The feds, in the guise of Fannie and Freddie caused the problem in the first place. As GSEs, they had the implicit backing of the feds and a mandate to increase home ownership. Since they were not subject to the pressure of the market (the big one-the possibility of failure, i.e. going broke, is non existent with government backing), they underwrote loans that were not credit worthy, other lenders did the same, knowing that they could sell the loans to Fannie and Freddie, and the two grew to astronomical size ( holding something like half the mortgages in this country ). That never would have happened if they were fully private corporations because they wouldn’t have taken the risky business in the first place. A private corporation wouldn’t have wanted to make risky loans, and they wouldn’t feel that they had to to meet some social engineering “mandate”. Then they spin off investment vehicles based upon those risky loans, and the whole rotten house of cards is falling apart because it’s a house built on sand-there was no stable foundation. And yes, I realize that we (the taxpayers) DO have to foot the bill, because F&F DID get so large that it would be disastrous to the economy to allow them to fail. However F&F are swollen pigs that need to go. They should be chopped up, sold off and cease to be. If the government wants to encourage home ownership, they should do it directly and transparently through tax breaks or penalties. Then the entire industry should go back to what it should have been all along, and would have been without government “help”.
(And FTR, I’m not against ALL government regulation, the Govt’s role is to ensure fair and honest business practices, to prosecute fraud and to ensure a level playing field. Beyond that…well, the mess we’re in now demonstrates the folly of that, doesn’t it?)
I’ll just cosign to Weirddave’s posts if I may. You “we need more regulation” people wouldn’t get it if I said the same thing in different words anyway.
Re: this from the OP
Ask Obama where he got “Change we can believe in” (hint: it was lifted word for word from an earlier presidential campaign).
The mortgage crisis was caused by Government intervention, not the lack of it. The easy mortgage rules fueled the home inflation which turned into an ugly spiral.
Home buyers were also to blame for entering into horrible deals. Unfortunately, it’s going to now fall onto the backs of Joe Schmo taxpayer to cover the loss of mortgage value/home value difference.
That doesn’t make any sense. How does deregulation of mortgage lending force lenders to lend to unfit borrowers? If there was supervision (which some states wanted and Greenspan rejected) crap loans would have not been made.
Maybe you meant mortgage rates? It’s true they were kept maybe a bit low, but that was a Republican (Randian, in fact) Fed Chief helping out a Republican president. I hope you aren’t proposing that the Fed stop working. If so, you really need to read some 19th century economic history.
What actually happened was that Fannie and Freddie, seeing the regular companies making a bundle, wanted a piece of the action, to make the shareholders happy and let the execs make a bundle of money. They did start taking risks they shouldn’t have. Given their government backing, they should have been regulated more to keep them on task. The meltdown clearly shows there was too little regulation, not too much. Remember the more unregulated lenders melted down first.
With more regulation of lending practices, some buyers would be forced out of the market, thus reducing demand, thus forcing home prices to trend down, possibly resulting in a soft landing. Not having lending regulations is like removing stop signs from all corners. Sure, if everyone acted responsibly there would be no problems, but we know people won’t, and there will be carnage.
More regulation of F&F probably would’ve stopped it, but even better would’ve been not making F&F. There is no good reason for their existence at all. If you want to subsidise homes, just do it, don’t make up this absurd convoluted system which in the end makes some suits very rich and fucks over the taxpayer.
The other idiots who engaged in sub-prime are getting what they deserved. Companies failing isn’t a bug, it’s a feature. It’s not a “crisis” when a poorly run company goes bust.
The melt down is due to the lax qualification rules that were applied to buyers so that higher home ownership could be acheived. This was driven by the above referenced Government mandate.
But it is a crisis when a bank failing has the ability to fuck over the whole economy. This is something that free-marketeers and those calling for near-complete deregulation often neglect to address. Banks aren’t like family-owned bakeries; a bank failing is a major disaster, what with the extent that they are “plugged-in” to the economies of most developed nations. Whilst the pseudo-Darwinism of capitalism may work well the vast majority of times, is a situation where there’s a possibility that five huge banks go under at once something we really want?
The unbound capitalist in me wants to say “Yes”, but you’ll see that I did address this point above. We never would have gotten to this point (multiple banks failing) w/o the distortion of the market caused by government intervention, absent F&F we might have had one bank fail for poor lending practices, in that case I say absolutely, let it fail, but we wouldn’t have had 5 or more. The whole reason that " a bank failing has the ability to fuck over the whole economy" is because of government intervention, what I (and I believe others) are saying is “OK, we have no choice but to take it on the chin and fix it this time, but for God’s sake change the system so that it can’t happen again”. That means getting the govt out, not more deeply in.
I don’t see how this mandate is relevant. If a company is under marching orders from the government to increase home ownership, that will push them in the direction of making more loans, and lowering their qualification standards to accomplish that. But they make their money from loans, so the profit motive is also pushing them in the direction of making more loans. The same factors that pose a risk to their profit also pose a risk to fulfulling the mandate.
I can understand how government backing would insulate them from risk and alter their behavior, but how does a mandate to increase home ownership prompt them to do something that they wouldn’t if they were just in it for the money?
“Making money” is a goal that conflicts with “increasing home ownership”. A mortgage company doesn’t make money by the volume of business it does, it makes money on the quality of the loans it underwrites. Quality was sacrificed ( without risk, the feds were always assumed to be there to catch their fall. ) in order to meet the goal of increasing home ownership, and what we have now is the result. By taking the risk out of the equation, F&F caused the whole rotten house of cards to be built in the first place.
And hell to me. I will never understand this view, as long as I am alive. It’s frustrating to read things like this.
I have a feeling that economic conservatives have a completely different set of goals than an economic liberal like me. We’ll never actually agree on the proper handling of the economy because we don’t even share the same desired outcomes. Economic conservatives want to maximize things like growth, wealth creation, and the ability of the market to adequately meet demands, whereas the liberals care more things like the wealth distribution curve, unemployment levels, and labor conditions.
Each side wants to optimize for its own favored metrics at the expense of the other, but neither side is particularly right or wrong when their separate goals are taken into account. I don’t see the point in arguing about pros and cons of “regulation” if the participants don’t agree what the regulations (or lack thereof) are attempting to accomplish!
How did Fannie and Freddie influence the lax guidelines of the lenders who were lending to people who didn’t even qualify for the government backed loans? I think you have things in the wrong order - the government backed companies got into trouble because they were falling behind in apparent profitability by being too cautious, and felt they had to take more risk to support their stock prices.
The root cause of the increase in risk for the lenders was the ability to sell off the mortgages so that there was no apparent downside to writing risky ones (and a lot of upside). The rating agencies (also not government) were asleep, which hurt also. The idea was that though there would be some defaults, they’d be few enough and widely enough distributed that any particular purchaser of the loans would hardly notice. That was true as long as the housing market continued to rise.
I can see (but don’t agree with) the position that the government shouldn’t do anything at all to help home buyers. But that is different from saying that government regulation was responsible for the meltdown. Even Ben Stein is now saying the problem was too little regulation, not too much.
I see the problem. You haven’t been paying attention to what has been going on for the past few years. You are quite right in the old model, where a lender makes the loan and keeps it. In that case, the quality of the loan is very important. In the current model, where the lender makes the loan, gets a commission, and then slices and dices it to the broader market, the quality means little, so long as the rating agencies don’t blow the whistle. In fact they sold loans with high returns (from the risk) while getting ratings that indicated low risk.
If some clown blows himself up playing with fireworks, it is his problem, no one else’s. If some clown blows himself up playing with a nuclear bomb, it becomes everyone’s problem.
Yes and we engage in yet another round of “All I’ve got is a hammer so every problem is a nail” with the Libertarians.
I’m SO SICK of hearing you guys blame every single fucking problem on the government. Would you kindly point one single shred of supporting evidence in the real world? It seems to me that the most stable countries in the world have more government influence not less.
The general consensus is that less intervention yields higher absolute growth, less equality and less stability, while more intervetion yields the opposite case.
Why are you so sure that a complete free-for-all would yield higher growth and MORE stability? Again, we should stick to talking about provable real-world evidence here because these econ 101-level explanations aren’t going to cut it anymore. I don’t fancy myself an economist, but I do know better than to cast my lot in with a fairty-tale economic system in which the benevolent invisible hand takes care of all of our needs.
That would possibly be the truth if we had 100 percent transparency. But the fact that we aren’t living in a computer simulated model of the economy means that there are inherent flaws in the system that prevent the “perfect market” from existing. You guys ALSO seem to think that the less regulation the better! So here we are, far less regulation than in the past 20 years, and you blame these problems on TOO LITTLE regulation.
“This current round of deregulation was met with an eventual financial catastrophe. The only sane solution is to deregulate further!”
I’m glad none of your ilk are actually making the decisions here.
But that quality also affects how well they fulfill the government mandate you described. If an institution approves a mortgage, and the buyer successfully pays it off, the institution makes a profit and the home has a new owner. If the buyer defaults on the mortgage, the institution loses money and the home-ownership statistics take a hit.
Whichever standard you are pursuing, your behavior should be the same.
Furthermore, the government only insulates them from financial risk, not from the risk of failing to meet their mandate. If the heads of these institutions cared about money, they’d have given mortgages to everybody; the government backing means they can’t possibly fail on purely financial terms. But if they really wanted to increase home ownership, they’d have been much more cautious. There is no artificially-ensured bottom to how badly they could fail at that mission.