In tday’s NYT, Joe Nocera calls out FCIC member and long time AEI analyst Peter Wallison, and his inconsistent narrative about Fannie and Freddie:

“As he wrote in 2004, “Study after study have shown that Fannie Mae and Freddie Mac, despite full-throated claims about trillion-dollar commitments and the like, have failed to lead the private market in assisting the development and financing of affordable housing.”

After the crisis, his tune changed considerably — as did that of many other Republicans, who tended to follow his intellectual lead on this issue. Now, he said, it was government policy aimed at increasing homeownership that essentially forced the private sector to make bad subprime loans.

And Fannie and Freddie, with their enormous power in the securitization market, were the government’s vehicles in leading Wall Street and the other market participants down this garden path. “Fannie and Freddie were in competition to reduce underwriting standards,” Mr. Wallison told me when I spoke to him this week. This of course directly contradicts his criticism of six years ago, but never mind.”

This is not intellectual flexibility, it is the opposite: The conclusion is always the same — government bad, markets good — but the rationales are what changes. Different theories, arguments, rhetoric all are in service of the same narrative regardless of facts and data to the contrary.

Start with the conclusion, look for confirming facts; If they don’t exist, make them up.

Wallison’s white whale obsession with Fannie and Freddie has led him to exist in a fantasy world, filled with intellectual artifice, devoid of empirical evidence.

Nocera:

“The only problem with Mr. Wallison’s theory is that it’s not, as they say, reality-based. Anyone who has looked at the role of Fannie and Freddie will discover they spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards. (Indeed, for most of their existence, Fannie and Freddie didn’t so much meet their affordable housing goals as gamed them.)

When Fannie and Freddie finally did get into the business, it was very late in the game. But the motivation wasn’t pressure from the government; it was pressure from the marketplace. You see, the subprime companies and Wall Street had long used subprime loans as a way to do an end-run around Fannie and Freddie. By the mid-2000s, subprime underwriting and securitization had become so profitable — and such a large part of the overall mortgage business — that Fannie and Freddie felt they had no choice but to dive in. In other words, the G.S.E.’s were reacting to the realities of the market, not to the government. They were worried about losing market share.”

Never let the truth get int he way of a good narrative . . .
>

Source:
Explaining the Crisis With Dogma
JOE NOCERA
December 17, 2010
http://www.nytimes.com/2010/12/18/business/18nocera.html

Category: Bailouts, Credit, 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.

44 Responses to “Dogma Versus Reality”

  1. Liminal Hack says:

    “Never let the truth get int he way of a good narrative . . .”

    Well we are all guilty of that, you too BR. In particular, the common or garden narrative that ‘interest rates were held too low for too long’ is a classic case of narrative before reality.

    If you hold rates high, asset prices fall and yields rise. The obvious thing to do then is borrow more money to buy these high yielding assets, and then guess what, we end up back here – high prices, low yields. In a similar vein, there is no justification whatsover in a fiat monetary system to arbitrarily restrict the quantity of outside money such that whoever happens to hold it gets a return on it.

    What right has anyone to dictate a “yield by fiat” – that housing should be cheap and have high rental yields? The whole point of markets is to equalise yields such that all that remains is the inherent risk premium. Therefore rising asset prices and falling yields is always and everywhere the result of markets doing what they are supposed to do.

    Sure we could knock it all down so we can start again but the outcome will be the same. Housing will always rise to a price at which its rental yield is only just above a reasonable risk premium, like 2 or 3%. This wouldn’t matter if incomes were more evenly distributed. In the end, only reduction of income inequality will make housing affordable.

    ~~~

    BR: I honestly have no idea WTF you are trying to say here . . .

  2. Sarge says:

    “In the end, only reduction of income inequality will make housing affordable.”

    And how is that achieved?

  3. The math is inescapable that when interest rates were lowered to 1%, homes prices popped.

    Do the math yourself: How much mortgage does $2000 per month buy you at 9% ? How about 6% ?

    If you lower the cost of credit, you bring more buyers into that market. Suddenly, the people who could afford a $350k house goes up dramatically.

    Its pretty basic, obvious stuff. Indeed, it is the only explanation I have found that can explain the simultaneous global boom in Housing in the 2000s . . .

  4. Jackson says:

    Liminal Hack,

    What Sarge and BR are saying is that your argument really isn’t persuasive. The data about low rates driving home prices is incontrovertible.

    I don’t disagree that we subsidize Home ownership over renting — but there are very valid reasons for that, worthy of another debate altogether.

  5. Liminal Hack says:

    OK BR, lets say that rates had been kept at say 4%. Lets say that had held down the price of housing for a time. Now, unless wages go down by a similar amount, the rental yield would then have been something quite special fo rnew investors.

    Try this graph: http://2.bp.blogspot.com/_1V7wnZxPqok/RjQlDLRv2lI/AAAAAAAAEA0/HVCla4Ww-bo/s400/abn.jpg

    I mean, this is why foreign investors initially started investing in US and UK property – because they had nice high yields given the low prices back in the 90s. Especially in the UK, in the 90s prices were far too low given rents. This partly explains why our so called bubble in the UK hasn’t collapsed to the same degree.

    Anyway my point is this – you have high rental yields and low real estate prices, and foreign money will come in and buy up that real estate if the locals can’t or won’t afford it. Then prices go back up and yields down.

    OTOH, if prices fall, but wages and rents do as well (so as to maintain a low overall yield), then housing is no more affordable than it was when wages and prices were high! Thus the equilibrium situation here is for high house prices, low yields, and peak debt in the economy.

    So what I am saynig is that in a globalised fiat economy with free floating exchange rates, interest rates cannot be used to restrain asset prices if a large interest rate differential exists between countries. This is why china can’t raise interest rates to cool off their economy, because it just attracts more hot money – which is exactly the problem the Australians have.

    Plus, roubini just bought a 5 million dollar hmoe in New York didn’t he? Now why would he do that?

  6. BusSchDean says:

    The conservative view that anything gov’t does to alter the market to help business is good — like subsidizing housing construction and mortgages — and anything it does to increase competitive pressures is bad — like increased transparency and accountability — has no connection to an underlying faith in capitalism or competitive markets. Ironically, some liberals have unwittingly helped support this particular brand of “survival of the fittest…winner take all” conservatism. Funny thing about some winners..when they win they want to keep on winning even if that means changing the rules of the game.

  7. Liminal Hack says:

    And this chart graphically shows the source of the US housing bubble.

    Rental yields declining from 8% in ’90 to about 6.5% in ’05.

    http://4.bp.blogspot.com/_1V7wnZxPqok/RjQmGrRv2mI/AAAAAAAAEA8/KSQGj1tauxI/s400/abn1.jpg

    Given real returns available to equities over the same period its hardly surprising house prices rose!

    Arguably, those renting in ’90 were paying massively over the odds for what they were getting – which can only mean there were a good many rentiers getting an unseemly high yield from property. Yet somehow this is judged to be preferable to a low yield and a high price. Why is that?

  8. “Wallison is a Hack”

    great, I’m glad that’s ‘News’ (“Fit to Print”)

    so what? it’s, yet, another, distraction..

    maybe Nocera should spend some time (un-)covering the type of ‘Laundromat’ that F&F was turned into..
    ~~

    and, speaking of ‘flexible Yardsticks’ — “…This is not intellectual flexibility, it is the opposite: The conclusion is always the same —….— but the rationales are what changes. Different theories, arguments, rhetoric all are in service of the same narrative regardless of facts and data to the contrary…”

    maybe the same ‘intellectual rigor’ should be applied to “Global Warming/GHG-induced AGW/Climate Change” (?)

    then what?

    instead, we get things like http://wattsupwiththat.com/2010/06/22/the-blacklist-of-climate-science/

    from the Comments: “James Sexton says:
    June 22, 2010 at 5:53 am
    An appeal to authority, that upon slight scrutiny, condemns the authority they appeal to. That drivel was peer-reviewed? And one of the criteria to determine expertise is the quantity of peer-reviewed papers published. What? Did he need one more paper to make the A-list? How about the number of peer-reviewed papers that had to be corrected, amended, or rewrote because the authors were errant in their conclusions or methods? In other words, the authors of this paper assumes quantity is equal to quality. Why? Well, because the paper was peer-reviewed and published.

    On a side note, this kinda blows that whole consensus bs out of the water. 500 peer-reviewed, published, and cited climate scientists expressing “skepticism of the IPCC’s findings, of climate science generally, of the “consensus” on human-induced warming, and/or arguing against any need for immediate cuts to greenhouse gas emissions.” ”
    ~~

    Maybe, it isn’t too late to begin thinking for one’s self?

    That’s, still, ‘Legal’, isn’t it?

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Lysenkoism+and+the+Corruption+of+Science

  9. Bill W says:

    How can Republicans who are supposed to believe in personal responsibility and the wisdom of markets make statements like, “it was government policy aimed at increasing home-ownership that essentially forced the private sector to make bad subprime loans.”

    They actually sound really liberal when they say stuff like that.

    Plenty of white people from the suburbs took out stupid loans that were not subprime, and everyone involved in those deals should have to deal with consequences of their own poor decisions. Subprime failed first because the shakiest hands got shaken loose first, but everyone else would have failed, with or without subprime.

    Personally, I’m a believer in free markets, even though they are not perfect. Markets participants drink the cool-aid, and markets fail. How we deal with that failure is whats matters. In my opinion, you hold people accountable, allow people to fail (with a social safety net), lean from mistakes, and rebuild the system to be more robust. Have we done any of those things?

  10. Bill W says:

    BusSchDean,

    I think you summed it up well when you wrote:

    “The conservative view that anything gov’t does to alter the market to help business is good — like subsidizing housing construction and mortgages — and anything it does to increase competitive pressures is bad — like increased transparency and accountability — has no connection to an underlying faith in capitalism or competitive markets.”

    But, I think the neo-liberals (Obama, Summers, Dodd…) are just as guilty. In my opinion, Republicans and Democrats who think this way are really just corporatists. They give lip service to small business and competition, but their policies are geared towards big business and preserving the status quo at all costs.

  11. BusSchDean says:

    Bill W

    The quick and obvious answer is “No!” Though most small and mid-market businesses live and die in the rough and tumble of competitive markets, that isn’t true of many large-scale businesses and certainly not true of TBTF firms. Business and political leaders that make the headlines rarely celebrate robust markets. Instead it seems a race for the exits with money spilling from pockets, either for oneself or a particular constituent. When O’Neal bet the farm at Merrill and lost he walked away with $161M; he should have been escorted out by security. When Obama insisted that Wagner leave at GM I was told by the CEO of a Fortune 50 firm how that was the job of the Board. Really? Well they had plenty of opportunity to act and didn’t (note: I do think Wagner had some ideas cooking that would help but it was way too late). With Boards that have lost their balls (if they ever had any), single-minded (read: self-delusional) business leaders, and complicit politicians those of us who still marvel at what markets are capable of tend to get a bit discouraged.

  12. Transor Z says:

    Wow, Liminal Hack is spouting what my man Hunter S. would have called “bad craziness.” First, this has been termed an asset-credit bubble crisis. The two are inextricably linked: housing and credit. However, it is incorrect to restrict the crisis to “housing credit,” aka mortgages. Consumer credit in the form of revolving credit also “popped” during the relevant period. The goal in all of this, from the perspective of lenders, was not “housing for all,” but fees, interest, fees, and fees.

    Note the proliferation of the HELOC/second mortgage during this period. It wasn’t about making homes affordable; it was about facilitating consumer spending in exchange for fees, interest, fees, and fees. Oh yeah, and a lien on your house.

    The other point I want to make is that interest rate policy does not occur in a vacuum. Context is critical. Changes in rates encourage arbitrage and, in extreme cases, create a risk of bubbles. The consequences of holding a rate at X% or Y% is an academic question. The real-life questions involve asking where rates were before a change occurred and how long they had been at that previous level; and, crucially, asking WHY rates were changed. Both questions go to the level of volatility being introduced in the system by an interest rate change and whether speculation is being encouraged.

    ~~~

    BR: Buy this man a cigar!

  13. KJ Foehr says:

    It’s not reality that matters, but the public’s perception of it. And that is being molded quite readily by Fox News, Rush, et al. The ultimate goal is, of course, political power.

    http://politifact.com/truth-o-meter/article/2010/dec/16/lie-year-government-takeover-health-care/

    They KNOW that if they keep repeating the same lie over and over for long enough, people will come to believe it, and, in effect, it becomes truth and reality.

    and this

    http://blogs.reuters.com/felix-salmon/2010/12/15/the-fcic-falls-apart/

    “During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.”

    George Orwell is nodding his head saying, “The aim of Right-wing Newspeak is thought control achieved by replacing any words or ideas that reflect negatively on conservative principles with more positive terms. Over time this reduces the incidence of alternative (progressive) thinking, and is further reinforced by labeling any such progressive thinking as “cancerous”, anti-patriotic, and the like. In the final stages any non-conservative thinking or expression becomes what Orwell called a “thoughtcrime”, or “crimethink”. We came close to that in the run-up to the Iraq War when Americans who questioned the need for War were called unpatriotic.

    “During times of universal deceit, telling the truth becomes a revolutionary act.”
    George Orwell

    But their goal is not just to change the perception of reality and “truth”; it is to consolidate power on the right, to remove the “cancer of liberalism from our country”.

    Our country is in dangerous political waters, and the far right’s increasing control of our country’s direction may not change until they have gained full-control, economically and politically, and our whole system collapses after implementing their ruinous ideas.

    So let them have their way. It seems that only after they fail and their ideas are discredited completely will we be able to begin anew and make progress again in this country.

  14. carleric says:

    Fannie and Freddie were and are complicit in this mortgage mess as they insured the money was there for lenders to provide buying opportunities to all comers…..they could not and did not control the end use of the monies they provided . The fault lies with the managment of Fannie that somehow thought loaning to undeserving clientele fulfilled the liberal dreams of house ownereship to any and all with their hands out. Wonder where they came from? Whose constitutents were they?

  15. Pat Shuff says:

    All the Devil’s are Here, by Bethany McLean and Joe Nocera

    This book focuses on how mortgage lenders, rating agencies, investment banks, regulators and government agencies started down the primrose path to the final mortgage madness in early 2007. Most persons and institutions come off as petty, clueless or short-sighted, with ulterior motives masked by some public spiritness (‘financing the American Dream’).

    Fannie and Freddie, the big Government Sponsored Entities (GSEs) come in as a real powerhouses. The book notes an employee there saying “the same people who had power over you, whether they were congressional staffers or HUD employees or even members of Congress, wanted jobs and would unabashedly seek them.” It was pretty clear that the regulators of Fannie and Freddie were puppets of the legislators who relied on the GSE perks, (Fannie spent $170 M on lobbying in the decade ending 2006). When legislators were about to rule on the GSEs they would get a “Fannie pack”, which consists of every single loan originated in their district over the past 5 years. Republicans and Democrats loved this agency.

    http://falkenblog.blogspot.com/2010/11/book-review-all-devils-are-here.html

  16. BusSchDean says:

    carleric

    No doubt Fannie and Freddie helped to spread the hurt. This is clearly an “over specified model” as the actions of independent actors that together explain the result are highly correlated with each other. I would like to think the result should cause an examination of the role played by a gov’t seemingly unable to know the impact of its own actions. But if you know much about the history of trying to improve gov’t purchasing behavior (e.g., for the military, etc.) it doesn’t give much hope. Who were the constituents does matter but the answer isn’t located solely with a liberal agenda. Who were the constituent when Glass-Steagall was appealed? There is plenty of blame, irresponsible action, and a lack of accountability.

  17. The question at hand is WHAT WERE THE PROXIMATE CAUSES OF THE CRISIS.

    Anything associated with housing” is not a valid answer.

    If you want to hold someone or firm accountable, you need to show the bad behavior, demonstrate the impact that had in the economy (preferably in dollars), and then reveal what behavior should have been happened instead, which would have avoided the crisis.

    By that standard, you can see why my on the hierarchy of blame, Fannie/Freddie are down towards the bottom of my list.

  18. Joe Friday says:

    carleric,

    “Fannie and Freddie were and are complicit in this mortgage mess as they insured the money was there for lenders to provide buying opportunities to all comers….. they could not and did not control the end use of the monies they provided . The fault lies with the managment of Fannie that somehow thought loaning to undeserving clientele fulfilled the liberal dreams of house ownereship to any and all with their hands out.”

    “Liberal dreams” ?

    I’m afraid not:

    * In 2000 [during Clinton], as HUD revisited its affordable-housing goals. HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay.

    * But by 2004 [during Bush], when HUD next revised the goals, Freddie and Fannie’s purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

    “THAT YEAR, PRESIDENT BUSH’S HUD RATCHETED UP THE MAIN AFFORDABLE-HOUSING GOAL OVER THE NEXT FOUR YEARS, FROM 50 PERCENT TO 56 PERCENT. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and ‘MUST DO MORE’.”

    ” ‘That was a huge, huge mistake,’ said Patricia McCoy, who teaches securities law at the University of Connecticut. ‘That just pumped more capital into a very unregulated market that has turned out to be a disaster’.”

    http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_2.html

  19. VennData says:

    Carleric,

    You claim, “…provide buying opportunities to all comers…” yet conforming mortgages have all sorts of restrictions, and weren’t of the NINJA variety. It was the PRIVATE mortgage lenders, the shadow banking system that did that.

    You’re facts are wrong, like all the right wingers trying to deflect blame. I suppose Obama is a Socialist too, eh?

    Do you let these lies infect your investment decisions? Sorry to hear that.

  20. dss says:

    The key phrase:

    Now, he said, it was government policy aimed at increasing homeownership that essentially forced the private sector to make bad subprime loans.

    I thought we had a free market where the private sector is free to make loans to the good, the bad, and the ugly? The private sector was forced by government policy? Just like the private sector forced all those loans on people who could not afford them, duping many of them into loans with ruinous terms, because of the fees they would make? They could not churn the loans out fast enough! How silly.

    Always blame the liberals (read undeserving low income black & brown and white people with their hands out, of course), instead of putting the blame on the greedy loan originators, banks and investment banks who were supposed to do the responsible thing of not giving loans to people who could not afford them. What a quaint idea these days.

    Blaming the mortgagee instead of the mortgagor is just another not so clever way to exonerate the real culprits in this mess, Countrywide, New Century, Lehman, Merrill, Bank America, etc., and their managers and executives who became rich as Croesus and had every reason to keep the fraud going.

    I am always amazed at how millions of dead beat undeserving clients could force the bank to just hand them hundreds of thousands of dollars merely by extending their hands.

    Now shifting the blame is crucial to keeping the narrative going and the sheeple brainwashed. Repeat after me, it was Fannie and Freddie, (code for low income losers), Fannie and Freddie….

  21. Liminal Hack says:

    Well Transor, you have your narrative and I have mine, with the difference between them being their explanatory power and which one survives the application of Occam’s Razor.

    If you stop thinking of housing in emotive terms and view them in the same light as any other investment asset then there is absolutely no reason at all why real estate should yield any more or less than the other investments, after the difference in risk and liquidity is taken into account.

    In fact once we dropped the last semblence of gold convertibility of the currency the expansion of credit to equalise yields at their theoretical minimum makes perfect sense from a market perspective. I could put it another way and suggest that the correct yield on fiat money (an asset costlessly created and which has no real world upper limit on its quantity besides what is decreed by fiat ) is zero, and look, here we are.

    By this line of thinking, after the end of convertability all assets achieve price increases in order of their liquidity, so treasuries first, followed by equities and then followed by real estate.

  22. BusSchDean says:

    Bill W

    I couldn’t agree more. If I use that again I will take out the word conservative.

  23. rktbrkr says:

    Whenever my friends start repeating the BIG LIE that the real estate bust was caused by F&F giving money to the po folk and the banks being forced at gunpoint to play along with this scheme I just send them this classic video of Bush spouting off about the success of his ownership society. This man was out to lunch in so many ways for 8 years. (Actually I’m being very charitable limiting his out to lunchness to only 8 years)

    http://www.youtube.com/watch?v=QYvtvcBKgIQ

  24. Transor Z says:

    By this line of thinking, after the end of convertability all assets achieve price increases in order of their liquidity, so treasuries first, followed by equities and then followed by real estate.

    What in the wide world of fuck are you talking about? RE was historically relatively a-liquid but during the speculative credit-asset bubble it moved with a velocity that the poor, poor note holders couldn’t keep up with in the crush to securitize. Thus the creation of MERS, among other unsavory reasons.

    Seriously dude, you talk purty but I’m pretty sure that’s as far as your “analysis” goes.

  25. rktbrkr says:

    The subliminal message (sometimes not very subliminal) I’ve always gotten is that F&F led the charge to provide housing to the undeserving poor and the innocent big banks were forced to join in against their wills.

    I then ask my dogmatic friends how come most of the construction (in the sand states) was second, vacation and retirement homes and still largely vacant.

    Sure there were some working poor first time homebuyers in rust belt cities like Detroit but the real story is the waves of gated communities and sparkling condo towers that spouted up along our southern coasts and in our deserts. The 50 new condo towers in downtown Miami didn’t go up for the residents of Liberty City and Overton, Donald Trumps half dozen (still half empty) skyscrapers in Sunny Isles wasn’t overbuilt for po folk, ditto the waves of condos in Vegas.

    What the po folk got was the cheesey apartment conversions into condos when all the low lying fruit had been picked, the bankers version of making lemons into lemonade.

  26. Liminal Hack says:

    Dude, the whole purpose of markets is to turn illiquid assets (for example, unquoted shares) into liquid ones (for example, equities listed on major exchanges). Looks like – mission accomplished re. real estate.

    Going back to BRs point about narratives, I suggest to you that to discern narrative from reality you must first dispense with emotion and ideology. So far you have failed to do that.

    Thats not to say you can’t have a moral position on these things but don’t expect morality to help discern the actual from the merely perceived.

  27. lulsh says:

    Amazing.. this argument keeps centering around whether Fannie and Freddie actual originated sub prime. The real issue is whether they provided assistance in setting up the structures that made the securitizations possible for some ABS deals. There is is no question they bought some subprime in bulk.
    There is no question they participated in Alt A structures.

    Aside from that, there is no question they made bad loans, otherwise they wouldn’t be in trouble.

  28. lulsh says:

    “If you lower the cost of credit, you bring more buyers into that market. Suddenly, the people who could afford a $350k house goes up dramatically.

    Its pretty basic, obvious stuff. Indeed, it is the only explanation I have found that can explain the simultaneous global boom in Housing in the 2000s . . .”

    there is no question that the Credit Bubble caused the Housing Bubble.

  29. carleric says:

    BusSchDean

    I should have excluded the phrase “liberal dreams” and perhaps used one less politically charged. I was thnking more in line with the social agenda of politicians seeking lifetime employment. My point, obscurely stated, was that F&F enabled the financing basis for the inherent greed of the mortgage lenders. I am apolitical (I think they are all scum and parasites that possess only qualities of corruption and venality) but forgot that it drives the lives of many. The question of who is more stupid, greedy and/or ignorant…the professioanl establishment democrats or republicans – is really a rhetorical question that demands no answer…lol..

  30. Liminal Hack says:

    If you keep the cost of credit high, foreigners suffering from a lower cost of credit (lower yields) will exchange their currency for yours, thereby forcing the cost of credit down in your currency.

    The only way of preventing a market driven equalisation of interest rates (and thereby, asset prices) via carry trades and hot money is to insitute capital controls, and even then the evidence is that markets quickly route around such impediments.

  31. roger erickson says:

    “The only way of preventing a market driven equalisation of interest rates (and thereby, asset prices) via carry trades and hot money is to insitute capital controls, and even then the evidence is that markets quickly route around such impediments.”
    http://www.ritholtz.com/blog/2010/12/dogma-versus-reality/#comments

    So, the next level of indirection is that hot money (expendable resources) will follow enticing options; and return on hot resources will be selected by context; so growth (reverse-entropy) follows the unpredictable product of (resources)x(explored options)

    conclusion cascade ought to be obvious:

    employ everyone
    take many risks
    create as much as possible
    Select aggressively: quit what doesn’t work early, converge to what does
    set up systems that allow rapid selection
    relentlessly pursue catalysts that accelerate selection

    which is another way of saying:

    reduce inequalities (poor asset allocation)
    reduce output gaps (poor resource utilization)

    given that:

    max cost = cost of coordination [in any system];
    max return = return on coordination

    best investment in history of mankind? Writing the US Constitution.

    looming best investments?

    enforcing said USC
    very,very carefully amending it

  32. BusSchDean says:

    carleric

    I appreciate what you are saying. Since I spend my day with college students anxious to make their way in the world I try to stay optistic. There are just enough positive examples to know that indeed things can be different. Of we all may still being going to hell in a handbasket. One can only try.

  33. Repeat after me:

    Follow the money . . . Follow the money . . . Follow the money

  34. Liminal Hack says:

    Follow the money . . . Follow the money . . . Follow the money

  35. Uchicagoman says:

    Slightly tangential, but I think this strikes a chord here:

    The time is ripe for the socially progressive/liberal, but fiscally conservative politician. I think Obama is helping to pave the way. Not for himself(just as Bush ironically paved the way for Obama) . But for the next generation. (Bloomberg perhaps?)

    As younger (and financially capable) Obama supporters get older, they will begin to realize more and more the utter incompetence (and severe conflict of interest) of Gov. and that we really cannot rely on it to solve our problems!
    And I am speaking from my own, slightly disillusioned perspective.
    I realize now it is not something personal against some agenda, motive, or underlying interest, it is just reality!!!

    Hell, I think Obama knows this in his heart too! People have to take matters into their own hands. They cannot be apathetic and expectant. As he said: “This is about you, not me.” And he is right.

    -snip-

  36. machinehead says:

    Nocera makes it sound like Fannie and Freddie were innocent good guys who got dragged into the muck ‘late in the game’ by ‘pressure from the marketplace.’

    That’s just a steaming load of crap. These two sleazeball Congressionally-chartered companies were playing fast and loose with their accounting from the beginning of the decade:

    3 Feb 2005 — The Securities and Exchange Commission has determined that Fannie Mae breached FAS 91 and FAS 133 from 2001 until the middle of last year [2004], having used: ‘Unique methodology to assess whether hedge accounting was appropriate,’ said the SEC. As a result of the decision, Fannie Mae must restate earnings and declare losses of around $9bn, arising from previously undeclared losses on derivatives. In doing so, Fannie Mae also goes into breach of its minimal capital requirement laid down by its regulator, the Office of Federal Housing Enterprise Oversight (Ofheo).

    It was OFHEO which initially blew the whistle on Fannie Mae, alerting the SEC to the scale of the disaster. The company was involved in ‘cookie jar’ accounting, said the regulator, by manipulating reserves and the timing of recognition of earnings. One result by-product of this smoothing was that executives were enabled to earn huge bonuses. Franklin Raines, chief executive of the company until forced out in December, obtained incentive pay of $26m over the last three years on top of his salary for that period of $14m. Finance director Timothy Howard obtained $7m of incentive pay additional to his $4m in pay.

    http://www.accaglobal.com/students/student_accountant/archive/2005/53/2342041

    The two undercapitalized mortgage giants were always highly political and still have their political defenders like Nocera, taking advantage of short memories to rewrite history.

    But like an elephant, I never forget how braindead politicized entities like Fannie and Freddie abused the public trust, not to mention stayed listed on the NYSE for years, despite not publishing accounting statements.

    Flush twice, it’s a long way to Washington!

  37. KLeBrun says:

    I spent 45 years in real estate construction, brokerage and finance, including as a VP and Mgr for Merrill’s real estate division while it lasted.

    For every trillion of mortgage backed securities (MBS) that Wall Street sold from 2002 to 2006, Wall Street, the commercial banks, the mortgage and real estate brokers took an estimated $120 billion in fees at a cumulative rate of approximately 12%.

    And there were several trillion in MBS sold during that time period, stuffed with subprime mortgages in the biggest financial scam in history for which no one has realistically been held accountable.

    The primary beneficiaries were predominantly large Republican owned businesses – which explains the massive pressure to continue the deregulation that created the bubble despite early warnings.

    In discussions with some of the insiders, they made money creating the bubble, they made money selling short as the bubble collapsed and they made more money buying up the wreckage at deep discounts with the cash they made on the way up and down.

    The three worst financial disasters since the Great Depression have followed Republican administrations that have been hell bent to deregulate the financial markets. The lesson learned and forgotten time and again is that when you stop regulating an aggressive and greedy industry the whores move in and take over driving the few with integrity out of the business.

    There are many stories of CEOs who were threatened with removal if they didn’t jump onto the subprime band wagon and take party in the financial orgy.

    And Fox News got out in front of the story by blaming it on an out of power gay senator, Barney Frank, and a hand full of black borrowers. The right wing loved it. And anybody on the right who strayed from the BS paid a price.

  38. bff426 says:

    The Credit Bubble leading to the housing bubble occurred in the United States, Ireland, the UK, Spain, Portugal, and is still going on in Australia. Blaming Fannie and Freddie alone can’t explain it. A number of factors and players contributed, to greater or lesser degrees:

    A number of companies in the developing world became relatively richer making goods for the developed countries, doubling fixed income savings from $35 trillion-$70 trillion from 2000-2006.

    Greenspan lowered and kept interest rates low on treasuries for a four year period from 2001-2005, making the favored investment of fixed income much less attractive. Looking for yield, they pounced on residential mortgage-backed securities, with higher yields and high safety.

    This sparked a refinancing boom, as rates went lower, and everybody took advantage to lower their mortgage payments. It also sparked a second home/vacation home boom as money freed up was used to purchase an asset whose value never went down, unlike the stock market, which bottomed in spring 2003.

    By the end of 2003, everyone who wanted to had refinanced. Credit started to be extended to people who, in the past, would not have qualified for mortgages to purchase a home — people with bad credit, unsteady jobs, no down payment. As time went by, lending standards became looser and looser. Stated income, verified assets, morphed to no income, no asset verification. Why? Because the data showed that the increased risk of default was low, compared to the high return you could get on subprime and alt A loans.

    House prices rose higher and higher, bringing in the investors/speculators/flipper. That in turn drove house prices even higher. Mortgages were starting to become unaffordable. The industry responded by bringing outlines of “affordable” mortgage products — interest-only, negative amortizing.

    Wall Street found ever more ways to make risky mortgages “safe”. Plain vanilla mortgage-backed securities became CDO’s, CDO’s became CDO squared, which became synthetic CDO’s. Slice and dice, retranche, and presto chango, no income, no asset negative amortizing pick a pay loans become AAA securities.

    Fannie and Freddie, who dominated the conforming market, lobbied to extend the definition of conforming, as they saw they were losing market share. Because of the funding advantage from their implicit government guarantee, they had shut out everyone else from the conforming market. As they entered the subprime/alt A market, things got even hotter, the classic end of the bubble push.

    As prices went higher and higher, people refinanced, taking out home equity lines of credit and spending, spending. It became a way to support an unaffordable lifestyle.

    And then, despite all the efforts of Wall Street, the real estate and mortgage industries, people simply couldn’t afford the payments. The air started leaking out of the bubble, and prices started to flatten, then fall. People rushed to put investment houses on the market to cash out — inventory started rising. Prices went down more. Wall Street no longer wanted to buy risky mortgages to securitize. The spiral down started.

    Fannie and Freddie played their part, but they weren’t the primary cause. Wall Street did their part, feeding the yield seeking investment community AAA investments. The real estate and mortgage industries fed Wall Street. The rating agencies waved their magic wand and voilà — lead turned into gold.

    If you were paying attention, you could see it coming. If you were reading this blog, Calculated Risk or a number of others, you watched his slow-motion train wreck.

  39. KLeBrun says:

    bff426 Says: Good analysis.

  40. obsvr-1 says:

    @KLeBrun Says: December 18th, 2010 at 10:59 pm

    Good to see someone from the inside speak without forked tounge, your on track with the exception of saying this is a Republican caused crisis … Rubin, Summers, Clinton getting rid of Glass/S and enacting the Commod Fut Mod Act as well as the day to day pandering to Big Business (which is neither rep or dem) they blow with the administration winds of change — money, lobbying, political donations – er – investments, revolving door all reinforces the crony plutocracy. And now a Democrat administration, having the biggest opportunity coming out of the crisis to CHANGE, slimes the American people by not seizing the opportunity to clean out the criminals, clean up, and reform the FIRE industry.

    The saying, “if you want to live like a Republican vote Democrat” about sums it up & follow the money.

  41. Joe Friday says:

    carleric,

    “I should have excluded the phrase ‘liberal dreams’ and perhaps used one less politically charged.”

    No matter, your point would still remain false.

    ~

    “My point, obscurely stated, was that F&F enabled the financing basis for the inherent greed of the mortgage lenders.”

    Except it’s their job to provide a secondary market.

    You can’t blame Fannie & Freddie for how the unregulated private-sector predatory lenders gamed the system.

  42. dss says:

    KLeBrun and bff426,

    Great comments!

  43. Andy T says:

    “Looking for yield, they pounced on residential mortgage-backed securities, with higher yields and high safety.”

    bff–

    This is the critical line/juncture of your argument and narrative.

    Why was residential mortgage backed securities considered “high safety?”

    Why? Why? Why?

    What “trend” (or backdrop) was in place that created the illusion of safety through the 80′s and 90′s that gave investors the confidence that the investment was “high safety?”

    Who was responsible for that false sense of security?

    Who? Who?

    If you think about it long enough, the critical answer will come to you….

  44. DeDude says:

    “Why was residential mortgage backed securities considered “high safety?””

    Because it was backed by an asset that “has never lost value”. How else could the iBanks have sold their mortgage backed suckurities?

    “Who was responsible for that false sense of security?”

    Well have you already forgot the names of our old friends with the “real estate never go down” narratives? But to be honest it was also the human natural tendencies to believe that if it has gained 20% per year the past 3 years then it will gain 20% per year the next 3 years.

    (sorry if these facts conflict with your narrative)