Tuesday, September 16, 2008

Mortgage meltdown due to pushing loans on low-income households
Tom Smith

Check this out. Pretty shocking claim. IBD says the root cause of the mortgage meltdown/subprime crisis, from which the rest of this financial crisis flows, was the Clinton era policy (continued, I have no doubt in the W years) of requiring banks to lend money to low income households, as part of a big social policy.

This is a very interesting claim, and could even be true. When the dust settles, I hope some financial economists dig into it.

I couldn't agree more that Obama's "see, see! The free market doesn't work!" response is both stupid and alarming. With humongous entities like Fannie and Fred shaping the markets and credit markets generally regulated every which way, you can hardly say this is a failure of free markets. One fact worth remembering is that -- how much? most? almost all? -- of the market for bad housing loans would not have existed at all but for implicit federal guarantees. Without that, there probably would not have been this mess. Starting with rotten loans as assets and levering them out astonishing degrees -- OK, that seems to have been the contribution of free wheelin' private institutions, which are now paying the price. The rest of us will end up paying plenty as well.


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Tom Smith


I don't suppose that Bank of America's proudly announcing a while ago that they'd give home loans to illegal immigrants had anything to do with the problem. I think a couple of other banks followed their lead down Good Intention Path.

Posted by: ZZMike | Sep 16, 2008 11:11:21 AM

Oh, come on. Nobody forced large investment firms to pour money into dubious mortgage-"backed" securities, any more than they were forced to pour money into dubious dotcom stocks a decade ago. The problem is much simpler: with every "Greenspan put", the Fed increases big investors' confidence that they can ride the next asset bubble for all it's worth, and simply wait for massive injections of liquidity to cushion their fall when it pops. A few big fish always fly too close to the sun, of course, and crash too hard, but even today, plenty of big investors have netted handsomely from the mortgage boom, and are simply waiting for low interest rates to carry them through the trough.

Unfortunately, each crash gets harder to recover from, and monetarism may have finally hit its wall, just as Keynsianism did in the 1970s. (Rising inflation is the telltale sign that the wall is fast approaching.) But libertarian zeal shouldn't mislead anyone into believing that government encouragement of bad mortgages was more than a tiny part of the current crisis.

Posted by: Dan Simon | Sep 16, 2008 12:34:56 PM

Oh, it's true. Hillary and all the harpies made it clear the Federal behemoth would look unkindly at those who did not loosen up to the unwashed and unworthy. This is all about repackaging and guaruntees. No implied federal guarantees, no loans.

Posted by: james wilson | Sep 16, 2008 7:37:00 PM

Here is a Village Voice (of all sources) article that shows how HUD did force Fannie and Freddie to underwrite more and more in the subprime market--aided and abetted by the Mortgage Bankers Association lobbying firm.


Posted by: Steve, Lutz, FL | Sep 22, 2008 2:02:34 PM