Posts filed under “Really, really bad calls”
Karl Smith is a Professor at UNC-CH and blogger at Modeled Behavior. He was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.
The Conservator’s Report on Fannie and Freddie is out.
Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.
As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.
However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.
The proper question is not: What story is consistent with my general philosophy or worldview?
The proper questions is: What story is consistent with the facts?
Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble.
Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.
This was a phenomenon of private-label non-conventional loan securitization.
1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
[ . . .]
1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.
Fact Two: Fannie and Freddie lost market volume during the boom.
That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.
There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.
The good news: Summers is gone Jan 1 (no word yet on Geithner). The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies. To review: Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the…Read More
I wanted to share an interesting email exchange from this weekend. “R” writes: “You occasionally shred an argument with more than a hint of animus. I don’t want to say its ad hominem, but it comes damn close. Some people get viciously disemboweled, while others are more gently corrected. Why?” That’s a fair question. You…Read More
I don’t know what is more idiotic: This horrific Reuters misquote, or the impossibly idiotic commenting system they have in place. First, the misquote: “Turning to the housing market, Barry Ritholtz at The Big Picture is predicting the worst in housing is likely over. Sure prices could fall another 33 percent — but it’s unlikely…Read More
As we noted in these pages a few weeks ago, Paul Kasriel gave Michael Boskin’s selective memory a who-dat-what-for.
This morning, Barron’s picks up the same theme:
IT’S PERVERSE OF US, WE ADMIT, but we get a real kick out of a dust-up between economists. If nothing else, it demonstrates that the dismal science is not a science and not necessarily dismal.
What occasions this somewhat less than profound observation is a recent commentary of Northern Trust’s director of economic research, Paul Kasriel, taking issue with an op ed piece in our sister publication, The Wall Street Journal, by Michael Boskin, a former chairman of the Council of Economic Advisers under the first President Bush.
Mr. Boskin blamed the lackadaisical recovery on the Obama administration’s economic policies, a view that is widely shared these days. Paul avers his intention is not to argue for or against those policies, but to express wonder that in fingering the causes of the feeble recovery Mr. Boskin somehow neglected to include the extraordinary contraction in bank credit.
In making his case, Mr. Boskin compared the current recovery with more robust ones, particularly the first quarter of 1983, when Martin Feldstein was chairman of the Council of Economic Advisers under President Reagan.
On that score, Paul finds it “curious” that Mr. Boskin makes no reference to the 1991 recovery when he was the Council’s top dog. Our initial reaction to the omission was, for gosh sakes, Paul, since when is modesty a sin?
Paul then proceeds to note that one year into the rebound in 1983, GDP growth weighed in at 7.7%, accompanied by a 6.4% growth in bank credit. That’s significantly better than the 3% rise in the first year of the present recovery, when bank credit actually contracted an awesome 7.9%.
And it also happens to be a heap better than the 2.6% rise in GDP in 1991, when bank credit rose only 1.4%.
It goes without saying, Paul concedes, that other factors besides bank credit play a part in GDP growth. But he insists that the shrinkage in bank credit has been a substantial element in the disappointing pace of this dispiriting recovery.
“If the current betting trends are to be believed, it now seems certain that a recall is in the cards” -Paddy Power, Irelands Biggest Bookmaker July 14, 2010 press release > Speaking of dumb bets: Its time to revisit a recent prediction market “winner,” and review the strengths and weaknesses of these markets: Recall this…Read More
As a follow up to yesterday’s look at Time magazine’s Housing covers, Paul Macrae Montgomery of Universal Economics was kind enough to share this report from 1992. In that research piece, Paul had made mention of an October 1st, 1990 cover story in Newsweek: The Real Estate BUST. > > How well did that cover…Read More
I have a commentary on the Time Magazine article coming this week — I find it is both inaccurate and misleading — but meanwhile, here is Jim Bianco’s take on it: ~~~ 1. Time Magazine – The Case Against Homeownership September 6, 2010 -Time: Homeownership has let us down. For generations, Americans believed that owning…Read More
Each year, I try to avoid writing anything about 9/11. But I had some issues to work through this year, and I find jotting a few notes down helps me. My personal experience on 9/11 was secondhand. I was in the LI office of the firm where I was Market Strategist. Our HQ and trading…Read More
We at the Big Picture have never been fans of economist Michael Boskin. The infamous Boskin commission was an intellectually dishonest exercise in clever ways to understate inflation, thus lowering Social Security obligations. (I found that approach cowardly, and instead offered up some SS truths). His commission helped the BLS to habitually understate inflation, the…Read More