off buying a house to wait for the crash, so we wouldn't get burned by inflated prices. Everything is FDIC insured.

And yet we may still lose everything before this is done, because the whole financial system was allowed to come to this passage. There may not end up being a safe bank in the world, let alone the country; and the FDIC is already talking about its reserves drying up.

We aren't done with this. Today's vote was the Boston Tea Party, but there's a revolution to follow it.

Hadn't seen the video before. It's sort of difficult to respond to, being a rapid-fire series of various charts spliced together with extremely simplified economic arguments. Hard to even read the charts fast enough, I had to pause it several times and rewind. And I'm not an economist, so I'm not sure how to evaluate the charges. It seems to be making the following points:

a) The CRA caused the crisis by forcing banks to lend to 'high risk' borrowers (ie, minorities) which is clearly liberal bleeding-heart socialism yadda yadda. I've heard this point made by a couple of conservatives recently, I don't think it's been taken seriously. Should it?

b) The CRA caused the crisis by artificially inflating the median housing price beyond what it should be, causing the entire industry to become an unstable bubble in a sort of self-reinforcing effect. Which is basically just a restatement of the conventional wisdom at the moment while inserting the CRA as the 'root cause'. I still don't really find it credible. Tim above lists several other causes of the housing price inflation.

c) The CRA caused the crisis by FORCING banks to accept mortgages at terms they would not have done otherwise, without compensating them for the added risk. It also loops in FM as the catalyst for this.

This part I don't understand -- if FM guarantees these mortgages, and the government bailed FM out, what is the problem now? The government would be on the hook for all those mortgages, but all these other banks should not be dropping like flies unless (until) the government goes broke. And yet if these mortgages are guaranteed, and this crisis is continuing, it must be much larger than just the CRA loans, or else the 'guarantee' must not be worth anything. Which is it?

Additionally, as far as I know, the CRA only covers the first lending bank. I don't think it contains any clauses which state that other banks farther up the food chain have to buy these mortgages when they are sold on. The decision to do so rests with each bank along the way, not with the CRA.

d) All of this is the Democrats' fault, who defied the heroic Republican efforts to bring a stop to this terrible socialist folly for the past 20 years. Mmmmmmmkay. That story is gonna take some serious sellin' this year.

------

I agree in principle (not really knowing anything about the structure of the CRA, and not willing to take anything in that video at face value) that if we are requiring banks to accept mortgages they would otherwise not accept, we should compensate them in some manner. The video states that FM's purpose is to guarantee those loans as an 'instrument of government'. I don't know if that description is valid or not, but if it is, it seems to undermine all the rest of the arguments unless those guarantees break down. Our government is now explicitly backing FM, so those guarantees should be solid, and the crisis should be over, if the video is correct in claiming that this is the primary cause. The crisis is clearly not over, so I have to suspect that the video is peddling a line of trash in some manner or another.

Maybe somebody with more knowledge of either the CRA, FM, or economics can lend a little light on the topic.

Republican solution to finacial crisis: blame the Democrats.

There was a housing value boom across the world without the equivalent CRA that this videos foists on the democrats and claims is the root cause of the finacial crisis; why is it that America was the only place to suffer a financial collpase because of it?

Like or it or no, this crisis has happened on the Republican watch. They've had 8 years to do something about, they've done nothing. The Bush admin avoided regulation of banks and mortgage brokers, leaving much of that work to the Federal Reserve, which, under Alan Greenspan, showed little appetite for regulation. By the time Bush's current Treasury secretary, Henry Paulson Jr., proposed an overhaul of regulations governing the financial sector in April, the storm was already brewing.

While CRA may well be part of the problem, it didn't cause the housing bubble.

In a stable housing market, the cost of buying a house would be roughly the same as the cost of building a house. (The exception to this would be in a prime area, such as central New York). But instead, house prices kept increasing, until they were vastly greater than the cost of building a house. And because house pices kept increasing, people saw them as an investment vehicle for their savings, so were prepared to spend more money on housing, which made the price increase more. So the price increases themselves caused more increases, which is a classic bubble, which had to burst sooner or later.

How could house prices keep increasing? Because of planning restrictions that limit the number of new houses that can be built. Without these restrictions, and increase in house prices would stimulate an increase in supply which would bring prices down again. And there'd be no way that a speculative bubble in house prices could get started.

Incidently the UK is facing the same situation -- an average house might cost £180,000. Median income in Britain is about £25,000; so an average person will never be able to afford a house unless prices drop considerably more than they have been doing.

So while the question "Who caused the financial crisis?" is a complex one, at least part of the blame should go to nimbys who oppose house building.

"Republican solution to finacial crisis: blame the Democrats"

Now that's a little bit like the kettle calling the pot black. Tell me good buddy one of the leaders of which PARTY stood up before the Vote in the House and took that opportunity to blame the other?

Is that the Democratic version of a "bi-partison" effort?

As for

"Like or it or no, this crisis has happened on the Republican watch. They've had 8 years to do something about, they've done nothing. The Bush admin avoided regulation of banks and mortgage brokers, leaving much of that work to the Federal Reserve, which, under Alan Greenspan, showed little appetite for regulation. By the time Bush's current Treasury secretary, Henry Paulson Jr., proposed an overhaul of regulations governing the financial sector in April, the storm was already brewing."

I've been watching some videos of Congressional hearings where Republican after Republican pleads for legislation to regulate Fannie Mae and Freddy Mac only to be shot down by Democrats who indignantly claim there was NO Danger brewing and praising Raines for all this good work?

Guess what? Greenspan warned about it. McCain tried to draft regulations, Republicans tried to sign, but the Democratic Leadership scuttled it.

Said the Meanspirited Republicans were trying to SCARE the Public where there was no, repeat No, I tell you 3 times NO Problem

According to them

It's wrong for about a dozen reasons.

1) Nothing forced banks to issue subprime loans. In 1994, as an answer to an increase in interest rates, they chose to create this new category. It existed prior to this, but only exploded after.

2) It confuses the concept of banks, some of which are subject to the CRA, and mortgage bankers, which are not. Though these can sell to banks.

3) There is nothing wrong with Subprime RMBS. As long as they are graded accordingly, sold with the correct insurance, and not allowed to go to funds which require AAA level. Really, treated slightly better than junk.

4) Fannie/Freddie went to higher risk loans in 1995 and 1999, then got knocked around for using them in 2000 by HUD, and limited themselves for a while (not entirely Alt-A).

5) It misses out that HUD upped their requirements in 2004, causing the GSEs to back a larger portion of the market. They were given a looser rein again in 2006-2008.
WaPo link

6) And not just being able to analyze loans - they met this requirement by buying RMBSs at a greater degree than loans, which in aggregate cost more than just the loans. Hey, we were about to do that too! Probably still will.

7) It leaves out that "more mortgages sold, more money it makes" is a motto for the industry. Relying on fees more than income means you care less about risk, only about getting them out the door. And that subprime was not only aimed at higher risk people (as Tim Oren and PD Shaw mention above). WSJ link
Great graphic in that article.

8) Banks did not fail due to GSE investments. And, these were never worthless - they were backed by all of us (muted sarcastic yaaaay! in the background). They failed due to a number of other reasons.

9) It uses a Pirates vs. Global Warming chart to say that CRA changes caused home prices to go above inflation. Regardless of everything else that happened 1994-2000, and 2000-now. One of the largest economic expansions quickly followed by too-low interest rates, and a Giant Pool of Money wanting to invest in something, let alone banks finding a profitable new segment in 94.

10) The new agency proposed to regulate may not have changed anything. It could have - but as we see, in 2004 and beyond, the GSEs were again used as a tool.

11) Calls out the Democrats for blocking it in 2003 - when they did not have control of the House. Didn't come out of committee in 2005 in the Senate, either.

12) Everything else that is missing from this video. RMBS. CDS. CDOs. Poor regulation. Improper grades assigned. No risk mitigation. Mass securitization. The wisdom of the market falling for always going up. Awful regulation relative to the vast amount of risk and economic damage potential. The Fed keeping interest rates too low. Gramm-Leach-Bliley. Mistakes by many homeowners.
If you're feeling more anti-Bush, throw in lower Capital Gains too, and running high debt levels just for spite.

It presents a sliver of the picture.

The only part it is truly right - is that the CRA distorts credit, and that the GSEs make more mortgages available due to the now explicit backing. Not to a vast degree as most studies show someone would move in to fill the gaps, but it would be silly to argue that it doesn't. It's just a matter of if it goes to somewhere you think it's ok.

And that's without getting to everything else in just the political parts, including the fact the author is committing a copyright violation by unauthorized song use, and had his last video pulled for it. Which just tops everything off.

[Links fixed this time -- for formatting instructions, see "To add a live URL" under "Post a Comment". -- M.F.]

"In a stable housing market, the cost of buying a house would be roughly the same as the cost of building a house."

Then why would I ever build a house, were I a developer?

Fannie and Freddie didn't cause this in the mortgages they made, it's the one's they bought (from companies like Countrywide).

There is a great primer on how the Mortgage Backed Securities (MBS) helped turn this into a market wide mess at Big Lizards. That's where, once the Dems got legislation in place to make banks make questionable loans, the banks then tried to logically distribute the risk so as to minimize their risk profile (forced on them by the legislation), then with Fannie and Freddy buying up so many of these loans and thereby encouraging more of these types of loans, a market was created for the MBS's and successive Collaterallized Debt Obligations (CDO) then hid the real risk from buyers of these instruments. Had the legislation never occurred, I doubt these instruments would ever have been invented. I place blame on those who tempt others to do bad things, by putting them into bad situations. In this case, it's the Dems in Congress.

Tell me where I'm wrong.

*the above linked Big Lizards post is really good, and I think he effectively answers all challenges in the comments.

It's pretty simple:

1. Congress uniformly forces banks to all start lending to people bad credit ratings.
2. This causes housing prices to go up everywhere and banks began making money on the houses whether they foreclosed on them or not. (or the people who could not afford them just sold them for a small profit due to the rising market).
3. Seeing how much money this system of sub prime loans was raking in many lenders expanded beyond just helping the poor that congress had directed them to do.
4. Sub primes went from 2% to 30% of all loans ( over a long time period ).
5. Banks who did not jump on the sub prime bandwagon where bought up by banks who where flush with crash from the sub prime loans (WuMu is a good example of this).
6. Bubble busts. Companies go broke. Market forces finally kick in.

Anytime you have a housing boom something like this happens but it's usually on a local scale and generally not all local lenders are part of it. This was a somewhat unique case due to it occurring everywhere at once (due to governmental action) and because of the self expanding nature of the process. Each step up the percentages of sub prime loans (2%,3%,4%...30%) brought more and more wealth as long as housing prices continued to rise(this loans also caused prices to rise). Once they stopped, the good times came crashing down fast.

Bank who make a lot of bad loans tend to go under relatively quick. Due to everyone making the same bad loans all at the same time the market forces that normally stops these bad practices failed to kick in till very late in the process (I.E. right now). This is pretty common for artificial booms/bust cycles.

Government needs to be extremely careful in messing with the fiscal markets as it's very easy to distort the entire market.

A classic example of this Andrew Jackson pet banks. Wikipedia link

Basically Jackson caused a boom by placing the governments money into banks all over the county. Because the same effect happened every at once, a boom followed by a bust badly hurt the US for many years. The road to hell is paved with good intentions.

["Other" Grim -- Choose a pseudonym besides "Grim" -- M.F.]

That's where, once the Dems got legislation in place to make banks make questionable loans
See, we're back to this again. No legislation said "make questionable loans". If at your core, you believe this is what the CRA says - then nothing else matters.
Questionable loans went throughout the industry, including over 50% which came from institutions not covered by the CRA.

the banks then tried to logically distribute the risk so as to minimize their risk profile (forced on them by the legislation)
They were distributing risk before the Subprime growth took off. They distributed risk after Subprime took off. They wanted to include as many loans as possible, as it provided the greatest return - assuming fees paid for many of the basic operations, the money they got back was equal or better than what they put in.
This also doesn't count mortgage only, non CRA covered institutions which went after the market.
And these were wanted

then with Fannie and Freddy buying up so many of these loans and thereby encouraging more of these types of loans, a market was created for the MBS's
RMBS existed before the GSEs bought them up. These organizations also bought far more RMBS than individual loans, total value.
In addition, the GSEs didn't take over more than 30% of the subprime changes until 2005, though it did dominate Alt-A after 1999. See Hud link in previous post.

Tell me - how much of CRA loans made up the entire market? Or subsection of market?

and successive Collaterallized Debt Obligations (CDO) then hid the real risk from buyers of these instruments.
And the bond ratings. See CNN Money link above. Which allowed them a far greater scope of purchasers.

Had the legislation never occurred, I doubt these instruments would ever have been invented.
They would have, as ABS have been around for generations, and are a close cousin to MBS, which are both cousins to CDOs. CRA may have been created before both general industry securitization and the start of subprime growth, but these neither caused nor required CRA, or the GSE expansion. The first Freddie securitization took place beforehand as well.
And that's without talking about the neglected child of the family, Ginnie Mae.

I place blame on those who tempt others to do bad things, by putting them into bad situations. In this case, it's the Dems in Congress.
I never saw this coming. Wait, yes I did.

If someone can get around to it - mind converting those 2 links in post 8 to HTML, then nuking this comment?
[done -- M.F.]

Fact is all the blame is being put on the greed of free markets and deregulation. Another fact is, businesses are all about making money but they are also very risk adverse when it comes to potentially loosing money. They weren't making these creative loans before the mid-nineties and were after then, go figure? The bundling of these junk loans is not the issue to me - originating the junk loans is the issue. Furthermore, the competitive pressures of the free market encouraged other lenders to get creative or loose market share. All of this was reinforced by lenders knowing they could sell their creative loans to the GSE's in the secondary mortgage market because they were backed by the federal treasury.

On a side note, it was not the text of the CRA that made this possible, it was the enforcement of its rating in the Executive Branch. when the legislation was written it was a process based rating - meaning a valid process was in place - Bill Clinton was not happy with that so he changed the rating to a results based test. When lenders had to start showing results they had to get creative to do what they had refused to do because it was too risky.

We are being loved into the arms of the very government that helped create the mess. Our society is on a slippery slope of "Moral Hazard" and I fear there is no turning back.

Nothing forced banks to issue subprime loans.

Nothing except being called racist for failing to do so, by a lobby full of "community" activists. Well, a bit more than than. Having your rating threatened or your merger blocked by lawsuits and complaints to regulators, filed by groups like ACORN.

Couple of comments on the video. It's clips from this 10/6/04 hearing of the Committee on Financial Services' Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. That link is intresting; it goes to a web page with two panes. The upper is the hearing transcript; the lower is an Index of Members with links to all of their statements. I checked Christopher Shays (R-Ct) and found his remarks on the transcript. Interestingly, I didn't find those of Gregory Meeks (D-NY). Presumably he edited out some of what he said prior to publication.

A list of the dramatis personae, and "where are they now."

Cassandras

• Richard Baker R-La -- 1/15/08: Baker leaves Congress to lobby for hedge funds

• Ed Royce R-Ca -- Incumbent, running for re-election in 2008.

• Christopher Shays R-Ct -- Incumbent, running for re-election in 2008. Just One [evil Republican] Left In New England

• Don Manzullo, R-Il -- Incumbent, running for re-election in 2008.

Enablers

• Maxine Waters D-Ca -- Incumbent, running for re-election in 2008.

• Gregory Meeks D-NY -- Incumbent, running for re-election in 2008.

• (William) Lacy Clay D-Mo -- Incumbent, running for re-election in 2008.

• Artur Davis D-Al -- Incumbent, running for re-election in 2008.

• Barney Frank D-Ma -- Incumbent, running for re-election in 2008.

Regulated and Regulator

• Franklin Raines -- Forced to resign as CEO of Fannie Mae. Now a wealthy private citizen and volunteer Obama advisor.

• Armando Falcon, Director, Office of Fed. Housing Enterprise Oversight -- 4/6/05: Top Regulator of Fannie Mae and Freddie Mac to Depart

OpenSecrets: All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

- Barney Frank D-Ma -- #26, $42,350
- Ed Royce R-Ca -- #48 from the top, $28,600
- Maxine Waters D-Ca -- #80, $17,800
- Gregory Meeks D-NY-- #104, $14,000
- Artur Davis D-Al -- #111, $11,750
- (William) Lacy Clay D-Mo -- #127, $10,250
- Christopher Shays R-Ct -- way down, $2,500
- Don Manzullo, R-Il -- way down, $250
- Richard Baker R-La -- not listed

Fannie and Freddie lavished a lot of (government) money on lobbying in total, but the sums spent on these particular players were modest. The names at the top of the OpenSecrets list make for somewhat more interesting reading.

The government MADE ME MAKE A FORTUNE on sub-prime mortgages and MBSs during the bubble's rise!! I tell you they MADE ME!

Anyone here ever read David Hackett Fischer's Price Revolutions?

He studies prices and inflation from the early Middle Ages to the present time using the methods that historians study such things. He comes to the conclusions that prices remain remarkably stable for long periods of time, punctuated by "price revolutions", periods of vigorous inflation. His conjecture is that the price revolutions are the result of economic growth bumping up against limited resources, with resources defined by the technological capabilities of the particular era.

The book is really steaming along until the very end, where he proposes a form of wage and price controls for the current era of general levels of inflation (which are not the long-term historical norm). I guess he is one of those liberal academics who cannot help himself -- he does all of this brilliant scholarly research and then comes out with a brain-dead policy prescription at the end. The reason I say brain-dead is that in advocating price controls, he didn't read any of the book that he just wrote. The whole point of the historical account is that these price revolutions occur when societies become resource constrained, and historically there was very little anyone could do about those periods of price inflation, and not for lack of trying.

I say that the housing bubble is a symptom of a price revolution. We can talk all we want about Barney Frank and George Bush, and ACORN, and Fannie, and Freddie, but if it weren't one bunch of "crooks" doing "A" it would be a different bunch of "crooks" doing "B." There is an underlying economic condition driving this.

The idea that by better regulation or by better people we could have avoid all of this is akin to saying that with a better FBI and CIA we could have avoided 9-11. If they had thwarted 9-11, it would have been something else, because the terrorists are determined, patient, and not to be thwarted indefinitely.

The resource constraint, of course, is narrowly oil and more broadly energy. As someone who occasions The Oil Drum when I can stomach their relentless pessimism and glee over high oil prices as a vindication, the problem is not so much oil reserves but oil production rates. Given current technology, geology of the fields, and level of capital investment, we are pretty much constrained right now at 86 million barrels per day of production, and world economic growth has bumped up against that. The argument is that there is no spigot that the Saudis or anyone else can turn right now even if they wanted to.

Those wacky Oil Drum people are pretty sure we are at peak oil and production will only decline. Optimists (they have a language, I believe the term is "cornucopian", or people who believe the "Earth has a creamy nugget of oil", and these terms are written and spoken dripping with contempt with anyone who disagrees) believe we can get production up to 110 MBPD, with more than enough oil to go around, but all of this will take time and large capital investments, and a friendly enough political climate that this investment won't get confiscated (Chavez? Medvedev? Putin? Anyone?)

I know it is not to be said that the Iraq War was about "oil": the Left is loath to think that their cute Suburu Foresters with the "No Blood for Oil" bumper sticker run on, you know, gasoline, and the Right doesn't want to admit it either. But speaking hypothetically, the way lawyers do, if the Iraq War was about oil, the lead time to bring increases in Iraqi production, not only in terms of ending the insurgency but also in drilling all the wells and building all of the pumping stations and oil-water separation plants, all of this takes more time than our election cycles allow. We want our prosperity NOW, and if we don't get prosperity NOW, we have a FAILED presidency, and so on.

So you ask me, what does the price of oil have to do with mortgages? People are getting squeezed, the high price of gas, home heating oil, food along with the rise in interest rates to stave off the general price inflation resulting from same is why a lot of people can't pay their mortgages, the price of houses goes down as defaults go up, which snowballs into more defaults. Oil may still be a "small" slice of our economy (700 billion out of 13 trillion), but everything economic is decided "on the margin" anyway. The economy is based largely on adding value to cheap resource inputs, but when those resources are not quite so cheap anymore, well, you get the picture.

Trying to get some numbers on this; quick search brings up this article from 2001.
Excerpt: _"... end of the first quarter of 2001, Fannie Mae's CRA acquisition volume totals $10.06 billion.
...Fannie Mae has pledged to transact before the end of this decade more than $20 billion in specially-targeted CRA business and to finance over $500 billion in CRA business altogether."_

So, thats a lot of finance, but not likely to account for anywhere near the volume of bad debt on everyone's books as of now, even assuming the whole lot of FNM CRA transactions has gone red. Which is unlikely.

I wouldn't expect a partisan attack video like this to be balanced, but it's still revealing as to our political culture.

A visit to the transcript makes clear that the five Enablers weren't quoted out of context. For preconceived ideological reasons, they came to the hearing determined to learn nothing from regulator Falcon, and determined to paint him as a devil. So that's what they did.

Four of the five show up in Google News as making wise pronouncements about the crisis' current iteration. Any apology or admission of error? Nope. Any evidence that any of them have learned anything? Nope. Barney Frank is particularly shameless; he's been an important player in turning the Paulson Plan into legislation, contributing his toxic ideas and down-is-up history to the mix. How uniquely charming to hear Speaker Pelosi praise him by name.

Like that marginally qualified candidate on the party's November ticket, this is another Rohrsach blot. Nothing enrages stalwart opponents of A more than reminders of the pre-train-wreck happy talk about B. Cries of "Hold the Scoundrels Accountable!" fill the air. But although most of these same folks are sympathetic to C, the spectacle of what ought to be humiliating declarations of poor judgment leaves them strangely unmoved. Bored, even. Accountability? What's that?

Key:

A The 2003 invasion of Iraq / Politically-correct social engineering

B "democracy, imposed promptly and economically" / "the persecution of the saintly Franklin Raines"

C Politically-correct social engineering / The 2003 invasion of Iraq

I have nothing to add (as a scientist, and someone who's spent alot of time with math, economy still seems like magical fairies and pixie dust to me). But I just wanted to say that a vast majority of the comments on here have been thoughtful, well-argued, and give plenty of back-up material. In short, the best posting I've read in awhile.

Except I will pick on Glen in #14. Links please?

So the Republicans just woke up last week to realize how much havoc those evil Democrat welfare policies could wreak on Wall Street? After controlling government for 8 years they just let it fester? Why?

I find that a little hard to swallow.

Even I find the Congressional Republicans newly rediscovered reverence for the market and fiscal responsibility nauseating. Its a little late in the day to start preaching about seat belt safety when you're barrelling into a brick wall.

There is plenty of blame to go around. This was the most despised Congress in history before this fiasco. We need to really start looking at our system at this point and wondering just what it would take, even in theory, to turn over the Congress. Between gerrymandering, campaign finance 'reform', etc, the one things these people have executed flawlessly is Incumbent Protection.

We need a Non-partisan Anti-Incumbent party, for real. All you have to do to join is swear to always vote for the challenger in the primary. That way nobody has to cross party lines to unseat the incumbent. So few people vote in primaries it wouldnt take all that much to really monkey up their little game.

Here's my layperson's take on the genesis of the residential mortgage piece of the current financial crisis.

• Over the long term, residential real estate prices are constrained by the monthly mortgage payments or rent that occupants can afford to pay. If the "human capital" of a market supports median wages at level $X, then median monthly mortgage/rent will not sustainably rise above 30%-to-45% of $X. Sailer

• "Monthly payment" used to mean "of a fixed-rate 30-year mortgage." In the course of the present bubble, it has come to mean other things. These other things include "of the first year of an interest-only adjustable-rate mortgage that resets at year 3, when principal repayment begins, too."

• These financial gimmicks are unsustainable over the long term--the financial meltdown started incubating the day the owner/occupant signed the papers at the broker's office. Unless... real estate prices continue rising into the indefinite future! In that case, before the clock strikes three and the house turns into an unaffordable pumpkin, the owner/occupant can refinance, pushing the day of reckoning three years farther.

• The Bailey Building and Loan Association would have been acutely aware of the risk of taking such loans onto its balance sheet. But community S&Ls don't hold many mortgages any more--Fannie Mae, Freddie Mac, and their correspondents do.

• In a sense, the point of inventing and popularizing mortgage-backed securities was to increase liquidity and tradeability of "mortgages" by replacing George Bailey's judgment with those of Moody's and S&P. Unfortunately, as these agencies have ruefully admitted, their AAA, AAa, AA, etc. ratings matrixes were based on the premise that real estate prices would always rise and never fall!

• Wall Street and Washington (Congress, D & R, and Executive Branch officials and regulators, D & R) ended up creating a system where all the players were rewarded by focusing on their small piece of a segmented transaction. Nobody made money by looking at the big picture and exclaiming, "this can't continue." (Except those Soros-style short-sellers who made billions by timing their bets correctly.)

This house of cards is the lens through which to view the video. Since Fannie and Freddie were golden egg-layers for investors, and since their politician/executives had already subverted them, why not engage in a little Social Engineering to promote the Undisputably Excellent Policy of Greater Home Ownership By Minorities? The CRA was born and repeatedly redefined in this spirit. Sailer again--plenty of blame to go around.

Did cronyism and political correctness cause the current financial crisis? Inasmuch as no single factor was mostly responsible, obviously not.

Did cronyism at Fannie and Freddie combine with the implementation of unrealistic, ideology-based legislation to make a bad situation worse?

In my opinion, the answer to that one is obvious, too.

I'd like to note that the "Grim" in #11 #10 is not the Grim who wrote this post, or normally comments here.

I don't think it's a case of spoofing, though, b/c it looks like a serious comment. Just a guy who happens to have the same name. :)

[ #10 now reflects this point -- M.F. ]

I took an MBA at a reputable regional school here in California 1995 to 1996 (Cal Poly). One of my economics professors had held a position in the Reagan Administration's Treasury department. He would go on and on about the moral hazard of Fannie Mae and Freddie Mac and GSEs in general and how it would all blow up someday.

The legislative and intellectual history is clear that moderate to conservative Republicans have seen this problem coming and have attempted to rein in the GSEs but have been repeatedly blocked.

The CRA was a bad idea on the face of it - that was clear to me when Carter first proposed it. Once liberals realized what a money bank to buy votes with - for a noble cause! - they milked it. The management accounting scandals are an example. Banks and mortgage lenders were expected to make a quota of substandard loans and were penalized if they didn't.

As to how those bad loans could cause so much damage, one need to look at the method of money supply creation, M2 in particular. Banks multiply money supply by making loans. Bad loans are write-offs against the regulatory capital. As a rule of thumb, 10% bad loan losses and the bank is closed. That's why the big worry - more losses in mortgages means that the money supply sharply contracts which means credit sharply contracts. Imagine a world with NO credit. No one buys houses, no one buys cars, farmers can't borrow to buy seed or fertilizer. Remember too that AIG held $600 million of FM stock which was made worthless by the recent takeover. That's a non-trivial hit on the balance sheet.

Frankly, Democrat apologists claim Republican and Administration "bad economic policies" are at fault or were major contributors but what specifics can they name? All I hear are generalities as if somehow the business cycle would have disappeared except for the Evil Republicans. The worst I've heard is that the Federal Reserve Bank held interest rates TOO LOW of late - as if Barney Franks would have applauded HIGHER rates.

Once the market rules were set by Congress, individual players play the game to win under those rules. Certainly some of us resisted hopping on the gravy train - I'm still a renter because I've long held doubts about the realism of the local California housing market. If big money was being made in flipping houses, people will flip houses - duh.

While government action to ensure credit markets continue to lubricate our economic system is probably required, if Barney Franks is involved in writing any legislation to that effect, I'll oppose it a priori.

Before I get to the video, let me point out that the GOP double-cross was ready. The RNC had anti-bailout anti-Obama ads in the can blaming the Democrats. They are even running them, having assumed that the package would pass.

Now you see why Pelosi was correct to slip in the triple-cross. If we have to drink bitter medicine, we need lots of GOP fingerprints on the spoon.

"Imagine a world with NO credit."

Dont have to, it was the proximal cause of the Great Depression. Whats astonishing is that despite that being well accepted by economists and history professors, we're still tap dancing on this land mine.

"Now you see why Pelosi was correct to slip in the triple-cross"

Now there is a profile in courage. Its always good to remember that Democrats dont need any Republicans votes to pass this bill. If they truly believe it is necessary and right but dont want to risk the ire of the voters, thats just pathetic to say the least. At least the House Republicans have the argument that they DONT believe in the bill, so of course they dont want to pass it.

But somebody better do something, and soon.

You know, Mr. Lazarus, until yesterday I had honestly believed the bailout bill was sure to pass. It seemed like a shoe-in: the leadership of both parties was apparently on board (Bush, Pelosi), the presidential candidates were both on board, Wall Street desired it earnestly, and the crisis was apparent and bad enough that even the hardcore politicians like Gingrich and Pelosi seemed sure to put aside partisanship and just make it happen.

Now we see that both parties actually planned to double-cross each other, and did so with such force that the vote actually failed on the floor. As others have remarked here, that never happens.

I think the Iraqi parliament is starting to look pretty good by comparison. At least they can manage to work together on the true do-or-die issues, and at least when they find a compromise, they stick to it.

Maybe its because the consequences of failure are much more personal for them: they know that if they don't make it work, you could see family members killed in renewed violence, and face assassins yourself. Our Congressmen are rich and insulated from both poverty and violence, and so they play these games all the way to the edge of the cliff.

Alchemist -

Not sure what point you want specifically linked; the point I especially want to make, about lenders being accused of racism for resisting subprime loans, is discussed in this 2002 article by Howard Fienberg. The Treasury department attempted to rein in FM the following year.

Make no mistake - THIS WAS A SYSTEM FOR PUSHING SUBPRIME LOANS, THE MORE THE BETTER. Not preventing them. This is why people who accuse regulators of not doing their jobs are wrong - they were precisely doing their jobs.

BTW, I say again, it smells like Barney Frank in here.

Democrats, who Pelosi tells us believe in markets, are taking every opportunity to blame the market for this.

Libertarians, Free Marketeers, and anybody to the right of Friedrich Engels: you'd better find your balls and get them screwed on, fast.

Yep, that's what I was looking for. Just wanted to make sure there was substance and not just innuendo.

Before taking AJL's word for it, see the video he links in #26. John Cole's comment is

While the Republican Leadership was shaking hands and allegedly rallying their troops to vote for the plan, they were already cutting ads to bash the Democrats. This is why only Republicans in safe seats and leadership positions voted for it. Yesterday, they went out and blamed Pelosi for injecting partisanship into the process, causing the bill to fail, when actually they wanted it to pass so they could… use it against the Democrats.

That's a plausible interpretation, but not the only one, in my opinion. As I heard it, the RNC presents an image of the "Wall St. meltdown" and then segues to bashing Obama for having plans to spend "a trillion dollars" for programs other than the bailout. In other words, the RNC's talking point is that Democrats want to spend too much on Democratic favorites.

Gee, the sort of hardball tactics that the Virtuous Side would never engage in. Shocking.
/sarc

Glen: Most libretarians I know gave up when they elected Bob Barr as their presidential candidate. Some went to Obama, some went to McCain.

The problem the House Republicans dont seem to understand as they make this line in the sand (again, waaaay too late to make a difference) is that the momentum towards Big Government naturally flows in one direction. IE- the bigger the crisis, the more power that will ultimately be ceded to government to deal with it. Even, perhaps particularly, if Big Government is the culprit in the first place.

Its rather amusing to see Pelosi try to talk about anything in terms of market forces, and being in favor of free markets is a joke. The idea that you can talk about this crisis in terms of Fanny Mae and Freddy Mac as though they were some form of out of control natural market forces would be funny if it weren't so troubling. Its not disseminating, she really doesn't understand the distinction.

I would try, but google pulled it because of "copyright" infringment by the user because of the music it used in the video.

Hmmm, I wonder what kind of political contributions to Obama, their CEO has been making? Could it be exclusivley to Democrats?

I must recognize the outstanding leadership provided by Chairman Barney Frank, whose enormous intellectual and strategic abilities have never before been so urgently needed, or so widely admired.

James Simpson has a lengthy piece at the American Thinker that links it all together.

His premise is the entire credit crisis is the pay off from the American Lefts three decades of work using the Cloward-Piven Strategy to force political change through orchestrated crisis.

[Link Fixed. See instructions just above the comment box -- it's a little unusual, and people often need a few tries to get it to work right. -Grim]

The CRA is part of the problem, but it grew well beyond the structural weaknesses of lending into poor communities. However, banks have to follow the CRA provisions and are held accountable by the Fed and Comptroller of the Currency auditors on their CRA commitments.

Having said that, Wall Street ingenuity in developing financial derivatives used the basic CRA structure to evolve ridiculously weak and risky instruments. As typical, any paper profit generates big bonuses with little if any accountability.

Politically, I have seen clips where McCain warns about Fannie Mae & Freddie Mac 3 years ago. In contrast, here is a video ( http://www.youtube.com/watch?v=_MGT_cSi7Rs ) showing Congress protecting their positions (ie votes) by allowing these agencies to run wild. While obscene bonuses to Wall St execs do not endear them to the public, how about some public outrage directed at Johnson, Raines and their congressional enablers.

There is blame on both sides, but note that Dodd and Frank, both Dems, are knee deep in it. Dodd in particular has some serious stink, given his committee position and relationships with key players in light of campaign contributions and sweetheart deals he received from those same players.

I agree with those that say an exec of a failed enterprise, especially one that has to be bailed out by the government, should not receive a disgustingly huge payout. In addition, the government program should be a work-out, not bail out, with the main benefit of any recovery going to the government, not the gamblers and "mismanagers" who caused the current financial debacle.

Mods: Naked URL on aisle 37...

Fixed.

One narrow problem I have with the former video is the discussion of the citibank lawsuit.

Citibank was sued for offering different loan terms to whites and blacks. This is basic Civil Rights Act of 1968 stuff. Disparate treatment of borrowers on the basis of race, religion or gender. Obviously, if whites were getting risky sub-prime loans, the effect of such a lawsuit would be to get risky sub-prime loans for blacks. But I think equal status under the law is a far different issue than those raised by the CRA.

P.S. Since the case was settled, we don't know one way or the other whether citibank violated the law.

Can't believe AMac is so partisan as to publish his list. Every party was so deep in this mess trying to point fingers only reminds one of the cartoon of Tammany hall:
gothamgazette.com/graphics/Tweed2.jpg

hoju_saram (#5)

why is it that America was the only place to suffer a financial collpase because of it?

Firstly, as usual, America isn't the only place where bad things happen, but the only place where bad things happen and it is known by the public. The rest of the world simply sweep their problems under the cover of the American crisis.

For instance, the European Central Bank keeps accepting Spanish bonds linked to mortage debt, that is, continues to finance the Spanish system of regional banks, controlled by politicians, avoiding its collapse. It has been doing so since last January.

I agree with the video. IMHO the expansion of credit, the cause of the problem, was triggered by politic measures, politics following the advice of bankers.

Robert M #42 --

The list in comment #15 contains the names of the Representatives whose CSPAN clips from the subcommittee hearing are the subject of Grim's post.

That video, pulled off YouTube because of the use of copyrighted songs in the soundtrack, can still be viewed here.

Suppose four Representatives were supportive of a bank regulator trying to do his job, while five other Representatives insisted that nothing was amiss--and that wicked motives were the best explanation of the trouble that OFHEO had caused Fannie Mae.

Then suppose that the claims of financial irregularity and of self-enrichment by management turned out to be true, and that the company's officers resigned in disgrace.

Further suppose that a couple of years later, the GSA collapsed because the misgivings expressed by the four Representatives and ridiculed by the five other Representatives turned out to be prescient.

It would be odd to blame all nine equally for this turn of events, wouldn't it?

Well, Speaker Pelosi may have secured her place in the history exams of the future: Who was the most disastrous ever...

As for the Republican insurrectionists: they'd better hope a deal can me made quick that addresses the issues, or they may save their seats in November at the price of destroying their party for a generation (or two).

Executive rewards, moral hazards, histories of lobbying and narratives of misbehavior in Congress and on Wall Street.
It's all beside the point right now. (Though by heck it warrants a thorough forensic examination and tubs of tar and feathers later.)

Right NOW the US is looking at bank asset write down of $500 billion done and likely $500 billion more to come.
One trillion dollars.

As banks lend about 12 times capital base that means a reduction in lending of around $12 trillion.

That is, approximately the entire US annual GDP.

Or roughly the current total US private household debt.

It gets worse:

As the credit markets lock up, the forced sale of assets to meet capitalization requirements is being made in a market where there are very few buyers, at least in part because even those willing to buy can't raise the money. (Unless your name is Warren Buffet)

So the nominal market value of the banks remaining assets marked to market drops further. Negative feedback.

Miss Bubble, meet your partner for this dance, Mr Death Spiral.

It gets worser:

Money is drying up in ALL the money markets.

Treasury 3 month bond yields are about 0.8%; 1 month bonds about 0.16%; last week they were negative for a while.
Translation: investors are so f'in desperate to get out of other instruments they're willing to go treasuries at a guaranteed LOSS.

The volume of trade in credit instruments lots of companies use to fund wage payments, inventory purchase, etc. is down about 20% on last year and still dropping.
Pretty soon growing numbers of companies are not going to be able to transact business normally: or even AT ALL unless they've got cash in the bank. And if this keeps up, cash on hand under the d*mn mattress.

How long before some of the shakier corporations fall over? (Ford? GM?).

To avoid a disastrous credit squeeze the banks have to be recapitalized. There is no way round that.
And as of right now, the private sector will NOT do it. No way round that either.

Unless I'm being really dumb and missing an easy out its EITHER: Govt. funded bank recapitalization (and try and get a scheme that's likely to avoid the taxpayer taking a hit net over time)
OR: $12 trillion credit squeeze and we party like it's 1929.

I see it like John does. The sequel is that banks start failing like dominoes and the FDIC instantly has to go to the treasury for cash, and LOTS of it. This results in rampant inflation, and everybody who thought their money was federally insured soon realizes that when the government simply starts printing currency, the currency is worthless.

And all those annoying jerks that have been pushing gold on me for ten years end up owning the country. Ughh.

I don't see it the way Mark and John do. Or rather, I can squint and kinda make it out on way on the horizon, but I don't think that's where we're going to end up.

On the flip side, I think there exists a possibility that the bailout plan gets us to someplace worse. As in, the Fed throws a ton of money at the problem buying bad paper, but the credit markets remain frozen. Then we've spent a whole bunch of money (and all of the Fed's authority), and we still do down the tubes.

BTW, a question about the bailout plan: If the bad paper is sold to the Fed at market prices, then there's no change in the bank's balance sheet. So how would that resolve the crisis? Conversely, if the paper's bought at above market prices the taxpayer gets screwed. Surely $700 Billion dollars could be used as a more effective stimulus than overpaying banks for bad paper. Isn't this just the broken windows fallacy, but with really big ($700B) windows?

And I recognize the theory that the paper is undervalued and the market is being irrational. But the corollary is that the market can remain irrational longer than you can remain solvent. What's the worst-case scenario if we test (and prove) that corollary using the Fed's bankroll? Now that's a Great Depression scenario...

#15 from AMac
OpenSecrets: All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

#44 from AMac
Suppose four Representatives were supportive of a bank regulator trying to do his job, while five other Representatives insisted that nothing was amiss--and that wicked motives were the best explanation of the trouble that OFHEO had caused Fannie Mae.

Three problems with these amounts.
Problem 1) Amount does not count Director and Lobbyist contributions, as a Director may have another job they put down on the donation form. So, did he give his money a Dir of FM or Dir of John's Fertilizer?
Problem 2) Does not include spousal donations, which can often increase the number, and per-plate dinners
Problem 3) Rates money given by a secretary at the same rate as an Exec VP

Further suppose that a couple of years later, the GSA collapsed because the misgivings expressed by the four Representatives and ridiculed by the five other Representatives turned out to be prescient.
See link in WaPo link in post #8, which had HUD regulations changes after that hearing, going to more risk. Also changed for more risk in 2006 and 2008. If you make a statement, and things which you do not control change to take something that weakens your statement - should you be held to it as being wrong?
Couldn't you also argue that people who were later proved right were incorrect at the time, though became right through actions not their own and not related to their statements or knowledge?

#25 from Whitehall
The legislative and intellectual history is clear that moderate to conservative Republicans have seen this problem coming and have attempted to rein in the GSEs but have been repeatedly blocked.

and

#29 from Glen Wishard
The Treasury department attempted to rein in FM the following year.
You guys too. Things changed after 2004, for the worse, with the full knowledge and approval of the administration. It was used as a tool to boost the market.
In addition, they were not blocked as much as never coming out of Committee in the Senate. Very different.

Dave #48 --

Re: Contributions to Representatives from Fannie and Freddie--I agree, the actual amounts could be higher, for the reasons you list. My opinion is that

• This is an illustration of Crony Capitalism; execs giving taxpayer dollars to legislators to benefit, er, execs.

• That said, the amounts are not that large, and extended to FNMA's critics as well as its supporters. I don't think the embarrassing enabling comments we hear on the video are due to corruption, but rather to ideology.

See link to WaPo in post #8, which had HUD regulations changes after that hearing, going to more risk. Also changed for more risk in 2006 and 2008.

The hearing was in October 2004, the linked article refers to changes made earlier that year, I believe. Here's the NYT describing the risk of promoting subprimes in 1999. The WSJ editorial board has been flogging this point for many years, if not decades. The themes--the perils of (1) moral hazard and (2) "helping" the disadvantaged through relaxed lending standards--have stayed the same.

If you make a statement, and things which you do not control change to take something that weakens your statement - should you be held to it as being wrong? Couldn't you also argue that people who were later proved right were incorrect at the time, though became right through actions not their own and not related to their statements or knowledge?

By all means, the Congressional Enablers caught on tape should make this claim. (WSJ on Barney Frank's record.) They should hold a joint press conference to announce the fact. Then they'll have two YouTube videos to embed on their House home pages.

SG #47:
re. paper and prices. A lot of the sub-prime junk in SIV's can frankly be left to rot. They're already seeing default levels of 30% plus. Buy them at fire sale prices or not at all.

But right now there is a lot of prime assets that banks kept, not the crud they sliced 'n' diced and fed to SIV's, that's being priced at levels that imply absolute financial meltdown. These could readily be purchased at sub-par and still recapitalise the banks levels sufficient to avoid disastrous credit contraction. Especially if you had an emergency modification of the mark-to-market rules.

I'm thinking of securities, with low risk borrowers, that if purchased at 70% of original valuation would need a default of around 70% of the loans AND a value fall in repossessed property of 50% for the Treasury not to make money.

Frankly, if the US prime property market is getting default rates and price drops at that level, then you're VSF whatever. And that 70 cents on the dollar is above the current market values we're seeing.

"...the market can remain irrational longer than you can remain solvent._
True, for private players.
But if the irrationality is bad enough and prolonged enough to outlast the capacity of the Fed to fund the holding at reasonable cost... well, in that case the Four Horsemen of the Econoclypse have come to town anyway.

Surely $700 Billion dollars could be used as a more effective stimulus...
Likely it could have been, if people had begun setting up a reconstruction package say 12 or even 6 months back.
Now?
Well, can the govt. set up an alternative to the current banking system and money markets, in a matter of weeks, preferably days, that can supply the necessary minimum credit flows to consumers and above all businesses required to maintain a functioning economy? No way.

I don't think the embarrassing enabling comments we hear on the video are due to corruption, but rather to ideology.

I agree, in principle, but it's hard to tell the difference at times between corruption and an ideology devoted to buying votes with loot; between a social welfare program - which is what this was, call it as well-intentioned as you like - and the deliberate and cynical creation of a permanent underclass.

Abolition for GSEs, accept nothing less.

In addition, they were not blocked as much as never coming out of Committee in the Senate. Very different.

Very different from what, please? New York Times, September 11th, 2003 -

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago ...

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Your revisionism doesn't even rise to the level of revisionism. And the Bush White House "fully approved" of more of the same in 2004, plus an accounting scandal, too? Why, because everybody knows they're just evil?

When the house is smouldering, and risking confligration, does it matter who set it, or why, or the ideology of how the water is obtained?

That is what we need to be asking ourselves. The risk is there, and we are aren't talking 1 in 1000. No-one knows the actual probability, but the consequences are FAR beyond what most people imagine when the overused term 'crisis' is invoked.

[Corrected "are" that should have been "aren't". --NM]

"The risk is there, and we are talking 1 in 1000."

Gerr, we ARENT talking 1:1000. Its surely orders of magnitude more likely than that.

Mr Buehner: Fixed the typo for ya.

#51 - Glen Wishard:
"Abolition for GSEs, accept nothing less."

My problem with blaming the CRA for the whole mess, is that it was only the straw that broke the camel's back, even if it did take a few years to do it. It was a very good camel.

Fannie Mae was created during the Great Depression to manipulate the housing market. That worked by getting homes selling again. It should have been slowly eased out of the market instead of encouraged to grow. But it came in handy after WWII also.

Where it really came in handy was in making the federal deficit look good (well, better at least) in 1968. That's when a Democrat-controlled congress and a Democrat president created GSE's, including Freddie and Ginnie to help cover Fannie's "duties". This, if I understand correctly, was done to take the liabilities of Fannie Mae off the Federal books, while still funding Fannie and her two new offspring.

Everywhere and everywhen you look, Fannie Mae has Democrat fingerprints all over it.

This is not to say that Republicans didn't use GSE's to their advantage whenever possible, or that they did enough to rein them (and abuse of them, including CRA) in, it's simply saying they didn't create them.

"And I recognize the theory that the paper is undervalued and the market is being irrational. But the corollary is that the market can remain irrational longer than you can remain solvent. What's the worst-case scenario if we test (and prove) that corollary using the Fed's bankroll? Now that's a Great Depression scenario..."
-SG

There's nothing undervalued about the paper SG, it's garbage. That's why private money won't touch it. Which then explains why the banks are now scurrying to Nanny Washington. Furthermore, the bloated housing values are attempting to correct (downward) to where the fundamentals suggest they should be. Nothing will change this, least of all a 700B giveaway to the reckless Wall Street hustlers.

To second what you've noted about the credit markets After The Giveaway (ATG), there's little to suggest that the atmosphere will change much. Billions have already been shoveled into the surviving Wall Street titans via the Fed window with little detectible increase in general lending. It's a good bet that ATG that money gets hauled to safer shores overseas and/or plowed into the commodities market--driving up fuel prices just in time for winter. The American consumers are maxed out and tapped out, a fact well known by the banksters so this is their last best hope for a windfall to tide them over after the crash. Let's hope they fail.

Interesting that the National Association of Homebuilders has consistently donated to Republicans over Democrats 60% to 40% (at least), until this cycle where the gap has closed somewhat.
Open Secrets link

I'm not going to argue anything because everyone has already made up their mind, but I see a combination of bad goverment regulation and market irrationality at work. I don't think you can blame any single cause.

1) Fannie Mae and Freddie Mac were quasi-governmental institutions which had been essentially blessed with a govnernment backed monopoly.
2) The regional housing market was completely screwed up. Homes in California, for example, could not possibly be worth 5-6 times the value of comparable homes in Tennessee, North Carolina, or Alabama. The economy in the South as been too good for too long and the quality of life has become too high and the movement of people into the South too strong to imagine that its California of all places that should be having the steep rise in home prices. The fact that the prices of housing in certain markets is in free fall suggests that this is the case.
3) Any time the value of something increases much faster than the growth in the economy as a whole, whether it be stocks or real estate, the comodity is probably being overvalued. This is especially true when the relative supply and demand aren't changed much. For example, in a state with constant falling population if the value of real estate is increasing more rapidly than the economy as a whole, it ought to be clear something is being overvalued.
4) Easy credit inflates the value of goods by increasing demand. Increasingly easy credit inflates the value of goods increasingly fast until you hit a market shock when demand crashes due to either failure to repay the loans and/or choosing to buy comparable goods (easily available low priced housing in more rural states).
5) If the problem is debt burden and easy credit, borrowing our way out of the problem isn't a solution.
6) Free market capitalism profit taking combined with government backed insurance against risk is I think we will all agree the worst possible combination.
7) Wouldn't the recent collapse suggest that the market had overprised the services of brokers? Can we imagine some reasons (changing technology, etc.) why that might be true? The smartest guys in the room once again turned out to be overvaluing their services. Surprise. Surprise.

I tried working through an example of the sort of mortgage that brokers, bankers, Fannie Mae, and investors found to be unobjectionable and a good deal all around. I picked Los Angeles in 2006, the tail end of the boom, when warning signs were all around.

In June 2006, the median asking price for a single-family residences and condominiums (combined) had already flattened, and was holding at $579,000. (HousingTrader.net)

Suppose John and Jane Doe paid 95% of the asking price ($550,000; ~$30,000 down), and, like about 40% of LA buyers (NYT 7/15/06), got an interest-only loan. If the Does' credit score qualified them for a subprime loan, they might have chosen a typical 2/28 ARM. The first two years of interest-only payments could have been locked at a teaser rate of 4%, equal to the average initial rate of a 1-year ARM.

Mortgage payments through the reset in June 2008 calculate to $1,830/month. To that, add property tax of perhaps 2% (~$1,000/month) and insurance of perhaps $200/month. Total: about $3,000/month.

Based on today's interest rates, this ARM would have reset to 7% or higher, depending on how it was indexed and capped. 7% works out to principal & interest of $3,740, or a total monthly payment of about $5,000.

If the Doe family was willing to devote 50% of their pre-tax earnings to sheltering in this median home, they'd have needed to earn $6,000/month. That's 160% of the median family income in LA of $44,500.

When the mortgage reset this summer, the Does would have had to devote 83% of their pretax income to mortgage/taxes/insurance.

All of this information was known in 2006 to the lenders, except the exact interest rate that the ARM would be raised to.

I'd like to see how the mortgage and banking industries defend these practices as ethical. Or prudent. Preferably before hearing the phrase "what's done is done" and moving on to the bailout.

If the Does haven't defaulted yet, they owe that initial $550,000 on a home that is now valued at $399,000.

Are there parallels between the Doe family's economic strategy (#60) and that of the United States?

How do our elites hope to obtain the loans necessary for America’s survival (at least $1.5 trillion in 2009)? We can only guess. Since private inflows have almost stopped, there are several reasons foreign governments might provide the vast sums of cheap loans we need.

(1) Hold the world hostage. As in “loan us the money or the world economy burns.”

(2) Hope that they see this as in their best interest, and that they take no measures to prepare themselves for an eventual day of reckoning (as we certainly are not).

(3) Trust to the kindness of strangers.

The fact that the prices of housing in certain markets is in free fall suggests that this is the case.

I think this point has been far too overlooked in this thread. If you take out California, Nevada, Arizona and Florida, you probably do no have a housing crisis. Link Looking for solely national explanations ignores states like Texas with few problems and counties like Spain that have experienced their own crisis that can't have been caused by CRA.

The lead item invites comment on a You Tube ad for one of the presidential candidates, ostensibly on the validity of its 'follow the dots' approach to why the 'other' candidate is to blame for what ails the economy. One more time, commenters with much more knowledge than I regarding the complexities of the credit crisis, patiently explain that it isn't that simple or one-sided. Instead of this 'process detail' based analysis, I want to invoke finger pointing rule number one in a democracy - when bad sh#t happens, its our collective electoral fault. I see the current mess as most likely yet another instance of benign neglect. A failure at the level of the most fundamental oversight required to keep a democracy functioning - that of the people over the selection and monitoring of their elected representatives, and in turn the agencies created to do their bidding. Its hard work to obtain and then analyse the information needed to put and then keep a representative administration in place. It's almost as hard as keeping a check on ones credit purchases, to ensure that one doesn't spend more than one makes. I would suggest that collective shortcomings in both these areas are a more legitimate target for all the finger pointing associated with the current state of affairs.

ahh yes, the "bail out" that isn't.

New Tax earmarks in Bailout bill - Film and Television Productions (Sec. 502)
- Wooden Arrows designed for use by children (Sec. 503)
- 6 page package of earmarks for litigants in the 1989 Exxon Valdez incident, Alaska (Sec. 504) Tax earmark “extenders” in the bailout bill.
- Virgin Island and Puerto Rican Rum (Section 308)
- American Samoa (Sec. 309)
- Mine Rescue Teams (Sec. 310)
- Mine Safety Equipment (Sec. 311)
- Domestic Production Activities in Puerto Rico (Sec. 312)
- Indian Tribes (Sec. 314, 315)
- Railroads (Sec. 316)
- Auto Racing Tracks (317)
- District of Columbia (Sec. 322)
- Wool Research (Sec. 325)

One more thing, if you have not seen this, you should. Regulation is only applicable when its meant to harm private businesses that havn't lined the pockets of Democrats. Once again, why isn't the media on Barney Frank like stink on crap over his role in exacerbating the the fannie/freddie debacle. At every turn where anyone in Congress tried to rein in these organizations, there was Frank and his cohorts throwing a wrench in the mix. You will never see this on the evening news, but you will see Sarah Palin dowdified by Charlie Gibson.

Nothing screams financial crisis like the untapped powers of Wool.

I think you misunderstand the point of this earmark... If we really do hit rock bottom, won't sleeping in the street be much nicer with a wool sweater?

Patterico provides links to Pat at Stubborn Facts, who has three worthwhile posts today. The titles are self-explanatory.

Accountability
Rewarding Bad Judgment
The Foreseen Crisis

That last link goes to a comment authored by former Congressman Richard Baker, featured on the video. And here's Patterico's post.

#66 from Alchemist:

Touche! Though, I'd rather see the investment in polypro garments which are superior to wool.

#63:

I see the current mess as most likely yet another instance of benign neglect. (emphasis mine)

I do not think that word means what you think it does.

Neither "toxically optimistic" nor "willfull" carry the same meaning as "benign".

Note that the wool research is a free trade provision.

#64: They really don't understand how to pass a single-topic bill, do they? /headdesk

This Congress is simply mentally incapable of passing a bill without earmarks. Its like asking someone to change the way they write their signature, its impossible to do. Failure of imagination.

The continuing budget resolution that passed the Democrat-controlled House contains 2,760 earmarks totaling $19.1 billion. None went through any public vetting. We should trust these guys to hand out $700b?

Congress. Rope.

#72: I think of it as more like legislative Tourette's. It's worse than hiccups.

There is {earmark} no time to waste {earmark} in restor{earmark}ing Amer{earmark}ica's faith in its e{earmark}conomy. We must act promp{earmark}tly.

(adjourn for two days)

I don't want to sound like an anarchist, but don't we have to start asking ourselves if we really live in a democratic republic if, even with all these outrages we've seen, 95% of these people are going to be reelected in November?

If we cant, dont, wont throw out the demonstrably corrupt and inept, is this really democracy anymore? For whatever reasons.

#69: The adjective 'benign' implies harmless, but my use of the phrase 'benign neglect' is meant to imply the 'unintended' nature of the consequences of the actions and/or inactions of the neglectors.

"If we cant, dont, wont throw out the demonstrably corrupt and inept, is this really democracy anymore?"

Sure. It's just a demonstrably corrupt and inept democracy.

I'm a firm believer that you don't get the government you way, you get the government you deserve. This is doubly true of free democracies.

There is no government program, nor regulation, nor set of laws that can fix a want of ethical culture. Once you lose the ethical foundation of a society, you can't fix it. You have no tools to work on the problem with. Once the salt looses its saltiness, its good for nothing.

It's easy to talk about fixing the problem. Everyone says that they want to fix the problem, a problem, all the problems. But if you actually start talking about the problems, everyone just means that they want to fix someone else's problems. Every person and every group wants to protect its own. So nothing gets done.

Take lawsuits. Everyone says the despise the litigious culture, but if you start doing polling no one actually supports any reform that would reduce it, you discover no one wants to curtail their right to sue. Pundits talk about cleaning out the corruption in government, but get down to it and they just mean removing the otherside. Ninety-five percent of them don't believe corruption on 'their side' is a real problem, certainly not worth risking the grip on power. Five percent of people can't change a democracy (not overnight at least). So nothing happens.

Eventually, the whole ponderous decadent mess will come crashing down, and then people will start to remember that ultimately good ethics are the most valuable thing a society has. Then the long hard earned lessons of our father's fathers will be relearned and we'll start stashing away capital rather than spending it. Or we won't and will go the way of so many societies before us, wondering how we lost our greatness and blaming it on this group or that group or this person or that person.

PD Shaw: the wool research is a free trade provision.

free trade provision, my woolly foot!

WARNING! OBSESSIVE COMPULSION ALERT! LOOK AWAY!

Curious about who stands to gain from wool research and why, I thought I found the answer: it was a free trade bill disguised as a research grant. But things were not that simple, it was really crony capitalism disguised as a free trade bill disguised as a research grant. My bad.

Details: The bailout bill extends a temporary reduction in import duties for worsted wool fabrics suitable for use in making suits, suit-type jackets, or trousers. All the bailout bill does is extend this program (set to expire in the next year or two) to 2015. But this program is only available to select manufacturers; the President must choose "fairly," giving preference to manufacturers that work with schools and research institutions. Basically, there are about 15 companies nationwide that receive this benefit. Free trade for the few; mittens hand-knitted from the fur of alley cats for the rest.

What does this have to do with the bailout bill? Nothing. Don't say you weren't warned.

Eventually may be closer than we'd like.

don't we have to start asking ourselves if we really live in a democratic republic if, even with all these outrages we've seen, 95% of these people are going to be reelected in November?

Well, that depends on the existence of many radically different opposition candidates ready to sweep the incumbents from the scene. It's way too late in the campaign cycle for anyone to start up a candidacy and run as the "answer to the crisis/bailout" guy.

Ask two questions:

• Was this really on the public's radar back in January?*

We were caught up in the admittedly fascinating spectacle of the Presidential primaries, especially when two "historic candidacies" collided in a bloodbath of identity politics. No one was beating up Barney Frank over FM, and the average voter who was very concerned about "the economy" was unlikely to include MBS's, a liquidity crisis, or bank failures in that overly broad category.

(2) Do you really think there's a slate of new candidates who have better ideas in this arena?

If so, they're being awfully quiet. We've got four 24/7 cable news networks and 4 major networks who will give any talking head some air time, not to mention a slew of newspaper editorial pages and a quasi-infinite number of Internet news outlets. The financial crisis is the big story of the day, so they've got the hook already lined up. Where are the politician-class idea guys who will jump up and wow the nation with their take on the crisis?

For your clean sweep, you'd need ~400 new House and Senate candidates from across the country. They need financing, connections, a bit of charisma or speaking ability, and the foresight to not have said anything stupid about housing in the past 15 years. Draw up a Venn diagram of the population fitting that criteria, apply it to each Congressional district, and the difficulty of ever getting a full replacement over a given topic becomes readily apparent.

Without a widespread public perception that there was a widespread failure in this area, it's hard to launch a candidacy based on reform in this area. And this perception was missing in first half of the year, and has only really spread once we got large, flashy, widely-publicized structural problems (FM bailout, Lehman bankruptcy, WaMu failing and Wachovia going under, etc). But if the elections were to be held 6-7 months from now, instead of a scant 2 months after banks started folding... you might get your wish of a widespread cleansing, if not necessarily wholesale replacement.

(Not sure what the heck happened to the formatting of my first question--was trying to do simple numbering with some bold--but at least nothing blew up!)

Im not sure if i believe that, unbeliever. I think the electorate is SO polarized that most people would rather elect a child rapist than cross a party line. Yes there are independents, but the gerrymandering and all the shenanigans the two parties play with each other to guarantee seats make them toothless.

I guess my thought is that at some point we took our eye so far off the ball that institutionally these guys have made themselves de facto undemocratic.

"Eventually may be closer than we'd like."

I don't believe in kicking problems down the road for our children to handle. All we have to decide is what to do with the time that is given to us. Eat, drink, and be merry for tommorrow we may die has been the ruling perscription for about 30 years now, and you see where that has got us.

Keep in mind, I'm the guy who in 1998 predicted the American Republic would collapse by 2020.* I still see no reason to abandon that prediction.

And unlike the vast majority of people who make similar predictions, I love the American Republic. I'm a patriot. I think we are the greatest country in the world. It's very hard to watch it die.

*This is the reason I have a hard time blaming even the incompotency of George W. Bush. It was completely obvious to me that we were in big trouble long before he did anything. As I said going into the 2000 election, "I pity which ever candidate wins."

#76: In law, "malice" can mean "recklessness as to whether...harm should occur or not....It is neither limited to nor does it indeed require any ill will towards the person injured."

There was malice here, in the legal sense. For your "benign", I might accept "bovine".

As far as the partisanship and polarization goes, I'm currently reading Peter Mansoor's book. When I finish, I think I'm going to need to make a post on Winds. Reading his account has really crystalized for me what has often been wrong with my thinking, and what is generally wrong with the thinking of the American electorate and the blogosphere in particular.

Celebrim #83 --

Here are two analyses of the current crisis that may align with yours. A sober interview with German Finance Minister Steinbruck (a friend of the US), and a gloating screed by America-loathing John Grey in the Guardian.

Maybe i'm just frazzled today. I've never felt so negative about our system of government before. I feel like maybe we havent shaken things up in too long in the system. Maybe in our brave new digital world we need a more responsive, small d democratic, system. Heck, i must be off the meds but im thinking maybe Europe has something to teach us about parliamentary systems.

AMac: I think Europe is in every bit as much trouble, and then some. Unlike America, I don't think there is much chance that Europe will dig its way out of its hole. Go visit it while you have a chance. Take your kids. It won't be there when they are old.

Mark: I've felt like that for at least 10 years now.

As far as parliamentary systems go, they have their advantages and their disadvantages. They do allow for your representative to have public positions that align more closely with your own, but conversely they greatly increase the representation of politically marginal groups. They give you a broader range of political positions in the debate, but they also come down to comprimises and coalition governments. It would be nice to think that they'd lead to ruling governments with less power, but Europe itself a great counter-argument to that line of thought.

The problem isn't the system, it's the electorate. And it's not a problem with that portion of the electorate, whatever part you may think that is, but a problem generally. (I've long known that, but reading Mansoor's account of the first year in Baghdad has really brought that home at an emotional now I really believe it level.) It's not stupidity or any of the other crap. It's a lack of a ethical foundations.

I've put it this way before: any one of us reading this thread could, without much thought, recite the names of 200 or more actors and actresses. We could recite the names of 200 or more atheletes.

How many famous engineers can you name? How many famous scientists can you name? Living astronauts? Inventors? If you can name more than a couple of any of those, you are probably in the field. The problem is a matter of priorities. We've got our priorities wrong, and we can't blame the 'other side' because we are all suffering from it.

Heck, i must be off the meds but im thinking maybe Europe has something to teach us about parliamentary systems.

They do, but not quite what you implied. Conduct a brief review of the laws those parliaments have passed in the last 20 years (including the EU bodies), and let us know if you would favor those results!

On the other hand, at least the British Parliament manages to fill its own seats and have some raucus debates. Compare C-SPAN, with Senators giving lectures to the cameras in totally empty chambers, with the various clips coming out of the UK Parliament, where it's crammed to standing room only and the speakers are regularly shouted down.

A few days worth of CSPAN clips with 535 Congresscritters having an actual debate, complete with point->counterpoint arguments, would go a long way towards restoring Americans' belief in their politicians. At the very least it would let the public have a glimpse of the real thinking behind the bailout package being bandied about with such fervor. The fact that said politicians seem incapable of such engagement is telling.

(Or maybe they're just permanently unwilling, which would be indicative to Mark B's point that their repeated failures may be systemic instead of just one-off.)

Question for PD Shaw: Did your researches show who inserted that little bit of crony wooliness in the bailout? gabriel, any information on which legislator is responsible for the other earmarks in your list?

Grim

One thing you have to do is top this site from being a dogwhistle stop for racism. The attacks on the CRA are attempts to blame AfricanAmericans for the problems. It isn't true. Maybe someone here will do some work and accept this source:
link

Nothing more racist than equating black people with the poor. There are a lot more poor whites than poor blacks in raw numbers.