I have been adding some additional charts to my powerpoint for this afternoon.I am choosing amongst the areas I want to discuss, when an email came in regarding my presentation.

One of the conference participants made the following challenge to me:

“Can you support your position, in a fast, easy way, why the US housing boom was NOT caused by Fannie and Freddie, or the CRA? I understand all the factors you laid out in the book — but I would like to see more evidence to support your view.”

Well, its difficult to prove a negative — supporters of the “FNM/FRE/CRA caused it” should have to prove their case, as I did in Bailout Nation.

However, I have always found this chart to be quite compelling:

>


Chart via BIS by way of NewObservations.net

>

Pray tell what caused the same boom and bust in these other nations?

And how could Fannie/Freddie or the CRA be responsible — that only applies to the US — when you have the same, global, coordinated rise in prices?  (And you can add Korea and New Zealand to the chart above).

For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

And if you can’t answer that, then what hope do we have that you will offer up empirical evidence that Fannie/Freddie/CRA caused this in light of the above?

(This is what I mean by squishy thinking . . .)

>

UPDATE: July 21, 2010 10:35am

In a discussion with some of the more vocal “FNM/CRA caused the crisis” advocates, I made the following point that seems to have resonated with a few of them:

We must distinguish between US legislative policy — and that includes Fannie/Freddie and the CRA — with the monetary policy of the US Federal Reserve, and its impact around the world.

American legislative policies had some impact domestically, but the total result of the CRA was not global, not was the GSE impact Global. Hence, how could FNM/FRE/CRA cause a global housing boom & bust? Answer, it didn’t.

The US Federal Reserve’s monetary policy, on the other hand, did have a global impact. The US has the world’s reserve currency, the biggest economy and the most important central bank.  When the Fed took rates down to 1%, it had an ginormous impact on everything priced in debt, dollars or leverage. That includes housing, around the world.

Category: Bailout Nation, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

98 Responses to “Global Housing Boom”

  1. Kort says:

    I’m not a CRA/Fannie/Freddie fanboy, but the problem I would have with your chart is that the US has a population of 2x the total of all the countries in that chart (above the US line). Only France (60M) and UK (60M) have reasonable populations. So, my question would be, what is the impact in the US of providing access to …20 million? 40 million? 60 million? people who, perhaps, possibly, were provided extraordinary assistance from CRA/Fannie/Freddie? A housing bubble in a country with 2M people in it..not a bubble. More like a pimple.

    Also, nobody is reporting on the impact, IF ANY, of the “CRA/Fannie/Freddie” in other countries…perhaps there are other culprits. I do know that in Spain, for example, home ownership is well over 75% and the government provides ample tax deductions and incentives to buy homes–perhaps there is some government not-invisible hand at work there too.

    As for many other countries, their GDP per capita were much higher than the rest of the EU (Ireland was 39% above EU average in 2004)…Sweden higher…UK higher…Norway higher… so, given a common currency and given extra economic growth, one would expect the house prices in those fast growing economies to rise.

  2. Kort,

    You have had a global synchronized boom — regardless of population, income, etc.

    The one consistent factor was ultralow rates — pushed by the biggest central bank, the US Federal Reserve — using the world’s reserve currency, the dollar.

    That seems to be a more plausible explanation.

  3. call me ahab says:

    obviously Fannie and Freddie need to go global-

    why they didn’t get a piece of those other markets is a travesty

  4. Kort:
    I think the UK’s population is more like 120 million.

  5. Ny Stock Guy says:

    On a side note: Has anyone seen my DOW 10,000 hat?

  6. well, just, at the ‘drop of a Hat’…

    CRA provides the impetus, FNM/FRE provide the ‘Mechanism’, and the FedRes, via ultra-low Rates/accomodative Monetary Policy, provides the “Go-Juice”..

    Stronger, nominal, Economic Activity (in the U.S.) attracts, additional, Investment Inflows–leading to stronger U$D..

    the ~G-8 Central Banks, looking to keep their Scrip ‘within Range’, competitively loosen their, respective, Policy (-ies)…

    impelling ‘Asset’ (Housing)-prices, in their, respective, Territories, Higher..
    http://www.thefreedictionary.com/impetus
    http://www.thefreedictionary.com/impel
    ~~
    Not, of course, that I, explicitly, believe as much, nor, is it ‘Empirical’..

    LSS: one would have take a peek at the, published, ~M3 #’s for the, given, jurisdictions..for starters.

    But, it was a ‘Paper Ramp’, with, as we’ve seen, a, for many, grisly Crash..
    http://www.thefreedictionary.com/grisly

    ~~~

    BR: Squishy, squishy, squishy!

  7. garo says:

    Calvin Jones, Kort is correct about the UK population.
    http://en.wikipedia.org/wiki/List_of_European_countries_by_population

    ~~~

    BR: What does population size have to do with housing booms and busts?

    Consider all of these populations — relative to each other — have been fairly stable for a long while. Why would that cause a global boom and bust ?

  8. dead hobo says:

    Kort Says:
    July 20th, 2010 at 9:22 am

    I’m not a CRA/Fannie/Freddie fanboy, but the problem I would have with your chart is that the US has a population of 2x the total of all the countries in that chart (above the US line).

    reply;
    —————
    It’s good to be ignorant. Unfortunately, I’ve been cursed with the need to put things in the proper perspective, or at least try to. I wish I could be a lazy thinker or a proud dumbass. Unfortunately, all I could master was being a massively handsome bum.

    This is a global economy and we are not comparing Japan to Afghanistan or the US to Pakistan with respect to their housing markets. If we were your objection would be on point.

  9. UK population grows to 61.8 million
    http://www.statistics.gov.uk/cci/nugget.asp?id=6

    that, is more ‘Empirical’

  10. garo,

    was, merely, answering CJ & the 13th..

    yours posted in the interim..

  11. Tarkus says:

    That chart is proof the subprime was “contained”. On planet Earth.

    Is it time to “go Iceland” yet?

  12. cvienne says:

    “Global Housing Boom”…

    Just labeling it that is half the problem… When is it going to be rightfully characterized as “Global Loose Credit Scam that got poured into housing”…

    That way – After all the dust finally settles (in about a century), we can hopefully avoid going that road again…

    Or in fact, did SOME intend to go down that road all along?

    ~~~

    BR: I thought Federal Reserve easy money covered that!

  13. Julia Chestnut says:

    MORE proof? Seriously? What on earth is wrong with these people’s world view?

    Can you please provide more evidence to support your view that the world is round? Be sure to make it succinct.

  14. Chief Tomahawk says:

    I know Japan has been in a deflationary funk for quite sometime. But what’s the explanation on Germany? Is it due to the reunification with East Germany still after all these years?

    ~~~

    BR: Yeah, adding a few million low price E.German homes probably brought the avergae down a smidge —

    Though I would love to see hard data on the impact of reunification on Housing prices in Germany.

  15. jackalope129 says:

    It was world wide due to copy-cat wall street alt-a mortgage products.

  16. call me ahab says:

    BR-

    I think you can plant the Ritholtz flag of victory on this topic without too much squabbling-

    however- I can tell you first hand that Fannie and Freddie both loosened their standards on their automated underwriting programs (Desktop and Loan Prospector respectively)-

    so that someone w/ an excellent credit score and decent down payment was approved for a loan even though the housing expense to income was over 100%-

    that’s right- the housing expense was higher than their income- but alas Loan Prospector gave it a thumbs up- I had this happen on more than one occasion-

    which brings back memories of a loan I did for someone who worked at Freddie Mac and who was instrumental in the development and implementation of Loan Prospector-

    his words- FICO is all that mattered- and that someone w/ a strong FICO would always find a way to pay-

    now we are finding out how unrealistic those simplistic ideas were

  17. algernon says:

    This is indeed excellent evidence of the global credit bubble as the sine qua non of the housing bubble. I would assert that the Asian & petro-state Central banks were as big a part of the problem as the Fed, even though their behavior was necessarily influenced by the Fed.

    Still, one should acknowledge that Fannie, Freddie, CRA, & other gov’t inducements to invest in housing rather than other areas, were exacerbating factors in the US.

  18. Hugh says:

    Ireland and Spain (and Greece & Portugal – not in the chart) “benefitted” by joining the Euro. This allowed those countries to borrow at lower rates…until it all went pear-shaped.

    More generally, booms in asset markets do seem to synchronise world-wide given half a chance. Whether this synchronicity exonerates CRA/Fannie/Freddie I don’t know – however, as a Brit I have a deal to propose:

    We Brits clean up the Gulf (our oil spew) – and you Yanks clean up our banking sector (your sub-prime spew) – D I have any takers?

    ~~~

    BR: That is awesome . . .

  19. DeDude says:

    Yes the first rule for claiming causation is that you have to have correlation. It is not enough to have correlation, but if you don’t have it you need to put up a multivariate model with all the other “influencing factors” to show that when you “zero out” the other factors then you do have a statistically valid correlation between the outcome and the factor that you want to claim as being a (contributing) cause. I have yet to see anybody bring out such a multivariate model that could demonstrate any significant contribution of F&F or CRA to the housing boom. So far the convincing claim of contribution goes to: “to much money floating around and trying to find a place to get a high yield”. Now if we tax the hell out of the rich we can take care of that problem and the national deficit in one grand stroke. About time that the people who stole all the wealth from the last 3 decades of increased productivity (or whipping the wage slaves) give back the ill gotten loot :-)

  20. wildebeest says:

    I don’t have an answer to the question but wanted to mention that the Bank of International Settlements has a more current version of the chart in their recent annual report — released a month or two ago and from memory the chart was on page 17 or 19 or thereabouts.

  21. crunched says:

    Folks, this is what a short squeeze driven completely by computers looks like.

  22. Transor Z says:

    And what about the amped-up demand for non-sovereign-backed MBS?

    As MEH demonstrates at 9:41 am, the CRA critics want to cast sovereign-backed MBS as the “gateway drug” that got the financial world hooked on credit derivatives.

    A few years ago I was watching a “Matchgame” re-run on Gameshow Network. Gene Rayburn had a herpe the size of a golfball on his lip right there on TV — awesome. Ah, the ’70s. Anyway, credit derivatives were more like a VD epidemic in an cultural environment of Free Love, Baby. EMH = Free Love.

    Bunch of hippies.

  23. wunsacon says:

    Barry, is it possible that:

    (a) lowering lending standards for some test programs initially proved successful, such that the banks decided to apply these same lending standards to larger groups of borrowers;

    (b) as housing prices moved higher, consumers reacted to the “wealth effect” by spending more and saving less;

    (c) in our “manufacturing-lite” economy, increased consumer spending implies spending more money on imported goods; and thus

    (d) the lowered standards in the US helped drive “good times” in other countries?

    (No, I don’t have data. And, even if I were to spend time looking for it, I would not know it “like the back of my hand” like you and your staff do. So, “just asking the question” is all I can “contribute”…if you can call it that.) :-)

  24. DeDude says:

    @wunsacon,

    I think you got it absolutely right. But the lowered lending standards “test programs” happened all over the world, and in countries without CRA or F&F. It happened because all the excess of income for the rich was burning a hole in their pockets and was desperate to find somewhere to have better yields. In this country the lowered standards were initially done by companies other than F&F and NOT subject to CRA rules.

  25. Soylent Green Is People says:

    Fannie / Freddie certainly had a hand in the bubble. During the heyday, funding lenders relied on what Desktop Underwriter (Fannie) or Loan Prospector (Freddie) said as gospel, while traditional underwriting was written off as an antique method of risk analysis. Wholesale loan providers routinely passed tips along to their originating base on how to trick DU/LP into surrendering an “Approve/Accept”. These rogue programs absorbed junk data from the programmers (high FICO = Low Failure) and absolute sludge like information from mortgage loan officers (you work at Subway, then you earn $100,000 per year) and as if by magic, the originating stooge would have a bullet proof loan approval ready to close within days.

    Yield chasing banks allowed robot programs to decision applicants who had zero possibility of paying back the mortgage. The mantra at the time was “who cares, Fannie’s going to buy the loan from us”. Given today’s lending environment, not much has changed. Today DU still gives an “Approve / Accept” to 50% debt to income ratio borrowers. I can assure you, much of this talk of Agency reform is merely backwashed swill.

    My .02c

    Soylent Green Is People.

    ~~~

    BR: How do you explain the vast majority of loans written by non bank lenders not covered by F&F and sold to Wall Street for securitization?

    Facts are stubborn things . . . the F&F crowd simply doesn’t have any . . .

  26. DeDude says:

    From what I understand the worst of the loans were those given to people moving from CRA zip codes to middle class zip codes. So if anything those were counterproductive to any CRA quota the a bank might have wanted to fill (not that anybody suffered enforcement consequences during Bush light). They took people who could have helped filling the CRA quota if settled in their own zip, and instead gave them a much bigger house loan that did not count against CRA because it was in the wrong zip and was much more likely to default because it was way more than what the house loaner could afford.

  27. rootless cosmopolitan says:

    Barry writes:

    The one consistent factor was ultralow rates — pushed by the biggest central bank, the US Federal Reserve — using the world’s reserve currency, the dollar.

    That seems to be a more plausible explanation.

    This doesn’t sound plausible to me at all, since it is assumed for this explanation that the Fed was able to control market interest rates not just in US, it was even in the whole world, just by tuning some tiny parameter like the Federal Funds interest rate. The Fed funds rate is the interest rate for which banks lend their excess reserves to each other, a money pool of just a few billion dollars at these times. So the interest rate for this marginal money pool is supposed to control the interest rates of credit markets with a volume of trillions of US-dollar? Not plausible.

    My alternative explanation would be that the main cause-effect relationship works the other way around. The Fed reacted to the decreasing market interest rates, particularly the ones at the long end, by lowering the central bank rates, whereas the decrease in the market interest rates was caused by something else (my take: over-accumulation of capital on the supply side that met limited demand in the economy, but capital needs to be profitable to not be devaluated so it went into the financial sphere of the economy; and excess credit money creation by banks). The view that the Fed reacted to the movement of the market interest rates is supported by looking at the data. For instance, if one compares the time series of the mortgage rates, the 30-year mortgage rate usually started to go down before the Fed started to lower the Fed funds target rate with a time lag up to a half year. Of course, if the causal link works the other way around then it allegedly did according to the blame-Greenspan-meme, one can’t single out individuals at the Fed as conveniently anymore to allegedly have caused the crisis.

  28. rootless cosmopolitan

    Novel theory — doesn’t hold much water

  29. DeDude says:

    @Soylent,

    If you want to blame F&F, you have to support the argument that without F&F (and with their part of the mortgage business being done instead by private companies), the bad loans would not have been approved. From all I know the private sector was even more lax with respect to the kind of loans they purchased (because they sold them down the chain without any guarantees).

  30. DD123 says:

    As a Libertarian, the “argument” that FNM, FRE and CRA are responsible is embarrassing.

    It is interesting, though, to see one’s own ideological bent through a different set of lenses. I mean, I can tell when the “other side” is bereft and utterly clueless. I look at many of their closely held beliefs, and ask: “How can they not see how wrong and blind they are? C’mon, it’s so obvious!”

    Yet, here I am confronted with what I know is ideological bullshit…and it’s from my own side of the fence. Is this a “one-off” event, where “my side” is correct on everything else, but this one issue? Or, are there more emaciated sources of “support” for other concepts I hold dear? I may need to revisit and reassess.

    Of course, many will answer: “Of course you’re wrong on housing. You’re worldview is corrupt and wrong and just about everything.” Please, spare me that crap—that’s just an opportunistic imposition of your own worldview.

    No, what I’m talking about is that with every ideological lean, there’s room for purveyors of the “ideology” to exploit the ideology’s supporters. Too often, I’m blind to it, when it occurs within my own belief system.

    I can just read Barry’s response: “That’s why I hate ideologies.”

    Fair enough, but I’m using the term loosely. I’m referring to an “ideological lean”, not being a hardcore ideologue. Hardcore ideologues do not have questions—only answers. [Even when they "do have questions", like the conference participant from above, the questions are merely passive aggressive attempts to engage in another tedious argument.]

    It appears that the pushers of this CRA, FNM, FRE junk are not positing this argument as an honest rebuttal to the Left. Hell, the pushers know there is no way anyone on the Left would buy this dogshit.

    Instead, I think the pushers are simply trying to ram an agenda down the throats of their own acolytes. Anything to keep us from thinking independently. “God forbid any independent thought…we might lose some “true believers”. Villainize Fannie Mae and CRA! Hell, even if we are ‘wrong’, we’ll still be right. Keep the drones occupied and ‘combat ready’. At all costs, keep this culture war alive, and contest the other side…over everything!”

    This is most unfortunate, and it makes us look ridiculous. It’s incumbent upon the believers in the limited role of government to police their own and to tell these ideologues…these purveyors of ideological bullshit to just shut the fuck up.

    If you have a Libertarian lean and you believe the CRA, Fannie narrative, don’t worry: There’s still plenty of reasons to despise and seek the end of these atrocious government entities. But don’t seek their demise at the expense of your integrity or clarity of thought. CRA, Fannie and Freddie did not cause the housing/mortgage debacle. The facts in support of the last statement are overwhelming and have already been laid out in very convincing fashion on this site.

    We rail against bequeathing our power to the State. Yet, when we refuse to confront the facts, we are allowing the ideologues do our thinking for us. In doing so, we’re simply bequeathing our power to a different source of rot.

  31. darekkkk says:

    Those who claim that Fannie /Freddie did not contribute to the US housing bubble please answere a short quiz
    1) Do you believe that price depends on the supply and demand ?
    a)yes
    b) no
    2) Do you agree that Fannie Freddie were supporting demand for houses?
    a)yes
    b) no
    3)Was the GSEs share in financing of the housing market?
    a)dominant
    b)neglible
    My answers are: 1a, 2a,3a so I claim that GSEs contributed to the housing bubble. Do GSEs coused the housing bubble? I do not think so. They allowed to finance the bubble so they are rather responsible for the duration and size of the buuble.

  32. KentWillard says:

    Supporting evidence that it was a general credit bubble is that commercial real estate, with or without apartments, has tracked closely in price to houses over past decade. Though I’m sure someone will stretch reason to blame the GSE’s for the boom and bust in office buildings.

    Bubbles occur regularly, with or without leverage and with or without the government. Most people don’t think for themselves, but follow others. It is usually for the better, but sometimes for the worse.

  33. wunsacon says:

    Kent,

    >> Supporting evidence that it was a general credit bubble is that commercial real estate

    Don’t commercial real estate developers build strip malls near new residential developments? In other words, rather than see “commercial” and “residential” as uncorrelated, aren’t they in fact correlated?

  34. DeDude says:

    @DD123,

    “Villainize Fannie Mae and CRA! Hell, even if we are ‘wrong’, we’ll still be right”

    I think you nailed that one.

    “It’s incumbent upon the believers in the limited role of government to police their own and to tell these ideologues…these purveyors of ideological bullshit to just shut the fuck up.”

    You nailed that one too.

    What an outstanding post. I am on the other side, so I hope the teapartiers don’t see this – nah – no worry – even if they did they would not understand it. That is the thing about ideologogs they do not think.

  35. Soylent Green Is People says:

    The private lenders “leased” – for lack of a better term – Fannies DU and Freddies LP to underwrite their loans. Wells Fargo made many portfolio loans – many of them outside of the $417,000 loan amount, but had their own AU system based off of Freddies LP decision engine. WAMU’s AU system looked very much like Desktop Underwriter with a few tweaks here and there. Ask any originator during that time who sent loans to New Century, IndyMac, or First Franklin about what AU system approved their loans and you’ll find it was either DU or LP.

    Bad loan programs (Stated/Stated) underwritten by a robot with the temperament of Bender, allowed originators to abuse a system that was supposedly the new way forward in risk management. Those AU programs had their base code rules created by FN/FHLMC’s mad scientists.

  36. DeDude says:

    @darekkkk;

    You are presuming that without the private for profit outfits called Fannie and Freddie, no other private outfits would have filled the need and done the exact same (or worse) things. That presumption flies directly in the face of facts. There were other private for profit outfits in the markets and they did much worse things, much earlier, than F&F, they did so because they could sell the risk to someone else (whereas F&F held on to the risk and, therefore, were more conservative). Fannie and Freddie only got into the more risky stuff because they were losing market share and as a privately owned for profit outfit they could not allow that (shareholders and CEO lose money).

  37. rsadj says:

    All the starts we aligned to create global excess liquidity… tons of savings generated by the synchronized aging of baby boomers in OECD economies, plus China. Plus, central banks endless appetite for US treasuries after the currency collapses of the 90′s.

  38. DeDude says:

    @Soylent, so it is all the fault of microsoft because they are the original inventors of code? – just kidding. All over the financial world these automated processes came into play as the ibanksters wanted to exchange expensive labor for cheep code. That would have happened in the mortgage part of private enterprise with or without F&F being there. So some some stupid in IndyMac would have purchased imperfect code from another entity and failed to realize how imperfect that code was and got burned on trying to squeeze another dollar of short term profit out by a short sighted saving, to please his masters at the ibank.

  39. darekkkk says:

    DaDude,
    As i remember F%F contribution to the housing market (direct and via guaranties) was close to USD 5 trillion. For me usd 5 trillions added to the demand side of the market makes a difference.

  40. beaufou says:

    It is the global red queen effect, everyone running to stand still in the name of financial expansion/GDP numbers.
    You can’t blame one or two institutions for the generalized cancer the financial sector has become, degrading society for one’s personal gain and corrupting its representatives.
    Unless someone can prove Fanny and co made up all those derivatives, I blame them all.

    This is what happens when a civilization can no longer make the distinction between the freedom of man and the free exercise of greed, my freedom stops where your begins and no amount of money can possibly buy me the right to exercise my will over others.

  41. Soylent Green Is People says:

    @DeDude HA – wrapping MS into the debate is practically Godwinning a thread.

    In the late 1990′s Fannie Mae began the roll out of Desktop Underwriter. Freddie followed shortly thereafter. Their AU systems became the gold standard for subsequent AU systems. Every lender then built their AU’s either from a DU/LP base, or had a parallel AU product blessed by FN/FHLMC. From then on any loan that failed AU approval was considered dead in the water. An AU accept was considered fully approved and ready to close and thus the rush began. Updates from FN/FHLMC’s AU systems were becoming so loose that for a time, I believed it possible to get someone on death row approved, but didn’t have a chance to try it out before things crashed out in 2008.

    I do not believe that CRA had anything to do with the build up and collapse. Stated Stated, zero down, and multiple loans to single investors (limitless at one time…) provided the fuel for the fire – all of which were programs available for approval by DU/LP or one of their offspring.

    To another thought line: Condo financing was extraordinarily hard to obtain if the project was not Fannie/Freddie approved. Had FN/FHLMC approvals required 90% presale per phase (currently 51%), and no more than 30% investor concentration in one project (currently50%) much of the overbuilding might have been strangled for lack of financing of take out loans. “But what about private lenders….” I’d rather have private lenders fund condo purchases with low presale/ high investor limits than FN/FHLMC, but they didn’t then. Ask any LO back in that time period what could be done to finance a home in a non Fannie / Freddie approved condo project. The expected answer is “nothing”.

    My .02c

    Soylent Green Is People.

  42. call me ahab says:

    That is the thing about ideologogs they do not think.

    hahahahahahahahha-

    what? ideologues like you?

    talk about the pot calling the kettle black-

    also- just wondering- have you ever found yourself at a cocktail party and the person you were talking to has hanged themselves from the nearest sturdy object overhead?

    my guess is that happens to you all the time-

    not that you are boring or anything and say the same thing over and over and over and over . . .

  43. DeDude says:

    @darekkkk; F&F did not purchase 5 trillion worth of houses they were the middle men between investors and the people purchasing 5 trillion worth of houses. If they had not been the middle men then other private investment companies would have been the middle men. The demand came from those purchasing the homes not from the middle men in the financial industry.

  44. rootless cosmopolitan says:

    @Barry:

    Novel theory — doesn’t hold much water

    Well, I guess that disproves my explanation.

    You would have to explain how the interest rate of a marginal money pool is supposed to control the interest rates of credit markets hat have a credit volume of many trillion dollars. And why the market interest rates move before the Fed funds rate is changed, if latter allegedly control first ones. The data are in contradiction to your explanation. Aren’t you always saying you are a data guy?

  45. ckullback says:

    It’s pretty clear that across the board globally, the boom in house prices was caused by non-market forces (i.e. governments/central banks) creating an easy credit environment characterized by record low interest rates and historically loose lending standards. This created an abnormal demand for homes as people whose income historically wouldn’t qualify them for homes were able to now purchase. Since these loans are all made in the respective countries, the real question is what entities were most responsible for causing the low interest rates and loose standards (who artificially propped up those statistically abnormal data points) in the respective countries. So…were Fannie/Freddie/CRA the primary entities responsible for loose credit and low rates outside the statistical norm or were they just key players in a bigger group all controlled by the government and central bank with the financial sector allowed to play fox in the hen house. I’d lean toward the latter.

  46. darekkkk says:

    DaDude,
    I do not agree F&F were just middle men. They transformed mortgage market risk into risk comparable only to US tresuries. That’s a big difference.
    Central banks of many countries did not bought US citizens mortgages they bought GSEs bonds guaranted practically by US

  47. obsvr-1 says:

    Start w/

    Demand for higher yields: DeDude “to much money floating around and trying to find a place to get a high yield”

    Mix in securitization to enable the money to find the yields — invest into
    MBS to attract the investors $ — offload risk Add leverage — start pumping the bubble

    Sprinkle some magic pixie dust, derivatives: CDO, CDO squared, CDS (a.k.a financial innovation) — Magnify leverage, offload more risk — pump faster

    Sprinkle a little more magic pixie dust, sub prime and Alt-A — keeping the “home affordability index” high — pump faster

    Incentives throughout the housing / mortgage ecosystem attracting “bad actors” (mules and pushers) — sell more houses, sell up, cash out Home Eq, artificially drive up housing prices — pump, pump, pump

    Globalization and Multinational Finance companies: Execute the securitization and risk offloading strategy around the globe (anywhere we can find $$ to suck into the bubble)

    Repeat, Grow, Pump — Assets real and synthesized grow to historic high levels stretches the bubble to the point of ‘the straw that breaks the camels back’ small increase in mortgage default and small decrease in home price is magnified by all of the leverage puts the entire worldwide financial system to the edge of collapse

    The world wide collapse (bursting bubble) is averted with the $T’s in support from Gov’t’s liquidity and guarantees (thank you tax payers) — let out some pressure so the bubble doesn’t burst.

    Today — housing bubble is still inflated (debt higher than asset value – effectively insolvent) —
    leaving a wake of foreclosures, mortgage modifications (a new thread can be started on HAMP), lower demand on new houses * * * to deflate the bubble massive delevering needs to occur to get the debt:asset value normalized….

  48. DeDude says:

    @Soylent;

    The question is not whether F&F were a couple of big players who had influence in the field and because of their size would be first adopters of certain technologies. The question is whether a lack of F&F in the market would have given a different outcome with regards to automatic loan approvals and irresponsible lending.

    In all other parts of the financial sector risk appraisal was automated (and that also turned out bad), so I am sure that it would still have happened to housing even in a “F&F free” world. The loosening of standards were a direct result of the ability to make more money without suffering any consequences that came from selling the loans to third parties via CDO’s etc. The other private companies that got the code from F&F loosened their demands because they found a way to get the sh!t painted golden by rating agencies, and then keep the profits and sell the risk. F&F were not nearly as able to get rid of the risk so they keep mostly to more conservative (although not conservative enough) conforming criteria. In the end (2008) F&F had gotten outrageously loose because they were desperately trying to keep market share (as a private for profit company should), and that is why they are in such a hole now.

  49. DeDude says:

    “They transformed mortgage market risk into risk comparable only to US tresuries”

    So did a lot of investment bank if you look at the old ratings and the miniscule spread between their CDO’s and Treasuries/GSE’s back then. The 5 trillion that ended up in GSE’s would not have ended up under some foreign government mattress (if GSE’s had not existed), they would have ended up in Goldie’s Golden CDO’s and similar AAA rated products from other iBanks. And if we had banned any and all securitizations of US citizens mortgages – yes then they would have gone out and bought thousands of individual mortgages (advised by Goldie’s Golden advisers), because the money was still there and had to be invested in something considered safe (house prices never go down, remember that).

  50. DeDude says:

    @obsvr-1;

    I totally agree with that and notice that neither CRA or Fannie and Freddie are named in your outline of events. But then F&F were not players in all those other countries where the exact same thing happened so how could anybody put them in a causing that cr@p. They were just tools of the masters who raped the world.

  51. Julia Chestnut says:

    @Darekkk, supply and demand came to have nothing to do with it, essentially: that’s what makes a bubble. So no, I’d disagree with you on the whole premise that prices were driven by supply and demand — for HOUSES. On the contrary, price was being driven by a demand for investment that would generate a yield, because interest rates were held down at real zero for several years. Below zero, probably. Demand was unhinged from the asset itself entirely. Remember that during this same time frame the last of the pensions was essentially disassembled, and we entered a world where your savings — everyone’s savings — had to grow at a rate greater than inflation or cat food becomes the fancy dinner when we retire.

    I don’t think that you can say that F&F or the CRA were in any substantial way involved in feeding the bubble. The only reason that the feeding frenzy got down to the type of people targeted by the CRA is that all other eligible players were already in the game. It’s a correlation/causation issue: just because poor people eventually bought houses that they couldn’t afford does not mean that they caused the bubble, it just means that eventually the bubble reached even them.

  52. kurtwestphal says:

    Barry .. Z for this one.. ;0

    the ‘gov did it’ is just to easy and sloppy.. , i like the data driven approach, it’s like cheating and using science… ;)

  53. darekkkk says:

    DaDude
    Let’s assume you are right- GSE’s could be easily replaced by other lenders.
    For me that means:
    -GSE’s should not exist -why US goverment has created and supported entities which do not affect a housing market?
    -closing GSE’s should be easy- banks and other lenders will take their share of business
    But that’s just speculation. Facts are: GSE’s were and are the biggest players in US housing market

  54. DeDude says:

    darekkkk;

    The reason GSE’s should exist (even if they in good times can be replaced by other private lenders) is that in bad times they are the only game in town. As you can see after the financial crisis, capitalism breaks down and leave us without any private lenders for the housing markets in certain situations. So to ensure that the housing markets do not freeze (and further deepens the catastrophe) during a financial crisis the GSE’s have to exist. But they need to be removed from the private ownership that got them into such deep trouble and get back to their old format. A government owned and operated entity that provides inexpensive and safe loans to regular people who have saved up a 20% down-payment and can afford a plain vanilla loan for the rest. If the private sector can provide better products and services then they will take market share from the GSE’s and that is fine (as long as those are not fraudulent products that entrap consumers). If the private sector with its presumed much better efficiency cannot provide better cheeper products, then people (and “we the people”) are better off by large responsible GSE’s.

  55. DeDude says:

    On top of that the banks/mortgage brokers should have a legal obligation to act in the best interest of their clients (the home owner), and be legally obligated to take back any loan from the GSE’s if it within the next 5 years become more than 90 days delinquent. That way the incentives will have been put in place to do the right thing (perhaps add criminal liability on the mortgage agent to be on the safe side).

  56. obsvr-1 says:

    DeDude Says:
    July 20th, 2010 at 2:18 pm

    @obsvr-1;

    I totally agree with that and notice that neither CRA or Fannie and Freddie are named in your outline of events.

    Reply —

    FNM/FRE/CRA were participants in the bubble pumping; although historically these GSEs did not cause bubbles. Not that FNM/FRE didn’t have excesses and accounting scandals (cooking of the books to enrich certain exec’s). CRA and gov’t policy for increasing home ownership contributed but did not cause the bubble.

    Private Label Securities (PLS – I-Banks) created the tools for pumping (increase leverage, offload risk) created the pumps — many participates used the pumps. The Private Label guys started to take market share from FNM/FRE.

    FNM/FRE private part of the GSE needed to show profitability and growth to their shareholders. To continue to meet the ROI demands of the shareholders they had to stop the market share loss to the PLS and had to compete to accomplish that goal. To compete the executives of FNM/FRE made the decision to compromise underwriting standards — and aways she goes down the slippery slope to join the bubble pumpers.

    Data shows the growth of the PLS side was leading the bubble pumping and the FNM/FRE followed in the PLS footsteps.

  57. Joe Friday says:

    Over the weekend, during an appearance on the WSJR, the CEO of American Century Investments, Jonathan Thomas, said in regards to the FinReg legislation:

    “as a consequence of this financial crisis, Fannie and Freddie played a large role, and yet it is wholly unaddressed in this bill”

    Mike Cuggino, the president of Permanent Portfolio Funds added:

    “The premise that it was only the banks and Wall Street that created this mess is a faulty one, and this bill does nothing to deal with Fannie and Freddie.”

    WHAT THE HELL IS WRONG WITH THESE PEOPLE ???

  58. darekkkk says:

    DaDude
    You have mentioned”house prices never go down” convinction as a factor contributing to a bubble.
    Now You wrote “The reason GSE’s should exist (even if they in good times can be replaced by other private lenders) is that in bad times they are the only game in town. ”
    Can’t you see a incositency here?
    If houses are overvalued their price should fall. Giving a loans to people in bad times means allowing them to buy an overvalued house. It also supports prices and creates convinction “house prices never go down”
    It’s like giving free puts to other participants of the market. In good times prices go up because that’s good times. In bad times goverment will took demand. That a recipe for a bubble.

  59. DeDude says:

    WSJR is serving its masters inviting people who will say whatever serves these masters. They hate the idea of Fannie and Freddie because these institutions to some minor degree protect the little guy from being cheated and plundered by banksters. For the corporate media machine it is not about the truth its about the narrative they have been handed.

  60. obsvr-1 says:

    Joe Friday Says:

    “The premise that it was only the banks and Wall Street that created this mess is a faulty one, and this bill does nothing to deal with Fannie and Freddie.”

    WHAT THE HELL IS WRONG WITH THESE PEOPLE ???

    ————- reply

    FNM/FRE have been put into conservatorship and regulated by FHFA about the strongest regulation you can get. What else could you add to FinReg ?

    FNM/FRE continue to bleed $ to the tune of 100′s of billions, much coming from absorbing the Toxic Assets, MBS and guarantees from the bailed out I-Banks.

    All of the executives from FRE and FNM were tossed in the transition to conservatorship — you can not say the same for the executives of the bailed out I-banks.

  61. DeDude says:

    @darekkkk;

    Giving a loan to people in bad times does not mean allowing them to buy an overvalued house, unless you give them a loan to buy the house for an excessive price. However, if the house market becomes purely cash then you can be certain that the prices will go way below fair market value (which is replacement “actual” +10%). What F&F have allowed is to ensure that house prices have not shoot to much below fair market value (look up replacement costs and you will find very few areas where prices are much different in either direction). This has saved a large number of regular folks from being victimized by the rich vultures who have been hanging around the housing markets to suck up units for 50 cent on the dollar and sell them for a fat profit a few years later after the bounce back.

  62. DeDude says:

    The idea that house prices are somehow way to high at this time does not resonate with the observations from the real world. The true/fair value of a product is what it would cost to replace it. For houses you have to look at the cost of materials + labor and then add a 10% risk premium for the builder. That is a fair price/value for a new house. A lot of builders are desperate to keep their business going yet very few new houses are buildt (<25% of the highs in 2006 according to a chart today at Calculated Risk). The reason is simple, builders know the cost of materials & labor and they know that they cannot sell the final product for a fair price. There the market forces are actually working – but also telling us something about current prices.

  63. ckullback says:

    House prices are purely a factor of INCOMES…PERIOD. House prices are not a mythical, difficult thing to figure out. Throughout the history of homeownership, a general indicator of “normal” house prices is 3 to 3.5 times income. In detail, it’s driven by income combined with debt DTI ratios both front end and backend. Anytime you exceed the standard ratios compared to income you are in an unsustainable bubble. The only way to allow that to happen is to modify the loan standards. Whoever allowed the loan standards to be modified and did not enforce existing laws requiring those standards is responsible for the bubble….who do you think that is??? Not hard to figure out. House prices can only rise when incomes rise and incomes have for the general population remained stagnant or decreased over the last ten years and will continue to as well. Only in very isolated areas do house prices increase more dramatically than the “average” house and that should only occur because the population bidding on those houses has an increasingly higher income level. Example is limited waterfront areas. The bubble was caused by buyers who were allowed to enter the buying pool for higher priced houses not because their incomes were increasing, but because the loan standards decreased. The only way to get back to sustainable home prices is to get to 3 or 3.5 times income with 30% to 50% DTI ratios front end and backend. It’s not difficult people. You don’t solve the problem of homes ot being affordable buy lowering standards. The price will come down to income if you don’t monkey around with standards. It sucks, but that means home prices have a long way to fall still.

  64. ckullback says:

    DeDude…you’re calculation for a house price is about the most idiotic thing I’ve ever heard. That is the calculation for what the builders WANTS to sell the house for, but the only factor in truly determining home prices is what is the income of the people who WANT TO LIVE in those homes. You must know your target market and demographics BEFORE you build. With normal loan standards you will only get approximately 3 to 3.5 times income from the people who want to live there. If you can only attract people who make $100k a year then your maximum price of the house will ultimately be $300k to $350k. Just because you build a nice house, doesn’t mean you’ll attract the right demographic of buyers. It’s a combination of location, regional salaries, regional costs, desirability, etc…When it all boils down, you can only afford what you can realistically pay for…3 or 3.5 times income.

  65. DeDude says:

    @ckullback; I don’t think there were any laws prohibiting IndyMac from giving loans to anybody who could sign them, or Goldie from making MBS paper our of those loans. So I guess the responsible party “not so hard to figure out” is: free market forces. So they could/can deviate from historical loan standards as much as they wanted. I don’t disagree with what you say in general to much. But you have to get back to a long-term sustainable situation where builders can get a fair price for their products (fair price = cost +10%). Without that they will not build and market forces will eventually push prices up. I agree that there is also an issue at the demand side but it is a lot more flexible. People may be convinced that housing is important enough to use 50% of their monthly income to pay a mortgage (forgoing all but the minimum on things like food and cars). As incomes increase people’s ability to flex on what % is used for each category is increasing. The idea that 3.5 times income is a universal price sealing that must be obeyed in the long run is simply not true. It is based on assumptions regarding interest rates and a maximum % of income going towards mortgage payments that although reasonable in historic perspective, are not in any way hard rules.

  66. BTUR says:

    @DD123

    “Instead, I think the pushers are simply trying to ram an agenda down the throats of their own acolytes. Anything to keep us from thinking independently. “God forbid any independent thought…we might lose some “true believers”. Villainize Fannie Mae and CRA! Hell, even if we are ‘wrong’, we’ll still be right. Keep the drones occupied and ‘combat ready’. At all costs, keep this culture war alive, and contest the other side…over everything!””

    Extremely interesting observation. I had never even thought of it that way.

    “Too often, I’m blind to it, when it occurs within my own belief system.”

    All of us are. I think at least being able to see and acknowledge our limitations makes it easier to figure out the truth. The best we can do is look at the facts and hope our biases don’t get in the way…

  67. obsvr-1 says:

    @ckullback is correct

    Median Household Income vs US House price index through the 90′s were closely correlated with small departures over time until about Q4 1999 then there was a huge departure where the US House Price index increased dramatically over the Median Household Income. This lead to the increase in DTI getting out of whack, setting up the creative financing Alt-A and sub prime to keep the Home Affordability Index high.

    Maintaining discipline in financing by keeping an eye on DTI and not manipulating the monthly payment would have helped, may not have prevented the bubble, but certainly would have moderated the size of the bubble.

  68. DeDude says:

    Ultimately our increased productivity has made everything cheaper as measured in man-hours. It used to be that a man and his wife had to work over 60 hours per week to produce the minimal needs of his family. If you calculate the actual work hours invested in producing the minimal needs for survival today you would probably look at less than 5 hours/week. People have decided that rather than just work 5 hours per week we will use that productivity to get something that is more than the minimal survival needs. In Europe many countries have decided to use that productivity to give people 5-6 weeks of vacation (and accept a lower GDP/person). In US we decided to use the increased productivity to indulge ourselves (particularly the rich people) with things. There is no saying that we could not one day decide that the fruits of increased productivity (whipping the wage slaves) to a higher degree should be given to those wage slaves producing the things. We may also culturally end up valuing big houses much more than anything else, and then house prices could easily be sustained at 6 times income (with current interest rates).

  69. Reinko says:

    Ha ha, this is funny! Quoting Barry:

    –Pray tell what caused the same boom and bust in these other nations?–

    Your prayers have been heard my honourable Barry, the most likely reason in other nations we had such funny house booms too is that they listened too much to stupid USA laureates in the economical sciences…

    And although your prayers have been heard my dear Barry, I still don’t have a clue why foreigners buy USA debt.

    Do you?

  70. DeDude says:

    “I still don’t have a clue why foreigners buy USA debt”

    Its better than the Greek and the money has to be placed somewhere.

  71. Reinko says:

    Please stop the Greece nonsense, a small country will adept fiscally or die.

    How about California & the likes?

  72. xynz says:

    @ DD123

    You’re on the right track.

    I highly recommend that you read Thomas Kuhn’s “The Structure of Scientific Revolutions”.

    http://en.wikipedia.org/wiki/The_Structure_of_Scientific_Revolutions

    It’s THE seminal work on how paradigms evolve. Heck this book is what introduced the word “paradigm” into the popular lexicon.

    Scientific theories, ideologies and religions are all “intelligibility strategies”*: they are models that we create to impose order on the world. These models are ALWAYS limited and flawed: the history of human cultural development is the history of how these models ultimately fail and are then replaced by different models.

    (*”intelligibility strategy” is not a TSSR concept)

    “The Old Guard” or “The Establishment” are incapable of accepting the fact that their ideology has failed. This is partly because they have a vested interest in maintaining the old ideology. But it is mainly because they have made the classic error of confusing their “map” with the “terrain” it represents. They firmly believe that their map IS the terrain; so that anyone who asserts otherwise is perceived as fool or a liar.

    The EMH (in all of its forms) is just another ideology that has failed and it’s time for humanity to develop a new model in the continuing evolution of cultural development. But like all true believers, the EMH acolytes will vigorously denounce and resist any “blasphemy”. Unfortunately, the EMH “church” is very powerful and it’s well armed.

  73. ravenchris says:

    BR, dd123 and xynz, thank you.
    Protect yourself and the future, do not reelect incumbents.

  74. Tao Jonesing says:

    “I still don’t have a clue why foreigners buy USA debt”

    Pick up a copy of Michael Hudson’s “Super Imperialism” for a clue, and check out his website (michaelhudson.com, I believe).

    To the extent that the GSEs bear any responsibility for the US housing boom (I think they had a minor role primarily as money launderer for Wall Street) it was in the service of Wall Street and the lenders, not low income borrowers. Cui bono?

    The major problem that I have with “the CRA caused it” narrative (besides the fact that it is factually incorrect) is that it seeks to absolve the banksters of any responsbility when they, in fact, bear all of it. Regardless of how low the interest rates were or how lax the lending standards were, it was their business and the cocked up all on their own.

    In view of everything that I see , it is pretty clear to me that Wall Street set the policies of the GSEs, not the other way around. This was done, in part, to point the finger at “the government” in case everything collapsed, which it did. In this manner, the collapse could be blamed on illusory collectivist/socialist government policy when, in fact, the government’s sin was to aid and abet the rent-seeking behavior of Wall Street at Wall Street’s behest. Poor people simply don’t have the political power to pull that kind of thing off. Sheesh, how many months did it take to get a further extension of unemployment benefits?

  75. Nighttripper says:

    Just curious, do any of you follow Doug Noland ? I always found his Credit Bubble framework to be an invaluable tool for understanding the global macro landscape.

    Using his framework, the global housing boom was a result of loose Fed policies that inflated global asset markets via the shadow banking system and the hedge fund bubble.

    With Fannie/Freddie among the major issuers of non bank credit, and because they were the ultimate backstop and source of liquidity to leveraged hedge funds, its hard to conclude that Fannie/Freddie were not major enablers of the speculation and leveraging that caused the global boom.

  76. xynz says:

    @ ravenchris

    Putting the Republicans back into power will definitely make things worse….they are the primary purveyors of the failed ideologies that continue to choke the US.

    It is true that the Democrats aren’t much better. Back in the early 1990s, the Democratic Leadership Council and its “New Democrats” morphed the Democratic Party into what is essentially “Republican Lite”. That is why they were so eager to help the Republicans repeal Glass Steagall; don’t forget that Gramm Bliley Leach was signed into Law by President Bill Clinton. Obama’s appointment of Geithner, his backroom deal with Big PhRMA and the watered down version of Wall Street reform demonstrates that the Republicans don’t have a monopoly on whoring for the well-to-do and the well-connected.

    But Republican Lite is definitely better than the lunatic asylum that is the Republican Party.

  77. louis says:

    Hopefully Elizabeth Warren will make them put cskull’s explanation on the front of mortgage apps.

    Will leaving unwanted tulips in the street have any lasting affect? The Ostrich’s are trying their best to not look.

  78. Rescission says:

    Was in the mortgage lending biz for 20 years, in a big way.
    CRA had nothing to do with it. Securitization and the insatiable appetite for those bonds drove the lending.
    Everyone thought everyone else was managing the risk. Everyone relied on the rating agencies. Fannie and Freddie saw how much money was being made in the “non-agency” securitization market and wanted to get in on the action, so they did, in a big way. Responsible parties were: Mortgage brokers, Mortgage Originators (the lenders), the securitizers, the rating agencies, Fannie/Freddie, and of course the Federal Reserve for artificially keeping rates so low. It started getting out of control around 2004 and beyond. When everyone is making money, no one wants to be the one to question anything, but they also don’t want to be one left holding the snake. They job was given to the bond holders.

  79. Temjinck says:

    BS! The boom in Australian house prices is caused by lack of supply and high demand from both home buyers and foreign investors, forever increasing immigrations, strong economy (we never were in a recession!), and because us Aussies are just different and we love houses more than you Yankies do.

    We are unique and different, and our house prices will keep going up forever, unlike those over in the US. Blah, blah blah.

    P.S: This is the prevalent mindset for most “sheeps” in Australia. Relaxation in lending practices, low interest rates, and massive intervention by government policies are never ever considered when we come to the conclusion above. (or rather largely ignored)

    P.S.S: *acting as a typical Aussie who has a love for property* Mate, I know nothing about who or what is Fannie and Freddie. It’s supply and demand all the way! House prices to the moon! Buy now or it’s too late.

  80. gordonq says:

    Most of the discussion of wreckage is around the engineering analysis of brakes, seat belts, airbags, throttle position, steering response, and tire grip as to why the housing boom/economy caused such a devastating crash and of course this is fine. But a very real question is why were people crossing over the center line speeding down the windy road in the first place? The financial institutions who may have made the road safer were just too accommodating in funding the public’s excesses to make their share of profits and fulfill the political expediency of home ownership. You probably didn’t notice, but the US housing boom was caused by the catalyst of Clinton’s removing of capital gains taxes on short term sale of houses effective 5/27/97. US housing prices launched from that exact point in time with buyers hoping to make 10′s and 100′s of thousands $$$ tax free by buying and flipping their home of residence, and not wanting to be left behind in the ensuing real estate grab. As for the other countries’ housing booms, I have no knowledge of their tax structures but capital gains are capital gains and just the global influence of what is happening in the US is more than enough to spawn excesses all over the world. Buying homes and making improvements is extremely energizing to an economy so who wanted it to stop? Had some or all of the financial system components had the cojones for more discretion and restraint we would have avoided the devastation but my main point here is that the removal of capital gains taxation from the relatively short term sale of homes on 5/27/97 was a very poor idea but everybody thought they could benefit from it and no one objected.

  81. obsvr-1 says:

    gordonq Says:

    tax policy did not cause the boom,

    house flipping was predominately by speculators never intending to occupy the home. Can you imagine moving every 6 months….

    Tax policies that did contribute to pumping the bubble:

    * 1031 exchange which sets up the environment for investors to sell and then roll the return and capital gains into more real estate holdings.
    * Incentives for homeowners to buy up buy using equity + capital gain as down payment to a bigger Mc Mansion
    * Change in tax policy to disallow consumer credit as a write off — this set off the Refinance wave to pull out equity for consumer purchases, credit consolidation, life style enhancement, etc . etc … and be able to write off the interest on the debt. Even if someone was conservative and maintained a 80% LTV it turned out to be a mistake when housing prices fall 30-50%.

  82. [...] between those two facts is a bit incidental. Barry Ritholz has a smart post that makes the case for the basic irrelevance of idiosyncratic features of the American property [...]

  83. AHodge says:

    I call it cheating whan you show US only FHFA, not Case Shiller which went much higher then collapsed much deeper.
    Ireland UK netherlands much worse but on way lower ownerhip start bases.
    it leaves out the many stable biggies canada etc?
    it would be boring to repeat my last to you on this.
    But how can FF losing a half trilllion in loans have been market based lending? I am with you on CRA ALONE being minor cause. but you wont even list FF as one of your 15 causes of the crisis

  84. AHodge says:

    And spain has Casa’s quite similar to FF

  85. DeDude says:

    @AHodge; obvisously a lot of money was involved in this crisis trillions of dollars. So was money (the paper itself) a cause of the crisis or just an instrument in the crisis? To be a cause, it is not enough to be part of a chain.

  86. AHodge says:

    its less about money than other financial assets. fake assets, and fake insurance including FF tailoring the emporers clothes fiction that mortgage paper is a reliable fixed income security. fake assets funded with real debt.
    those are real losses expressed in money.

  87. DeDude says:

    You have to come up with a “but for Fannie and Freddie doing ???” – this crisis would not have happened or been substantially less. Anything I have seen trying to explain why F&F were causing the crisis are things that the other private mortgage securitization companies were doing at least as bad or worse – and if F&F had not done it the other companies would have just taken over that business. The fact that they could do it at 50-75 bp less made a difference to it being done on a grand scale is absurd (and conflicts with the fact that it was being done at companies lending at slightly higher rates).

  88. DeDude says:

    Goldie and the other banksters sold their sh!t (with a payola AAA rating) to the world as being just as safe as treasuries, but giving a better (above inflation) yield that what Greenspan would allow investors to get on real treasuries. Those who where not quite convinced, were referred to get insurance on the paper (for a small fee that would still leave you ahead of the game) from the worlds largest company, AIG (even if you were to lose that 100 million, this trillion dollar company will cover your sorry a$$). Furthermore, the paper was tied to (backed by) a reliable asset known to “always to up” (so they said). So how could you say no to investing in Goldie’s Golden papers (giving you that above inflation yield that Greenspan denied you, backed by rock solid assets, and insured by AIG). All Goldie (and the other Banksters) needed, was enough of that “rock solid asset” to create as much Golden paper as the market demanded. When/if Fannie and Freddie could not deliver enough then they could/would get it from someone else. They did not care if it was F&F or Joe Smoe that delivered the mortgages because they quickly sold off the risk. This whole racket was in no way dependent on the existence of F&F. They were simply the conduit between the “rock solid asset” and the Golden paper. If anything the existence of a choice for investors to directly purchase F&F paper cutting Goldie out provided an inconvenient brake on this Golden racket and that is why F&F suddenly came under political attack at that time (F&F trying to get into that dirty business themselves didn’t fly that well either).

    The underlying cause fuelling this racket was the huge amount of money that was chasing a yield better than inflation and treasuries. Some of that liquidity was created when huge tax-cuts for the rich and failed (lack of) income distribution policies, left the consumer class unable to create a sufficient demand for productive investments to allow all the investor class moneys to be put to good use. That is what creates all bobbles – an imbalance between consumer class and investor class incomes. But this time the problem of this imbalance was multiplied when rules on maximum leverage were loosened, so the already excessive amount of investment cash could be leveraged up creating an even greater excess.

  89. AHodge says:

    In spite of your last para being right, and BRs latest on there was a globl boom, this in no way refutes the proofs i supplied in june that 10% minimum of the US was “caused” even by your tightest standards. if you cant find mine i refer you TO YOUR OWN of June 15

    “DeDude Says:

    June 15th, 2010 at 10:58 am
    The real dumping happened in 2005-7, when the master of the housing Ponzi scheme realized that they had to get F&F into it, to keep it going long enough to allow themselves to get out. So they had their lawmakers and white house sock-puppets allow, entice and push F&F into the subprime business. This may have been completely against the neocons ideal of letting the (real) private sector do everything; but as soon as someone whispered in their ear that this was actually to give the GSE’s greater market share in some toxic waste that would blow them up, then the Bush White House were all for it. Not that it took much to convince the Bush White House. Their whole economic policy (another Ponzi scheme) was resting on the need for a housing bubble to provide consumers with money to spend. And in the liberal lawmakers ears they whispered: “this is to give poor people big houses” (then those suckers were on board). So our financial masters (now with personhood) got to harvest their profits at the peak and leave the losses to everybody else.”

    here is where you say excuse me you are right and move on

  90. DeDude says:

    Yes the house and mortgage supply part of the game was getting nervous and had to unload before it all collapsed (many builders were scared to death because it takes them at least 12 months to “get out”). That did not change the goals and strategy of the bankster demand end of this scam. The fact that suppliers managed to stick some of their loses to F&F in the end game does not make F&F a cause of the scam – just one of the final bag holders.

    I would be more than happy to say you are right if you can show me anything to support the idea that without F&F the Golden boys at Goldie would not have found some other entity to deliver the goods. It’s not like F&F had all the dummies and the rest of the private sector (C, AIG, IndyMac, etc.) was full of brilliant people who (like Goldie) figured it out and got out in time. For the political reasons mentioned in the June 15 post F&F were the perfect target for “bag holding” (and help with extend/pretend of the Bush light economic growth), but other targets would have been found if F&F had not existed.

  91. AHodge says:

    Prove some other alternate universe could not have happened? not a standard i go with. Logically “you” know nothing about anything by that standard
    Your errors, of which there are a number in the quoted, and the first of your recent, include thinking
    1 FF was fine till induced by those bad boys from planet R to buy subprime
    2 That this was mostly a subprime problem
    3 That the subsidy and distortion was “only” 50 75bp

    these are all errors from planet D
    of the partizanship makes you stupid kind. would you like me to prove that?

    on the later its not 50-75bp only
    its 100-200bp over 10 years thats 10% of a house price–cha ching and not covering losses
    its much lower down payment –cha ching, more buyers, and not covering losses.

    that all went on since the nineties
    its lower “prime” credit standards– more buyers and not covering losses
    its falling credit standards more buyersnow more losses ahead

  92. AHodge says:

    someone whispered in their ear that this was actually to give the GSE’s greater market share in some toxic waste that would blow them up, then the Bush White House were all for it.

    It’s not like F&F had all the dummies and the rest of the private sector (C, AIG, IndyMac, etc.) was full of brilliant people who (like Goldie) figured it out and got out in time

    these two statements are completely contradictory ( except for goldie) Another example of desperate blame the other side wrongheadedness

  93. rnspiess says:

    You asked for another explanation. Here it is.

    A well regarded economist, speaking on CNBC, commented that understanding the economic cycle was difficult in its complexity. To the contrary, I believe that if one simplifies by starting at the beginning, a listing of the axioms — premises, the incontrovertible truths of free market economic rises and falls — sound, understandable postulates will follow.
    That is if the understanding is allowed to develop in the abstract as economic cycles are too much under the human influence to be definitive.

    FOUR AXIOMS

    Axiom 1 . . . People, human beings, are the best during the worst of times, worst during
    the best of times. During hard times, people tend to help one another, their neighbors,
    many of whom may be suffering difficulties greater than their own. As times improve,
    these same people become more hardened, become more inclined to connive, cheat and
    defraud their fellow human beings.

    Corollary… Success breeds failure. Although success can breed more success, at least temporarily, eventually with success/prosperity comes complacency, over-confidence, risky decision making, etc., all the breeding grounds of failure.

    Axiom 2 . . . Where there are needs, humans, to the limits of their abilities, will rush to meet them. Where there are holes of opportunity, humans will do their utmost to fill them.

    Axiom 3 . . . Money is an exchange for value. When civilizations began producing more
    value than consumed, there arose the need to store the excess value rather than
    immediately consume or barter it. Thus the origin of money: gold; silver; wampum;
    exchange bills or notes; anything that could serve as credit for the stored value.

    The concept of value … To accept the concept of money an exchange for value requires a functional definition of value. What is value? What are value’s characteristics? First and foremost, value is fluid. It can be considered a constant only for an infinitesimally short period of time. Second, value is closely related to demand. Demand can not exist without value, nor value without demand., not even for the shortest period of time. A loaf of bread’s value, the demand for it, deteriorates with the length of time on the shelf. The value of fresh fish slips quickly to zero, or even minus, if the fish spends time in the hot sun.

    Regarding a money/value exchange, it is important to keep in mind that for sound money value must exist before the exchange takes place. Money that is not an exchange for value is worth no more than its deceit.

    A problem (confusion) in applying the money/value relationship is that value can not be quantified. Value is typically assessed in terms of either its real or estimated money exchange. Imponderable in complexity and measurement, albeit essential to our economic existence demands that value be treated as an abstract variable in the money/value relationship.

    Axiom 4 . . . Credit quality varies inversely with credit availability, at its highest when money is tight, deteriorates as funds grow more plentiful.

    THE CREDIT CYCLE

    At the bottom of the cycle: money is tight; credit quality high: loans are granted to the most productive enterprises, i.e. those that produce value/money exchange either equal to or in excess of mortgage maintenance requirements – the more secure/productive the loans the greater the value creation. Excess value is plowed back into the system to grow credit availability.
    The increasing funds enable more loans and increased value production, which in turn enables more available funds, loans and value production, etc, etc. etc.
    As the process continues, credit availability increases and credit quality declines i.e. more and more funds chase poorer and poorer quality loans. Good or bad, lenders continue to lend any and all funds they can get their hands on. More funds than they know what to do with, they turn inevitably to housing as the only mass demand loans to satisfy the growing, overabundant funds. Greed prevails; people, best during the worst of times become worst in these `best’ of times. All that matters for the lenders (lenders will be lenders) is making loans. Borrowers, greedy in their own rights, are always easy to find.
    Housing thus becomes the end of the line for the credit cycle. Greed induced, the near-perfect bubble maker, the loans remain productive until . . .
    Saturation . . .
    Stagnating prices . . .
    Weakening demand . . .
    Defaulting loans . . .
    Declining then falling off-the-cliff portfolio values . . .
    To the level that banks fail in their abilities to exchange portfolio values for money to support their depositors. Down, down the remnants of the popped bubble descends to rock bottom and defaults that destroy portfolio values. Success once again paves the way to failure.

    Fixing the system

    The destroyed value must be restored to completely fix a failed credit system. If banks (all lenders here regarded as banks) with shreds of life (reserves) can persuade, require depositors to ration withdrawals and thus conserve whatever funds they may be able to lay their hands on, they can continue lending (albeit modestly) and thereby work their way (create enough value) back to solvency. Presumably at the bottom of the cycle, their new loan portfolios are of high credit quality and thus prove productive in restoring their balance sheets.
    Depositor insurance by and large defeats this strategy. Who among depositors would choose rationing their withdrawals when full withdrawal is available should the bank go bust? Such banks unable to meet reserve requirements must therefore be saved through capital infusions (loans, sales of stock or mergers) or else broken up and the pieces sold to other banks
    It is noted that such fixing of banks balance sheets does not in itself restore portfolio value, especially when the infusions are funds (printed money) that are not exchanges for value. While the banks’ balance sheets may technically be restored, the value lost to the collapsed bubble can remain in disrepair.
    Thus the overlooked question: What will, what can replace the massive amount of destroyed and displaced value? And, what are the economic effects if the value is not restored? What can induce demand, value’s close cousin? Strong demand is mandatory for success in restoring deficient value. Weak demand can only lead to ill-conceived, unsuccessful efforts in fixing the system.
    Contemplating the interacting, complex credit relationships leads to digression. What is the result of infusions of money not exchanged for value (printed) as related to money exchanged for value. While they both look the same, act the same, smell the same, one must keep in mind that value is the essence of money while money is not the essence of value. Wealth is the accumulation of value. Creation of value is the backbone of economic health. Mixing printing press money with value based money dilutes money’s average worth. The result can be shortages of value when holders of money wish to make an exchange. However, what difference does the valueless money make if holders stuff their money in their mattresses or deposit it in bank accounts? In such case there would seem to no inkling that a shortage of value existed. Ostensibly if banks applied worthless deposits to credit-worthy loans, the value produced could restore the system, making everyone a winner. So it would seem.
    If . . . if . . . if . . . if the loans were credit-worthy. But, with banks flush with reserves, the system’s credit availability could be fairly high. As lenders lend (it’s all they know how to do) they would eventually (maybe sooner than later) overcome any reluctance to lend and go full bore after potential borrowers, induce them to borrow again whether their credit quality is high or low. The new credit cycle could thus begin with credit quality not at its peak (as when credit available is low) but at some deteriorated point on the curve. The result could be hastening the of blowing a new bubble.
    Such possibly was the ’03 condition. Too soon after the dot-com bubble burst, tax cut, Congress spending like drunken sailors and Fed easy terms money flooded the banking system, Add the general public eager to exchange the saved value of their houses with money to invest, the finagling of Fannie and Fredie and puff, an inflating bubble.

    Conclusion

    Value is the principle element of economic cycles. It can not be directly quantified as it consists not only of a real worth of goods and services but the perception of that worth. Value therefore is inflated when perception is high and deflated when perception is low. For a system to be economically sound, money must be an exchange for value. If money that is not an exchange for value (printed) is perceived the same as money that is an exchange for value, then it is. However, perception can and is likely to change if and when shortfalls in value become apparent. A burst bubble destroys both value’s real and perceived counterparts.
    When bank balance sheets are restored by infusions of capital, the effect will be to increase credit availability and thus advance on the curve toward lower credit quality and a new, inflating bubble, in other words to shorten the boom-bust cycle.
    In the final analysis it is the creation and production of value that determines economic health. It is value made available to local, regional, national to global marketplaces in that the marketplace is where money/value exchanges are made.

  94. DeDude says:

    @AHodge,

    You are still not addressing the question of whether some other entity would have filled the hole left (and done the same thing) had F&F suddenly disappeared from the earth. It’s actually easy since there were other entities that did the same or worse, and if more business had come their way they would just have expanded. If you want to blame F&F then show me something they did that would not have happened anyway, if they had not existed.

    We agree that the other entities would have had to deal with higher credit cost and exactly how much is not that important, so lets use your numbers. You want us to be impressed with 10% of a house price over 10 years when the hot markets had annual price increases of over 20% per year? In pumping the bubble up, cost was not the issue. To retain demand you just made an even funnier product so a person with 50K (undocumented) income could “afford” a 500K house. The vast majority of those funny products that pumped the bubble seriously at the end did not come from (or to) F&F. So they had no influence on how high prices could go.

    Yes you almost got the point in those two statements Goldie had the smartest people; that is why they got out of this with their Gold intact. Nothing contradictory in that. It happens in all bubbles; a few very smart, rip money away from the huge number of not so smart.

  95. AHodge says:

    you managed to completely miss my point
    namely if only goldman got it where were all the folks who
    “whispered in their ear that this was actually to give the GSE’s greater market share in some toxic waste that would blow them up, then the Bush White House were all for it”

    When cause is refuted by “something else could have/would have done it”, the logical retort is who cares.
    But as my final contribution since you insist in either playing stupid or worse, the FF role was not just the 10% that comes from 1 % pt
    thats a minimum it could be twice that
    they supplied half the US market.
    they set a global standard of convincing everyone they could buy this without being experts
    induced the rest of the world to buy this on the basis of it being government enterprise
    drastic ally reduced down payments and credit standards also raising price via more demand, and also set a global example there
    bought nearly a trillion of the private stuff.

    with this i am joining all the other sensible folks on this post, many of whom further detailed the above points, in ignoring you.

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