Me: He's a ninny in this article. The contrast is very weak. The parallel is very strong. The burstings of the railroad and internet bubbles were associated with excess capacity in railroads and bandwidth. The bursting of the housing bubble is associated with excess capacity in housing. Exactly the same. He tosses off the parallel offhandedly by suggesting that the excess in housing is condos in Florida that "should never have been built". He implies that the current bust is different, worse, more evil, because it did not relate to the creation of useful assets. But a condo in Florida can be quite useful. In their day, you could find a lot of railroads and optical fiber networks that "should never have been built" too. So, in conclusion, stupid. Journalism is in a pitiful state.
He: Do think that housing's not the problem, nor subprime, nor greed? We need to take the inflation out of many markets and I'm not sure how easy that is. If an $8 loan on a $10 house generates $40 in credits through structured products and a $10 or 11 loan on the same house does the same the rising tide will lift all boats until at one point no one's afloat.
Me: The problem is the proliferation of mortgage loans that were undersecured and made to borrowers who could not afford them. Freddy and Fannie made many of these loans and encouraged the making of many more. You can call much of this phenomenon "subprime." Why do you think that happened? I know why. Do you?
Greed is not a "problem" in the financial markets or in any business. Greed is a very common vice. Any system that does not function well in the presence of much greed is perverse. For greed, the cobbler wants to raise his prices. For greed, the banker wants to raise interest rates. Most businesses make exactly as much as they can. Most businesses are not subsidized by Freddie or Fannie. Most businesses do not enjoy federal guaranties of their debtors' debts. By the way, your hypothetical "an $8 loan on a $10 house generates $40 in credits..." never happened, and nothing like it ever happened in the US mortgage market.
He: I don't think it was those loans alone, and I thought a lot of them were written to enable mortgage brokers to get paid up-front origination fees with little concern as to whether they'd be paid, and bankers to insure them with derivative products. I'd be interested to know why you think it happened. I've seen figures suggesting the sub-prime tranche of bank portfolios insufficient to bring them to their knees, though the derivative backwash gamed their asset ratios. Of course greed (a vice) is not a problem but it's a word bandied about by candidates and congressmen, incorrectly attributing the blame, which ensures the solution will be wrong. The way the political decision to encourage home ownership gamed the market. What I meant by the $10 to $40 figure, based on interviewing bankers who dealt in swaps, cdo's, cmo's, cds's is that an initial fixed-rate loan could be swapped with a variable one, packaged before or after into a CMO, that was then protected by a CDS. This enabled banks to maintain 'assets' that weren't assets, all based on a shaky initial instrument, whose failure multiplied its way through the system.
Me: Ultimately the bad assets currently coming home to roost are indeed the mortgage loans. (Credit card debt and car loans, also securitized, may be next; because much consumer debt was supported by cash from second mortgages and refinancings of home loans.) Banks and non-bank mortgage companies typically get origination fees. Nothing wrong with that. But why did they have little concern as to whether they would be paid? -Because they sold the loans to other institutions who had little concern or who could get them guarantied by other institutions who had little concern.
By dollar volume, by far, the biggest buyers and guarantors of bad mortgage loans were Fannie and Freddie. That outlet for risk (that vast moral hazard) quite simply caused the current problems. Full stop. It provided a large, strong incentive to gin-up liquidity for these loans. The liquidity came in part from securitization. In other words, selling securities that were backed by mortgage obligations. Some of these securities were also guarantied by Fannie and Freddie. Some were guarantied by AIG. But importantly, securitization is just a way to raise more cash to make more loans that could then be sold on to Fannie or Freddie or guarantied by Fannie or Freddie.
Meanwhile, there was of course an asset price bubble in real estate. That bubble helped banks and other mortgage lenders make loans that appeared to be sufficiently secured but weren't. It also promoted expansive consumer debt in the form of second mortgages, mortgage-backed credit cards, and mortgage-backed lines of credit.
The unwashed masses were parading around saying things like, "ya gotta unlock the equity in your home." In my neighborhood, these stupid jerks were zipping by me in their new BMWs. Little education and lousy jobs. In fact, a lot of them were manning the phones in boiler rooms dedicated to selling second mortgages to other jerks who couldn't afford their debts or their expenses. Now the Republican president and Democratic congress want me to bail those guys out.
Let 'em shine my goddamned shoes.
Let 'em shine my goddamned shoes.
The rest of what I said was unprintable, so I'll stop there. My main point is that, despite the apparent complexity of securitization, credit swaps, options, and other derivative securities, the root of the problem is clear--lenders did exactly what the U.S. government and its monstrous public-private chartered bastards (Freddy and Fannie) asked them to do and encouraged them to do and payed them to do. I don't much blame them. I blame both the government and the borrowers who took out unaffordable loans just because they could.
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