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Tag: mortgage crisis (Page 1 of 2)

Money for idiots – we have no choice

February 20, 2009 /

David Brooks laments the harsh reality that the bank, auto and mortgage bailouts are rewarding too many people for stupid behavior. Yet, if we want to stop the downward spiral, we have no choice.

It makes sense for the government to intervene to try to reduce the oscillation. It makes sense for government to try to restore some communal order. And the sad reality is that in these circumstances government has to spend money on precisely those sectors that have been swinging most wildly — housing, finance, etc. It has to help stabilize people who have been idiots.

Actually executing this is a near-impossible task. Looking at the auto, housing and banking bailouts, we’re getting a sense of how the propeller heads around Obama operate. They try to put together programs that are bold, but without the huge interventions in the market implied by, say, nationalization. They’re balancing so many cross-pressures, they often come up with technocratic Rube Goldberg schemes that alter incentives in lots of medium and small ways. Some economists argue that the plans are too ineffectual, others that they are too opaque (estimates for the mortgage plan range from $75 billion to $275 billion and up). Personally, I hate the idea of 10 guys sitting around in the White House trying to redesign huge swaths of the U.S. economy on legal pads.

But at least they seem to be driven by a spirit of moderation and restraint. They seem to be trying to keep as many market structures in place as possible so things can return to normal relatively smoothly.

And they seem to understand the big thing. The nation’s economy is not just the sum of its individuals. It is an interwoven context that we all share. To stabilize that communal landscape, sometimes you have to shower money upon those who have been foolish or self-indulgent. The greedy idiots may be greedy idiots, but they are our countrymen. And at some level, we’re all in this together. If their lives don’t stabilize, then our lives don’t stabilize.

There will be those who gripe about this and try to whip up anger and opposition to the administration’s efforts, but they won’t offer practical alternatives. They might call for the banks, automakers and homeowners to go bankrupt, but they probably don’t mean it. If they do, it probably means they have no clue of how bad it can get if they get their wish.

Economy, Policy

Greenspan’s cop out

February 14, 2009 /

Alan Greenspan deserves some credit for admitting to Congress last year that he made mistakes in not foreseeing the mortgage crisis, but his latest statements in a CNBC documentary, “House of Cards,” suggests he still has not come to terms with the full extent of his failure on the issue.

Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.

“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.

Mr. Greenspan’s critics have argued that the former Fed chairman expanded the money supply well beyond the growth in the nation’s gross domestic product by keeping interest rates too low for too long.

The Fed’s “easy money” policy created an excess of cash that inflated equity and asset prices, leading to both the technology bubble of the late 1990s and the housing bubble in this decade.

While Mr. Greenspan acknowledges that he could have done something to avert the housing crisis, he contends his hands were tied.

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.

“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”

This is a complete cop out on the part of Greenspan, and shows the danger of brilliant economists who get too immersed in the details. They become obsessed with the data and how it fits into their models, but can’t step back to see problems that can be seen by anyone with common sense.

First, the crisis was not limited to sub-prime. It was obvious at the time that many middle-class Americans were buying homes they could not afford, using exotic “interest-only” mortgages. Plenty of experts warned that these could be problematic if the economy turned south, but Greenspan and the administration did nothing. Once Americans started flipping homes like stocks, Greenspan should have known we had a major problem on our hands.

Second, most people understood that there was plenty of fraud in the system. Greenspan goes on to blame the rating agencies, and he’s correct on that front. The rating agencies should be investigated for fraud and gross negligence for their role in this crisis, and Wall Street banks need to be investigated to see just how much they really knew about the mortgages underlying the bonds they were buying and selling.

As for what Greenspan could have done, he’s presenting a false choice that betrays his real concern. He was obsessed with keeping economic growth going, and he suggests that he was concerned that any intervention here could have killed the party.

Well, the party has certainly ended, and the damage is staggering. By 2006 it was obvious that we had a real estate bubble. Greenspan helped to cause it with his loose money policy, and he did nothing to stop it once it became obvious we had a problem.

Economy, Media, Policy

Incompetent management

December 1, 2008 /

Incompetence will be the hallmark of the Bush presidency.

Many have tried to blame the mortgage meltdwn on efforts started in the 1990s to encourage banks to make home loans to poor people. This ignores, however, the responsibility of the current administration to do its job of providing regulatory oversight.

It was apparant to many experts and ordinary citizens in 2005 that the housing bubble and easy loan standards could lead to disaster. We now know that the Bush administration was warned about this, and that regulations were proposed that wuld have eased the crisis. Naturally, the Bush administration dithered and left us with this mess.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

“Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

Bowing to aggressive lobbying, along with assurances from banks that the troubled mortgages were OK, regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

“These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,” David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.

The administration’s blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.

Many people share the blame for this crisis, but in the end we need a president and an administration that can act when problems arise. This isn’t a conservative or liberal issue. It’s a matter of competence.

With the Bush administration, the pattern was clear. With Katrina, the Iraq War and the mortgage crisis, we see a president and an administration that consistently made matters worse. Good riddance.

Economy, Policy, Politics

Peter Schiff vs. Art Laffer and all the other cheerleaders

November 14, 2008 /

Peter Schiff has been calling the mortgage crisis and the recession for years. This video shows Schiff battling the likes of Art Laffer and Ben Stein, who were arguing last year that the US economy was in great shape and that there was no problem with inflated home values or the sub-prime mess.

Laffer is the same guy saying the sky will fall if Obama institutes his tax plan. Why should we listen to this guy?

For years we were told that tax cuts would solve everything. Of course, we were just living it up on cheap money, and now the bill is coming due. Watch the video, and ask yourself who you should be listening to now.

Hat tip: Andrew Sullivan

Conservatives, Economy, Policy, Taxes, Video

The role of credit rating agencies

October 22, 2008 /

We will be spending the next several years trying to understand the various causes of the financial collapse. As most agree, there’s plenty of blame to go around.

There’s no doubt that the credit rating agencies played a huge role in this crisis. I worked on bond deals in the 90’s that were very similar to the mortgage-backed securities at the root of this scandal. The role of the rating agencies was very clear. It was up to them to assess the risk tied to each security, and that process involved quite a bit of due diligence regarding the underlying income streams.

It has been clear for years that the rating agencies were not doing their jobs with respect to pooled mortgages. Now Congress is holding hearings in order to learn more about what happened. Needless to say, you can learn quite a bit by following the money.

Conflicts of interest were largely responsible for the disastrous performance of credit rating agencies in assessing the risks of mortgage-backed securities, two former high-ranking officials at Moody’s Investors Service and Standard & Poor’s said in Congressional testimony on Wednesday.

The agencies are paid to issue ratings by the securities issuers, whose interests can eclipse those of investors, Jerome S. Fons, former managing director of credit policy at Moody’s until 2007, told the House Committee on Oversight and Government Reform.

“While the methods used to rate structured securities have rightly come under fire, in my opinion the business model prevented analysts from putting investor interests first,” he said.

And Frank L. Raiter, former head of mortgage ratings at Standard & Poor’s for 10 years, characterized the failures at that company by saying simply: “Profits were running the show.”

This reminds me of the problems we had with the accounting firms in the 1990’s. It was impossible to expect accounting firms getting huge deal fees to be objective when they were auditing the same client. Efforts were made to block this conflict of interest back then, but Congress blocked the reforms. Things didn’t get fixed there until we had the Enron and Worldcom debacles.

With the rating agencies, it’s painfully clear that more regulations are needed here as well. Let’s hope that we get it right going forward.

Economy, Policy

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