It’s all beginning to make sense.
1. “When it comes to the home mortgage boom and bust, who was to blame? The borrowers? The lenders? The government? The financial markets? The answer is yes. All were responsible.” (Thomas Sowell, The Housing Boom and Bust, 2009.) This seems fair.
2. Not explanatory of the problems are “greed” and “no regulation.” Greed is a constant, always with us as part of human nature. As for “no regulation,” the highly regulated commercial banks and the highly regulated thrifts are deeply enmired in the swamp of the bust, just as they have been many times in the past, constant regulation notwithstanding.
3. Economic and financial cycles are natural and cannot be avoided. The bubble was an exaggerated cycle. Various government actions contributed to making it worse:
• Fannie Mae and Freddie Mac, a government-sponsored duopoly, were made into huge points of concentrated vulnerability to failure, which then indeed failed. They significantly inflated the housing bubble though their huge entry into high risk mortgages right at the top of the market — financed, of course, with government-guaranteed debt, so that the buyers of their debt did not have to ask about the soundness of their asset expansion. (See paragraph on trade deficit and China below.) This risky strategy was encouraged by politicians and by HUD’s “affordable housing goals.”
• The “Greenspan Gamble,” which was intentionally to ignite and feed a housing boom to offset the deflationary effects of the tech stock crash, succeeded too well. Instead of a mere housing and mortgage boom, we got the bubble.
• The dominant rating agencies, a government-sponsored duopoly, were made by regulation into concentrated points of vulnerability to failure, which then failed, when their high credit ratings of MBS built from risky mortgages did not include anything resembling the downside case which became reality.
• Politicians all cheered rising home ownership rates and “creative” mortgage financing, which simply meant riskier financing.
4. There was a “logical” very widespread belief that house prices could not fall on a national basis. “Average U.S. house prices rarely fall from one year to the next. Bankers, brokers, appraisers, loan servicers, mortgage investors, homeowners and the designers and promoters of collateralized debt obligations all attest to the truth of this assertion… ‘History is definitive,’ pronounced the American Banker, ‘the national average price of a home may remain flat for a number of years, but it doesn’t fall.’” (James Grant, Mr. Market Miscalculates, 2008.)
Mortgage professionals were well aware of many instances of regional housing and mortgage busts, with falling house prices and high defaults and losses. But it was thought that this would not, and perhaps could not, happen on a national average basis. This firm belief by almost all parties made it possible for the belief to be false, in the paradoxical way of financial markets.
5. The market and the regulators became enamored with statistical treatments of risk. But: “The model works until it doesn’t.” (Moore’s Law of Finance)
Human sources of risk are old-fashioned: short memories, the inclination to convince ourselves that we are experiencing “innovation” when what is happening is lowering credit standards, optimism, speculation which is successful in the early bubble stages, gullibility, group psychology.
6. “The good times of too high price almost always engender much fraud. All people are most credulous when they are most happy.” (Walter Bagehot, Lombard Street, 1873.) True then, true now, unfortunately.
7. Highly leveraged financial systems are bound to have panics and busts from time to time. Increasing leverage of households was promoted by lenders and the government to create “affordable loans,” with both higher LTV ratios and higher debt to income ratios. Financial firms were highly leveraged. Financial engineering produced highly leveraged structures, including CDOs, SPVs, CDOs-squared. Banks are able to be highly leveraged because of government deposit insurance, and have created balance sheets heavily concentrated in real estate risk. The entire macro economy became more highly leveraged, with record debt to GDP ratios, the “Big Balance Sheet Economy.” Leverage always feels good when things are going up.
The “Great Moderation,” of which the world’s central bankers were so proud, created the conditions in which increased leverage seemed successful, thereby also creating the conditions for the bubble and bust. “Stability creates instability.” (Epigram of Hyman P. Minsky’s “financial fragility” theory.)
On the way down, needless to say, the leverage is more than painful.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?
H/T to National Review Online