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Deregulation Did Not Cause the Financial Crisis, Welfare Did

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“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Henry Hazlitt – Economist/Journalist (1894 – 1993)

If only Alan Greenspan, George Bush, and the rest of the economic imbeciles in Washington who gave us the Great Recession had heeded the words of the great Henry Hazlitt, as a nation we would not have produced so much phony wealth which in turn has caused so much pain. Leftists wholeheartedly support this view. As a matter of fact, the current occupant of the Oval Office is fond of constantly reminding Americans that it was George Bush and his Republican Congress from 2001 to 2006 who implemented the policies that caused the worst financial and economic crisis since the Great Depression. But, while Obama and the left are correct about who caused the crisis, they are way off the mark about what the guilty parties actually did to bring it about.

Obama and his ilk claim the cause of our current troubles was the deregulation of the financial services industry in the late 1990s and early 2000s. Now, they have to be careful because the major deregulation legislation in this period was signed by one of their own, President Bill Clinton. I am of course referring to the law which repealed the Glass/ Steagall Act. Enacted during the Great Depression, Glass/Steagall prohibited commercial banks from owning investment banks, and vice versa. It was meant to safeguard commercial banks against failure by making it illegal for them to participate in investment bank practices such as securities trading and stock and bond underwriting.

It does seem more than coincidental that the most severe economic crisis since the Great Depression has taken place shortly after the repeal of Glass/Steagall, and to the shallow statist mindset that is all that matters. But Obama and the left are wrong; repeal of Glass/Steagall did not cause the current financial crisis. In the first place, as Conn Carroll of the Heritage Foundation has pointed out, Glass/Steagall was “steadily weakened” from the 1970s on by the “complex new financial reality” of the times and by waivers from regulators that made mergers routine. The 1998 merger between Travelers and Citigroup essentially repealed the law once and for all. Thus, the erosion of the law over thirty-some years without any major financial crisis is an indication that the ultimate repeal of what was left of the law in 1999 did not cause the troubles of today.

Next, by looking at which institutions brought on the financial carnage one can conclude that Glass/Steagall’s repeal was inconsequential. Bear Stearns, Lehman Brothers, and Merrill Lynch all went belly up as investment banks without commercial bank divisions. The granddaddy of them all, AIG, is an insurance company with no commercial banking division. Washington Mutual was a savings bank which went bankrupt because of the many subprime mortgage loans it made which went bad.   Glass/Steagall did not regulate Fannie Mae and Freddie Mac, and their bailouts are on target to hit $1 trillion if home prices continue to fall at the current rate, so in reality, Glass/Steagall would not have prevented any of these firms from causing so much trouble for the economy. Further, it has been argued with a lot of validity that the repeal of Glass/Steagall has actually benefitted taxpayers in this crisis. It has reduced the losses that would have been incurred by direct government bailout by allowing Bear Stearns to be purchased by JPMorgan Chase and Merrill Lynch to be scooped up by Bank of America. All things considered, the repeal of Glass/Steagall has been a blessing in disguise for our economy.

Lastly, it is ridiculous to believe that the repeal of Glass/Steagall would cause bankers and investors to become so reckless and irresponsible with their resources that they would risk their economic viability. It just wouldn’t happen. Knowing that they could lose everything: their robust salaries and benefits, personal wealth, good name of their companies, and their own professional reputations most CEOs take great care to honor the fiduciary responsibilities they are given.

But, some obviously do not. As we have seen, it was not on account of the repeal of Glass/Steagall. Those who gambled with others’ money to get rich quick did it because of statist government policy, not libertarian deregulation.  The simple fact is that the Great Recession was caused solely by the irresponsible welfare policies of Washington. These policies specifically targeted homeowners and banks. Undeterred by the dot-com bubble and ultimate crash he caused in the 1990s, Alan Greenspan kept interest rates too low for too long again in the early 2000s, after 911. At the same time, President Bush stated that he was about to “use the mighty muscle of the federal government” to make homeownership more available for more Americans. He got Congress to spend up to $200 million a year to assist first-time homebuyers with down payments. He pressured mortgage lenders to make subprime loans because “Corporate America has a responsibility to work to make America a compassionate place.” Lastly, he caused immense moral hazard by getting Fannie and Freddie to guarantee all the junk loans being made, again to the tune of potentially $1trillion.

The banksters who closed the deals all along the financial food chain knew that if their get-rich quick scheme ever failed, Alan Greenspan and his Fed and the full financial resources of Uncle Sam would be there to catch their fall. This precedent was set in the 1930s with the Reconstruction Finance Corporation, the savings and loan bailout of the 1980s, and as recently as 1998, when Greenspan’s Fed bailed out hedge fund Long-Term Capital Management. Sure enough, the banksters were correct as Greenspan’s protégé, Ben Bernanke, and treasury secretary Hank Paulson frightened Congress into appropriating over $800 billion toward the Troubled Asset Relief Program.

When Bush, Greenspan, and their legislative accomplices on the Hill launched this massive welfare program for banks and homebuyers after 911, they did not take into account the words of Henry Hazlitt. They only considered the immediate effects for two groups in society. Even years later, when Bernanke and Paulson informed the president of the enormous economic catastrophe that our country was about to face and they pressured him to sign off on government bailouts for their banking buddies, Bush was said to have remarked “How did we get here?”

We got here because of government intervention into the economy, not deregulation. Unfortunately we are going to stay here because Obama is doing exactly what Bush did before him: providing cheap money and encouraging borrowing through government funding (tax credits for first time homebuyers) and guarantees. Maybe that is why Obama and the left are so keen to blame deregulation for the crisis. They use it as a smokescreen to hide the failures of the welfare state in the past, as well as the failures we will experience in the future.

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About Kenn Jacobine

  • http://bradenpace.wordpress.com Braden

    Unfortunate, but true. Good job.

  • Glenn Contrarian

    Kenn –

    Did you take out any mortgages since the repeal of Glass-Steagal? I took out two in that period…and my credit rating was in the 500’s then. I shouldn’t have been approved.

    But I was approved, and I’m now in an upside-down mortgage situation since I owe significantly more than my house is worth. Last year I came within five days from a foreclosure sale. The market is such that a short sale is a remote possibility at best. My income isn’t getting any better. If I can’t get my business started and running well, I’ll have to walk away from this house sometime next year. ASC and HSBC will have to suck up about 400K between them.

    So what does this have to do with your article?

    Neither of my mortgages had ANYTHING to do with Fannie Mae, Freddie Mac, Sallie Mae, or anybody else. Lenders – those who did and those who did NOT have anything to do with Fannie/Freddie/Sallie – were giving out mortgages like they were hotcakes even to those with low credit ratings and questionable income.

    So NO, your premise is wrong. It was a deregulated market that was the cause. It was banks ‘investing’ (gambling) with their depositors’ money. It was derivatives, the value of which currently outstanding is something like $600T last I read. It was ‘bundling’ debts and mortgages, the good along with the bad.

    AND it was the red-hot housing bubble that all of the above enabled.

    Sure, Fannie, Freddie, and Sallie – and their guaranteed loans – had to do with it as well, but these were NOT the primary cause. My own upside-down mortgages that should never have been approved are proof enough of that!

  • http://pajamasmedia.com/blog/author/danmiller/ Dan(Miller)

    I agree, excellent analysis. However, this does simplify it a bit. Do note the date, February 14, 2008.

    Dan(Miller)

  • http://handyfilm.blogspot.com handyguy

    Bill Clinton just said this about Michele Bachmann, but it could apply to every one of Kenn’s articles:

    “I respect people with a conservative philosophy. This country has been well-served by having two broad traditions within which people can operate.

    “If you have a philosophy, it means you’re generally inclined one way or the other but you’re open to evidence. If you have an ideology, it means everything is determined by dogma and you’re impervious to evidence. Evidence is irrelevant [to the ideologue].

    “[Bachmann is] the ultimate example of putting ideology over evidence.”

  • Kenn Jacobine

    Glenn,

    You said “I shouldn’t have been approved” for those two mortgages. Don’t you have any responsibility for the mess you are in? If you couldn’t afford them you shouldn’t have applied for them. See this is the problem with statist like yourself – you blame every bad decision you personally make on someone else and look for the rest of us to bail you out through welfare.

    I did get a mortgage from that time period, still have it, and can afford it. I bought a home in a part of the country I was confident was relatively recession proof. I am sure my house has lost some value, but I haven’t leveraged it to the max either like most Americans did. You see I never expected Uncle Scam to bail me out of my bad decisions so I made good ones. I resent having to bail other irresponsible people out. Oh, that’s right I live abroad and have figured out a way not to pay for all the welfare schemes of Uncle Scam.

    The repeal of Glass/Steagall is just an excuse for those that live off the state. It did not cause the crisis – the welfare state, dishonest bankers, and irresponsible consumers like yourself did.

  • http://www.maskedmoviesnobs.com El Bicho

    “the welfare state, dishonest bankers, and irresponsible consumers like yourself did.”

    You left off a few components of the housing industry from new home builders to house flippers both of whom drove up the market to unsustainable levels through their greed and ignorance.

  • Cannonshop

    #6 whom would not have been able to do that, if not for the three groups Kenn mentioned.

    The Welfare State Removed the Risk, and artificially boosted demand.

    Dishonest Bankers read the structure, and figured out how to exploit it.

    Irresponsible consumers decided not to save and work for what they wanted, because the Government could be used to obtain it NOW instead of later.

    Home builders will build if there is money and a market-the Welfare State in cahoots with dishonest bankers made sure there was money, irresponsible consumers abetted by dishonest bankers and the Welfare state provided the artificially high demand.

    This was further assisted, by States, Counties, and municipalities who rely on Property Taxes to fill their coffers-instead of making sure that Appraisals were honest and accurate, these entities had a vested interest in every home appraising for more than it was actually worth-because that is how your Property Taxes are figured. Thus, State guidelines for Appraisal were in many cases weakened or eliminated during this process in hopes of pumping tax revenues as home values spiraled upward.

    Now we get to the House-Flippers: During the worst of the build up to the crash, ‘flipping’ didn’t require much at all-the return on a re-sale of a property was, frankly, guaranteed, often to levels you can’t get back playing Casino table-games (Thirty percent return on investment inside six months is NOT sustainable, it WAS what was going on in much of the country on the ‘flip’ market.)

    The best instrument to pull off this, was the Adjustable Rate or Negative interest Mortgage-because the intent was a quick re-sale before interest rates were scheduled to change.

    What created the conditions that allowed this? Well, it’s easier to gamble if you don’t carry any risk, or if your risk on your loss is minimized, and the risks WERE minimized…by Uncle Sam via Fannie, Freddy, and similar entities under the aegis of laws like the revised Community Reinvestment Act.

    And uncle Sam delivered on the promise-first the big (almost Biblical in scale) bailouts during the last year of Bush’s term, then the frankly gargantuan bailouts under Obama’s first year in office.

    The Taxpayers and anyone who wasn’t participating in the gambling got screwed without lube, the crooks got a bailout, as did selected groups of their chosen ‘marks’ among the protected classes of America (as defined by whomever is in power currently).

    Mostly, though, ti was the crooks who traded in financial instruments they did not understand (Derivatives), hedge-fund managers, Wall Street, and ivy-league educated bank CEO’s, and, of course, “Civil Servants”, who always get more from Uncle Sam than the people they’re supposed to be serving.

  • Kenn Jacobine

    I know I sound like a broken record but at the heart of this problem is the Federal Reserve which supplied the credit for the bubble. Bubbles don’t just happen. They need fuel and that fuel is money/credit. Who is responsible for our money supply? – Greenspan and his Fed were. They kept rates artificially low and gave everybody the impression that the party would last forever. Once rates began to rise and people had no savings or equity in their homes left and could no longer afford their higher payments the bubble popped.

    Now, Obama and Bernanke are doing the same thing.

    Glass/Steagall did not cause the crisis because it did not supply the fuel for the bubble, it did not cause the corruption of Glenn’s lender, and it did not make Glenn take out mortgages that he would not be able to afford.

  • Cannonshop

    #8 but neither did the Fed, Kenn-nobody FORCED Glenn to take out those mortgages-nobody held a gun to his head telling him “You WILL buy a house you can’t afford.”

    That decision was his, and his alone.

    It didn’t help, though, that the bubble created synthetic value and made it really, really tempting. (not everyone out here is willing to do more with less based on a realistic view of their own resources and earning power…)

  • http://jeanniedanna.wordpress.com/ jeannie danna

    What is all this Obama and the left? Clinton, who was not the left at all, is dragged in your theory because of Glass-Steagal? How convenient to leave out the Sherman Anti-trust-laws…

    Always with you, there is a stubborn insistence that corporate welfare is OK but not for the individual.

    Yes, Kenn, deregulation caused all of the mess you are sitting in right now.

    I thought the View from Abroad was going to show the view of where You live and pay taxes…

  • http://jeanniedanna.wordpress.com/ jeannie danna

    @#7,

    A great example of selective and let’s rewrite-history memory:

    Irresponsible consumers decided not to save and work for what they wanted, because the Government could be used to obtain it NOW instead of later.

    The banks and credit cards are directly-responsible for the irresponsible consumerism that plagues this country.

    But, just like the last comment I posted to you, Cannonshop, in reference to your greedy-generation, you ignored it and acted like you never even read it.

    JD #11

  • Boeke

    The fact is that the consumer, and home buyer, simply has no choice when facing the various monopolies that dominate the financial arena.

    Those domineering monopolies grew stronger and bigger under de-regulation and are quite free to jerk the economy up and down.

    Even the most determinedly Libertarian home buyer simply has no power to negotiate a buying contract with the monopoly lender he faces.

  • Cannonshop

    Boeke, you still have the choice NOT to spend what you don’t have. I know this, I have done it for more than twenty years, and somehow, in spite of not being independently wealthy, I managed to NOT get eyeballs deep in debt to Credit Card companies, Lenders, car lots, etc. etc.

    it’s amazing what you can live without-a New Car is NOT a necessity, nor is fifteen grand in furniture, or a wedding-cake house on a tiny lot in the middle of an overpriced subdivision-if you can’t afford to buy, you can usually afford to rent-until you can find something that won’t kill you to buy. (I’m doing this now.)

    No matter how low the interest is, before you can become indebted, you have to decide to do so, you have to sign the paperwork and contractually agree to pay the bill.

    Spending more than you make-or more than you CAN make, is a CHOICE, therefore the pain and the debt and the foreclosure? are also part of that choice.

    Even a monopoly can’t take your money unless you open your wallet to them.

  • Kenn Jacobine

    jeannie,

    Please go back and reread my article. I said that the welfare in question went to banks and consumers. The last time I checked banks were corporations. Therefore. I mentioned corporate welfare.

    Also, please give an example of how deregulation caused this mess. It is easy to just throw blanket statements out.

  • pablo

    I occasionally read Ken’s articles on this site, and more frequently than not, agree with him in very general terms on most of the issues of the day that he writes about.

    In this aricle however I find his analysis of the financial meltdown as cursory at best. To not mention Credit Default Swaps, and derivatives in general as one of if not the primary culprit in the house of cards falling down is absurd.

    Also the number 800 billion dollars that was the first installment that taxpayers would be liable for has climbe up to as high as 20 trillion dollars according to Bloomburg.com

    And then where Ken and I really part company politically is that I am a coinspiracist, and it is quite obvious to me that the whole financial debacle was the result of a concerted effort bye a select group of individuals to gut the economy. Hint: follow the money to find out who those individuals are, to the tune of trillions of dollars.

    Ken did however touch briefly on the FED as a primary cause of the meldown. As I am sure Ken knows; and if my memory serves me correctly he has written about the FED in numerous articles, the FED itself was part of the great Anglo American conspiracy started by Cecil Rhodes, and the Rothschilds.

    The truth of the matter is that these robber barrons are not only above the law, they in fact are above money itself, in as much as they are the ones the actually print it via the Federal Reserve system.

    The meltdown was as purposeful as the sun rising every morning, thus it was a conspiracy.

    Often times on this forum I have been accused by certain dullards on this site of believing in so many conspiracies. That assessment however is not accurate. I believe in only one real conspiracy, and all of the rest flow from that tributary.

    Whether of the CFR, the Bilderbergs, the Trilateral Commission, Bohemian Grove, JFK, MLK, RFK, the City of London, the FED, it is all one vast conspiracy with the same major players in all of them.

    If Ken wants to attribute the main cause of the meltdown as greed, which he did, he might want to go up the foodchain a bit. People such as Volker cfr, Geitner cfr, or Greenspan cfr, are the visible rich pawns that carry out the orders of the ruling elite, which is why they are in the CFR.

    On a side note Greenspan wrote an essay “Gold and Economic Freedom” in 1966 thats whole premise was that a fiat currency is countefeit, and would always ultimately fail. One need not wonder who Greenspan bends over for, it is obvious to anyone who pays attention, and he does a particularly good job of it!

  • pablo

    One minor correction in my above comment. Yes I do know that the US Mint actually prints the notes.

  • http://jeanniedanna.wordpress.com/ jeannie danna

    @ #13, I rest my case…

  • http://jeanniedanna.wordpress.com/ jeannie danna

    Also, please give an example of how deregulation caused this mess. It is easy to just throw blanket statements out.

    Like your nanny-state cry?
    :D Ha ha ha ha…

  • http://jeanniedanna.wordpress.com/ jeannie danna

    Kenn,

    To not mention Credit Default Swaps, and derivatives in general as one of if not the primary culprit in the house of cards falling down is absurd.

    To do so would negate this article.

    :B Is that a good example of what personal-irresponsible, unethical-business practices, plus ignorant-deregulation got us?

  • Clavos

    @#13:

    Very well put, Cannon.

    In the final analysis, we are all always responsible for our own choices — expecting the government to take care of us no matter how bad our choices are, is not only irresponsible, it’s selfish.

  • http://handyfilm.blogspot.com handyguy

    The repeal of Glass-Steagall, although not a great idea, is not the only deregulation, or non-regulation at issue.

    A non-regulated “shadow banking” system took advantage of a non-regulated derivatives market, and securitized all that mortgage debt — thus raising the stakes to economy-threatening proportions.

    Fannie and Freddie, publicly held companies whose shares were traded on the stock market, were pressured by shareholders because they were late cashing in on this big party. The shadow bankers were making a mint off their derivatives, and eventually Fannie and Freddie got into that game too, increasing the already very large risk in the markets.

    There’s plenty of blame to go around in a crisis as large and complex as this one. Kenn’s analysis, as usual, starts with a premise: government intervention is the root of all evil. Then he creates a narrative to fit that idea.

    But it just ain’t that simple.

    And failing to blame lenders for making what they knew were bad loans is disingenuous. Both the borrowers and the lenders share some blame — but the lenders do not have the excuse of ignorance. Many Americans don’t understand the complexities of finance, and didn’t know what they were getting into.

  • http://handyfilm.blogspot.com handyguy

    I recommend that everyone read up on “shadow banking” — the term that refers to huge financial entities and structures [think hedge funds, Enron-style leveraged shenanigans, derivatives contracts so complex no one can really pin them down] which perform some of the functions of banks but are not regulated like banks.

    From Wikipedia:

    “In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities off-balance sheet into special purpose vehicles or similar entities. This enabled them to essentially bypass existing regulations regarding minimum capital ratios, thereby increasing leverage and profits during the boom but increasing losses during the crisis.”

    This is why we “dumb liberals” keep talking about the need for more regulation.

  • Kenn Jacobine

    The fact is that the entire banking system worldwide is corrupted. The Federal Reserve is officially the lender of last resort for banks. No other industry enjoys such an implicit guarantee against failure from a quasi government entity like the Fed.

    Bad mortgages were caused by easy money and an administration that pumped billions into housing and gave explicit guarantees through Fannie and Freddie. Bad debt caused the credit default swap and derivatives markets. Thus, Fed policy and government money and guarantees caused credit default swaps and derivatives. Eliminate the Fed and its corrupt policies and eliminate government handouts and guarantees and there is no crisis. You can’t have a crisis if the initial catalyst for it didn’t exist in the first place. It is a chicken or the egg scenario.

  • http://handyfilm.blogspot.com handyguy

    For someone who describes himself as an “international educator,” you are certainly prone to gross oversimplification. I hope you show a little more nuance [and less ideology] in teaching your students.

  • John Wilson

    For more and more people it simply isn’t possible to live on just an earned income, you need to have some outside income as well, such as from stock and real estate investments. Everyone knows the real estate method: buy a cheap fixer-upper that you can afford on your wages, repair it and upgrade in a few years. But once you’re on that treadmill you’re at the mercy of market forces and lending rates.

  • Clavos

    but the lenders do not have the excuse of ignorance…

    True, but ignorance is not an excuse, it’s a shortcoming, which can and should be overcome.

    Many Americans don’t understand the complexities of finance, and didn’t know what they were getting into.

    Then common sense should have told them to get advice, or even representation. When I bought my first house I hired an attorney to not only look out for my interests, but also to walk me through the process and explain it to me. The next seven houses (I was moved a lot by my employers) I was able to buy on my own.

    The government cannot and should not protect people from their own ignorance, stupidity and poor planning at the expense of everyone else.

  • http://handyfilm.blogspot.com handyguy

    It can and should protect people from deliberately predatory lending practices.

    And there are hundreds of thousands of these loans. The circumstances, the lenders and the borrowers were not and are not all the same.

    Over-generalizing on this topic, especially to fit it into neat political narratives, does not solve any problems.

  • Clavos

    That’s where you and I diverge, handy, I think government should be the last resort for problem solution, because it generally makes situations worse when it attempts to “fix” them. An excellent case in point is the mess we’re discussing. The government, in an effort to encourage and enable home ownership among the less fortunate (a dubious idea at best — for reasons that are now eminently obvious), simultaneously pressured lending institutions to relax their loan-qualifying standards AND relaxed its own supervision of those same institutions.

    Typical government stupidity and ineptitude, and in this case, possible corruption.

  • Glenn Contrarian

    Kenn –

    Don’t you have any responsibility for the mess you are in? If you couldn’t afford them you shouldn’t have applied for them.

    Again, you miss my point. I never said I don’t take responsibility for what I did wrong – I DO. Do you really think I like losing my home? My problem is MY fault.

    BUT THAT WASN’T THE POINT.

    The point, Kenn, was that the lenders were eager to lend to ANYone…and Freddie, Fannie, and Sallie (FF&S) cannot have been a major factor in their calculations – otherwise I’d never have been approved in the first place.

    And there are millions of Americans in the same boat I’m in, whose loans had NOTHING to do with FF&S, who either lost their jobs or had a major loss in income (I had a cut in pay of 3.5K/month last year, and now am losing another 2K/month), who can no longer afford their homes, and thanks to the bursting of the housing bubble cannot sell their houses for what they owe on their mortgages.

    Kenn, if the only ones defaulting were the ones guaranteed by FF&S, then you’d be right. But that’s NOT the case. There’s millions out there whose mortgages had NOTHING to do with FF&S who are in the same situation I’m in…

    …and this could not have happened if the lenders had not been SO eager to lend loans that were NEVER guaranteed by FF&S.

    That single fact, Kenn, disproves the premise of your article.

  • John Wilson

    The fact is that modern lending practices are full of booby traps for the borrowers. Indeed, many of them may be unknowable in advance because lenders write in language that allows them to change the terms as they please after the contracts are signed.

    The fact that our laws allow such shenanigans is testimony to the corruption of our legal processes, as corporate takeover of the political and judicial systems increases every year.

  • Mark

    Krugman and Wells give a three part critique of your position, Kenn:

    1 – “There are, however, some serious problems with this view. For one thing, there were good reasons for the Fed to keep its overnight, or “policy,” rate low. Although the 2001 recession wasn’t especially deep, recovery was very slow in the United States, employment didn’t recover to pre-recession levels until 2005. And with inflation hitting a thirty-five-year low, a deflationary trap, in which a depressed economy leads to falling wages and prices, which in turn further depress the economy, was a real concern. It’s hard to see, even in retrospect, how the Fed could have justified not keeping rates low for an extended period.”

    and

    2 – “The fact that the housing bubble was a North Atlantic rather than purely American phenomenon also makes it hard to place primary blame for that bubble on interest rate policy. The European Central Bank wasn’t nearly as aggressive as the Fed, reducing the interest rates it controlled only half as much as its American counterpart; yet Europe’s housing bubbles were fully comparable in scale to that in the United States.”

    and

    3 – “Fannie and Freddie actually accounted for a sharply reduced share of the home lending market as a whole during the peak years of the bubble. To the extent that they did purchase dubious home loans, they were in pursuit of profit, not social objectives in effect, they were trying to catch up with private lenders. Meanwhile, few of the institutions engaged in subprime lending such as Countrywide Financial were commercial banks subject to the Community Reinvestment Act.

    Beyond that, there were the other bubbles the bubble in US commercial real estate, which wasn’t promoted by public policy at all, and the bubbles in Europe. The fact that US residential housing was just part of a much larger phenomenon would seem to be presumptive evidence against any view that relies heavily on supposed distortions created by US politicians.”

    Do they make any valid points, iyo?

  • Kenn Jacobine

    Mark,

    Like all economic/political analysis, Krugman’s is tainted because he is a rabid Keynesian. He never really refuted that low rates caused the crisis only said it was the right thing to do given the slow recovery. Now he is saying we didn’t stimulate enough and that is why we continue to lag in recession. I disagree with that too. To the best of my knowledge Krugman never saw the crisis coming.

    He also says low rates prevented a deflationary spiral. Well, maybe Greenspan did lower them too low for too long and this caused an inflationary spiral in housing. Isn’t there some logic that can be employed here – if you lower rates to prevent prices from dropping than don’t you also run the risk of prices increasing since all men are mortal and make mistakes?

    I must admit that I don’t know much about Europe’s housing bubble. The only thing I can say is that the way financial institutions are all connected today it is no wonder to me that they are also having problems.

    I didn’t mention the CRA in the article but I would blame it as well for the crisis. I don’t think all the government guarantees had to be explicit for lenders to be irresponsible. Just because Freddie and Fannie weren’t involved big banks were still reckless because they knew the Fed would bail them out. And that is what happened.

    The bubble in commercial real estate was similar to the housing bubble in that investors got a lot of cheap credit to build too many malls and houses.

    Look Krugman (keynesians) thinks markets tank because one day consumers decide not to spend their money. Austrians believe markets tank because of government interference and particularly monetary policy that distorts supply and demand and causes capitalists to make mal-investments. It is just a divergent view of economics. The real issue like Krugman alludes to in his article is how do we get out of this mess? After $3 trillion Krugman’s way hasn’t worked. Maybe it is time to try something different?

  • Jackson

    As a Banker, I had to laugh at how little Handyman knows about banking. his post was entertaining but quite inaccurate. Furthermore deregulation was practiced by Carter and Reagan with support of the Democrats in congress and in brought down prices and liberal banking helped bring inflation down.

    Is it merely coincidence that the collapse was predicted by Peter Schiff and other Austrian economists years ago and they never mentioned credit default swaps or deregulation, they did bring up interest rates though. So I guess it’s also a coincidence that the bubble burst twice in two decades shortly after the Fed lowered interest rates to near zero both times. Thats one incredible coincidence.

    And to Glenn Contrarian, you and other homeowners blame the Banks for making bad loans and they do deserve blame. However the Banks drew up legal contracts and YOU and the other homeowners were the ones to break the contracts. This IS simple. You can’t blame banks when YOU signed a contract that YOU didn’t honor. Of course Handyman says it is more complex than that, but it isn’t. Yes the mortgages may have been complex but you have to be an idiot to sign something that is going to cost you hundreds of thousands of dollars without having a lawyer look it over and explain it to you. I mean, did anyone REALLY think ARM’s were a good idea? Is it too simplistic to say that people should have known ARM’s were a bad idea, Mr Handyguy?

  • Kenn Jacobine

    Jackson,

    You are spot on, but I have an ARM and it has worked for me. Of course, I knew I could afford it and wasn’t looking for something for nothing like our friends Glenn and handy are all about.

  • Boeke

    As a consultant working with banks for 30 years, I had to laugh at how little Jackson knows about banking. In that ignorance he is like all the bankers I knew, who did not even know if their bank was solvent.

    If Jackson really was a banker (at a high level) he would know that bank balance sheets and other filings are fakes that simply satisfy a bureaucratic checklist.

    Bankers are the dumbest people I ever met in the business world.

    Banking is too important to be left to bankers. We missed a real opportunity to nationalize the banks, break them up, and re-privatize them under strict regulations.

  • Kenn Jacobine

    The real opportunity we missed was letting all the failed banks go bankrupt and allowing the small community banks to buy up their assets at pennies on the dollar.

  • Brian

    Not True A If you look at the Facts.

    Financial crisis was ‘avoidable’, concludes US government inquiry

    Here is the Main Conclusions The Inquiry found
    The commission concluded that the crisis was avoidable and caused by:

    • Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the “tide of toxic mortgages”.

    • Dramatic breakdowns in corporate governance, with too many firms acting recklessly and taking on too much risk.

    • Excessive borrowing and risk by households and Wall Street.

    • Policymakers who were ill-prepared for the crisis and lacked a “full understanding of the financial system they oversaw”.

    • Systemic breaches of accountability and ethics at all levels. Mortgage-holders took out loans they never intended to pay; lenders made loans they knew the borrowers could not afford.

  • Boeke

    Borrowers really have little choice in the terms of their loans. You, as a borrower, cannot change one word in the thick sheaf of papers thrown in front of you at a signing. All the words are about your obligations and duties.

    Since the lenders form a large oligopoly employing highly trained lawyers to bias everything their way you will find no competition between lenders. You are facing a take-it-or-leave-it situation. THAT is the gun held to your head.

  • iakovos