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My Sunday Business Washington Post column is out. This morning, we look at part II of the Big Lie (Part I examined the actual factors that led to the crisis) in this part, we look at the data and factors that disprove the elements of the Big Lie.

The print version had the full headline Dissecting the big lie about the economic crisis; the online version is Examining the big lie: How the facts of the economic crisis stack up).

Here’s an excerpt from the column:

“I want to move beyond what I call “the squishy narrative” — an imprecise, sloppy way to think about the world — toward a more rigorous form of analysis. Unlike other disciplines, economics looks at actual consequences in terms of real dollars. So let’s follow the money and see what the data reveal about the causes of the collapse . . .

Consider the causes cited by those who’ve taken up the big lie. Consider New York Mayor Michael Bloomberg’s statement that it was Congress that forced banks to make ill-advised loans to people who could not afford them and defaulted in large numbers. He and others claim that caused the crisis. Others have suggested these were to blame: the home mortgage interest deduction, the Community Reinvestment Act of 1977, the 1994 Housing and Urban Development memo, Fannie Mae and Freddie Mac, Rep. Barney Frank (D-Mass.) and homeownership targets set by both the Clinton and Bush administrations.”

No graphics this week — so I created a run of charts to illustrate the facts in the main article.
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click for ginormous version of print edition


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Source:
Examining the big lie: How the facts of the economic crisis stack up
Barry Ritholtz
Washington Post, November 20, 2011
http://www.washingtonpost.com/business/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/2011/11/16/gIQA7G23cN_story.html

Washington Post, Sunday November 20, 2011 (PDF)

Category: Politics, Really, really bad calls, UnGuru

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.

37 Responses to “Dissecting the big lie about the economic crisis”

  1. efrltd says:

    “a market collapse in 2008-09 on policies of the early 20th century is to blame everything — and nothing.” Early 20th century? I don’t get that–1909? Is that a typo?

  2. MayorQuimby says:

    The biggest lie continues to be the notion that more food is the solution for having eaten too much; that more credit is the answer to having ‘liquified’ too much; that paying back debts denominated in worthless dollars achieves sustainable growth.

    We have a failure to understand capital formation right here on TBP and until you all come to grips with this, your ‘high ground’ is anything but.

  3. EMichael says:

    “that paying back debts denominated in worthless dollars achieves sustainable growth.”

    Somehow missed the 1940′s, the 50′s, the 60′s and the 70′s, huh?

  4. Tarkus says:

    No offense intended in this comment, but – Why did it take YOU to go through these points, backing it up with data?

    What happened to the kind of investigative journalism that Woodward and Bernstein did? That the same meme is still circulating is pretty much proof that most of the Traditional Media of the day has abdicated its role to inform (with a very few exceptions of course).

    More and more it appears that what Nouriel Roubini said was true when asked “Why don’t they investigate it?”. His answer was “Because then you would find the culprits.” Neither side – democrat or republican – seem much interested, do they?

  5. Winston Munn says:

    Another symptom of squishy-narrativitis – besides the rash – is the misguided assumption that all elements in the narrative have equal impact, that in regards to debt the economic consequences are the same whether borrowing $400 million to build and blow up 100 Predator drones in a foreign country or borrowing $400 million to expand an interstate highway from 4 to 6 lanes that is then used in commerce for the subsequent 40 years.

    It would be nice if all of our problems could be reduced to the simplistic idea that debt is evil and once Father Marin exorcises our debt demons we will stop puking split pea soup, just as it would be nice if we could simplify the cause of the housing collapse to a single entity like Fanny or Freddie or the CRA and fix the problem and move on.

    Unfortunately, life is not so simple nor solutions so simpleminded. To refuse to prosecute power, whether for war crimes or real estate fraud, is not a desire “to look forward, not back”, but an evasion of responsibility and duty. Power in this country has been corrupted to the point where We the People have been marginalized in favor of maintainence of the status quo. Squishy narrative belief offers a simpleminded target that obfuscates the underlying reality so as to distract the masses. If religion is the opium of the people, the squishy narrative is the hallucinogen.

    At least there are a few around – like Barry – willing to speak truth to power. Let’s hope it is not too late for it to matter.

  6. RW says:

    “To blame the housing collapse that began in 2006, a recession dated to December 2007 and a market collapse in 2008-09 on policies of the early 20th century is to blame everything — and nothing.”

    Excellent closing line. It reminds me of Hannah Arendt’s comment

    “Where all are guilty, no one is; confessions of collective guilt are the best possible safeguard against the discovery of culprits, and the very magnitude of the crime the best excuse for doing nothing.”

    Arendt died in 1975 and much of her writing was concerned with the nature of political action (her 1958 work, The Human Condition, is considered a classic). For example, I am sure she would have had no difficulty identifying political corruption, regulatory capture and corporate control fraud as primary culprits in financial collapse nor would she fail to recognize the positive attributes of the Occupy movement.

    “There is all the difference in the world between the criminal’s avoiding the public eye and the civil disobedience’s taking the law into his own hands in open defiance. This distinction between an open violation of the law, performed in public, and a clandestine one is so glaringly obvious that it can be neglected only by prejudice or ill will.”

  7. Arequipa01 says:

    Love the quote from Arendt, in particular this: “an open violation of the law, performed in public”

    The truth is being played out in the streets. The nature of the regime has been lured into the light.

    From Robert Hass’s essay in the NYT:

    My wife bounced nimbly to her feet. I tripped and almost fell over her trying to help her up, and at that moment the deputies in the cordon surged forward and, using their clubs as battering rams, began to hammer at the bodies of the line of students. It was stunning to see. They swung hard into their chests and bellies. Particularly shocking to me — it must be a generational reaction — was that they assaulted both the young men and the young women with the same indiscriminate force. If the students turned away, they pounded their ribs. If they turned further away to escape, they hit them on their spines.

    NONE of the police officers invited us to disperse or gave any warning. We couldn’t have dispersed if we’d wanted to because the crowd behind us was pushing forward to see what was going on. The descriptor for what I tried to do is “remonstrate.” I screamed at the deputy who had knocked down my wife, “You just knocked down my wife, for Christ’s sake!” A couple of students had pushed forward in the excitement and the deputies grabbed them, pulled them to the ground and cudgeled them, raising the clubs above their heads and swinging. The line surged. I got whacked hard in the ribs twice and once across the forearm. Some of the deputies used their truncheons as bars and seemed to be trying to use minimum force to get people to move. And then, suddenly, they stopped, on some signal, and reformed their line. Apparently a group of deputies had beaten their way to the Occupy tents and taken them down. They stood, again immobile, clubs held across their chests, eyes carefully meeting no one’s eyes, faces impassive. I imagined that their adrenaline was surging as much as mine. “

  8. Arequipa01 says:

    Here is Hass’s fundamental error- empathy with the ‘psychopathologized’ thugs:

    ” I imagined that their adrenaline was surging as much as mine.”

    It is an error to expect any reciprocal regard from those who VOLUNTARILY wield a club to beat another human being.

    I was in Lima when the Fujimori regime collapsed- saw the Marcha de los Cuarto Suyos. Regimes enter their final stage when those who formerly acted in the shadows (like Montesinos) begin to operate in the light of day. One of the things they did that day was burn down the Headquarters of the Banco de la Nación- destroying records- which is a common denominator for all criminal operations. Romney, Obama etc

  9. MayorQuimby says:

    @Emichael-

    I think not.

    http://www.acting-man.com/blog/media/2011/02/Total-Credit-Market-debt-vs.GDP_.png

    You are confusing loss of purchasing power because of excess real GDP vs. loss of purchasing porter due to excess credit.

  10. MayorQuimby says:

    Edit-

    Meant real GDP, not excess GDP (I wish we had excess GDP haha)

  11. Winston Munn says:

    A little off target but still on the subject of narrative over data. From Forbes:

    “Income and wealth disparities become even more absurd if we look at the top 0.1% of the nation’s earners– rather than the more common 1%. The top 0.1%– about 315,000 individuals out of 315 million– are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.

    It’s crystal clear that the Bush tax reduction on capital gains and dividend income in 2003 was the cutting edge policy that has created the immense increase in net worth of corporate executives, Wall St. professionals and other entrepreneurs.”

  12. MayorQuimby says:

    Wealth disparity is the natural byproduct over time of fractional lending.

  13. Winston Munn says:

    Again, quoting Forbes:
    “The top 0.1%– about 315,000 individuals out of 315 million– are making about half of all capital gains….”

    “….according to the Congressional Budget Office more than 80% of the increase in income inequality was the result of an increase in the share of household income from capital gains.”

    I hate to soil the “evil fiat system” narrative, but the facts are plainly against it. Capital gains tax rates are ideologically driven.

  14. [...] See The Big Picture posts about The Big Lie. [...]

  15. brianinla says:

    Winston they’re not mutually exclusive. Congress was able to both decrease capital gains taxes AND increase spending by issuing new debt. And the owners of this country received the majority of the new money created. One way to clamp down on giveaways to the top 0.1% is to force Congress to stick to a balanced budget rather than use the US Treasury as a slush fund.

  16. WhyDoYouSayThat says:

    BR, in case you don’t check the other page, I have replied to your reply on the charts post here:
    http://www.ritholtz.com/blog/2011/11/charts-facts-economic-crisis/#comment-596187

    Here’s a summary:
    You replied to my question about GSE MBS investment with a statement about their issuance. They are two separate issues. The GSEs were late to the party for issuing MBS. But they were investing heavily in 2004 when they bought 44% of all subprime MBS sold that year. I’d be interested to hear your opinion about how much this may have encouraged issuance of MBS from private labels.

  17. drewburn says:

    Nice collumn, Barry. Very.

  18. Irwin Fletcher says:

    Good article. Congratulations on a nice job.

    Having hit this one hard, I wish you would turn your attention to writing about the entities (F&F) who WERE under federal regulations. I agree that the GSE’s didn’t cause the financial crisis, nor did CRA, etc.

    But that was 2008, and this is 2011 and the GSE’s have pissed away Billions.
    Also, would you comment or write an article dealing with the Billions of PLS’s that Fannie and Freddie did buy?
    They were big buyers of subprime, and early on, not late to the party.
    And they lost on it big time. Why do we gloss over that?
    Also, they bought subprime PLS’s for two reasons. Profits and CRA credit. They were motivated by profit and affordable lending. Those are facts Barry.
    To simply refer to them as two other crappy banks in to accurate. Can we have an honest discussion on this?
    If not, why not?

  19. Irwin Fletcher says:

    Next to last sentence should read “is not accurate” Oops

  20. Winston Munn says:

    @brianinla,

    Brian,

    The problem is the data does not match the narrative. Fractional reserve banking has been a constant but income disparity has not. Something other than the federal reserve and fractional reserve banking is needed to explain the discrepancies among 1927-1928, and 2006-2007, and the 1930s and 1940s.

    Here are some handy charts to illustrate income disparity back to 1913.

    http://www.minnpost.com/macromicrominnesota/2011/11/16/33195/why_do_we_have_so_much_income_inequality

  21. Randel says:

    Thank you for all your hard work pressing forward with the facts and truth. Everyone knows the “banksters” caused all this. The public has been informed. BR you cannot change the minds of those whose circuitry is faulty. Give up on this one now. We need you now to help us formulate the correct fiscal, monetary, and regulatory policy going forward. All those federal agencies are looking for help yet on the Volker rule. Maybe you could add your viewpoint, so we BigPicture folks can send in our public comments.

  22. philipat says:

    But, of course, the MSM allow the Big Lie to continue. It’s good that WaPo is at least publishing the truth via your column but I see no evidence that, Editorially, the MSM are taking the proponenets of “The Big Lie” to task?

  23. victor says:

    @Winston Munn: not being bookish but I wonder why Forbes is referring to individuals out of the entire US population of 315 million and not to the number of tax returns filed. 142 million tax returns were filed in 2008 the latest IRS data show. Roughly 51.6 million tax returns, or 36.3 percent, were filed by “nonpayers,” people whose exemptions, deductions and credits wiped out any federal income tax due. I realize that tax returns can be converted into # of people via the # dependents but that can lead to confusion too.

    I still haven’t seen a comprehensive explanation as to why Germany and Japan two major economies, then Switzerland and to a lesser extent Sweden, all did not experience a housing boom. And China, not to shabby an economy size-wise either? Did China have a boom/bust of her own?

  24. louis says:

    ‘I don’t do favours. I accumulate debts’ – Ancient Sicilian motto

  25. brianinla says:

    The degree of fractional reserve lending has not been a constant. It was loose from after the 1907 Panic leading to the 1929 stock market crash and GD1. Stricter controls were in place after WWII plus there was a solid manufacturing base allowing more to go to the bottom 99%. It took the bankers four decades to slowly get control of Congress and the Treasury and now we’re back to where we were back in the ’20s. The takeover fully started in the Greenspan era. Until Congress becomes accountable for their spending the fraud and looting will only get bigger. At this point Congress could directly deposit new money into their friend’s accounts and nothing would be done.

  26. Thanks, Barry. The closing is well said:

    “I recognize all of the above as merely background noise, the wallpaper of our culture. To blame the housing collapse that began in 2006, a recession dated to December 2007 and a market collapse in 2008-09 on policies of the early 20th century is to blame everything — and nothing.”

    In legal parlance this is called “proving too much.”

  27. mathman says:

    Hat tip to Mark, above.

    http://pressthink.org/2011/09/if-he-said-she-said-journalism-is-irretrievably-lame-whats-better/

    We here in the U.S. with it’s corporate controlled media, aren’t getting the truth, or even relevant information about what’s actually going on in the world (as you all well know). In the link above, one man responds to NPR’s lame reporting and offers something better (at least an improvement).

  28. smartjill says:

    speaking of big lies, I was outraged to see this in the Houston Chronicle today, which I pay $17 per month for: http://news.investors.com/editorialcartoons/Cartoon.aspx?id=591663

  29. Moss says:

    Some facts on how the 0.1 % percent do it. Enabled of course by the bankster oligarchy. Patriots they are.. NOT.

    http://www.bloomberg.com/news/2011-11-21/billionaires-duck-buffett-17-tax-target-avoiding-reporting-cash-to-irs.html

  30. efrltd says:

    STILL WONDERING. DID ANYBODY READ THIS, “EARLY 20TH CENTURY?” WHEN WAS THAT? TEDDY ROOSEVELT HAD WHAT TO DO WITH THE HOUSING CRISIS?

  31. EMichael says:

    Mayor Quimby,

    I thought we were talking about government policies.

    And I think you are ignoring who owns the debt and the main reason why the increase exists, income losses for the vast majority of Americans over the last thirty years.

  32. CTcynic says:

    Apparently we haven’t learned anything! Lending to individuals — deserving or not — continues.

    “One bad bill will wipe you out.”

    http://www.nytimes.com/2011/11/19/us/census-measures-those-not-quite-in-poverty-but-struggling.html?_r=1

  33. EMichael says:

    When will people understand that there is not a lender in the history of the world who does not expect to have some of his loans go bad? That the idea is to make enough money on the good loans to offset the bad loans?

    This crisis is not about loans going bad. This crisis is about lenders who made loans they knew would go bad at a certain rate and camouflaged them as loans that would go bad at a AAA rate in order to sell them to investors, and take the money and run. It was then magnified by their ability to maintain insufficient reserves on the faux AAA loans, which enabled them to pump out an incredible amount of bad paper.

    None of these lenders are surprised these loans went bad at levels beyond a AAA loan.

  34. EMichael says:

    “Also, they bought subprime PLS’s for two reasons. Profits and CRA credit.”

    How does that work with the knowledge that lending for “CRA credit” decreased from its height in 1994 steadily for over a decade and right through the bubble?

    http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf

    You are half right though.

  35. Not_Fooled says:

    Finally, somebody is telling the truth. I kept telling my “conservative” friends that blaming Acorn and other groups for the crisis was not just racist folly, but unsupported by the facts in evidence. They chose to believe the banksters that all of this happened because poor people were greedy enough to want homes.

    It is time to have the discussion about bringing back Glass-Steagall and starting the prosecuting. As for Goldman-Sachs taking over Europe, this can only last until the people begin actively starving and then justice will be rendered in a far less kindly fashion. The fact is when you create an inverted pyramid with all the money at the top supported on the narrow shoulders of the few people left working, it is only a manner of time until the entire mess topples.

    Even the vampire squid has to recognize that when the blood is gone…the carcass dies.

    Excellent article.