Weren’t there a lot more regulations on Fannie and Freddie when they were created that could have prevented all this? Then the “deregulate at all cost” crowd, notably including Phil Gramm, undercut all that and set us up for the current debacle? It seems pretty silly to say government intervention caused this problem when it was working fine until some corrupt legislators threw a wrench in the works.
And who does he sell it too? Which companies bought suspect paper that private corporations wouldn’t because they had much laxer standards because they wouldn’t be allowed to fail? You’re almost there Voyager, stay with me for the final yard.
I explained this already. The paper wasn’t all high risk loans, it was a stew of loans of different qualities. The purchasers had no idea of who the loans were from - there were tiny chunks of lots of loans in all these instruments. The purchasers judged the quality of the loans based on numbers from S&P and the like. Remember the uproar when it was found that the raters were giving A ratings to bonds composed of a lot of junk?
As I mentioned, the principle was that while some of these loans were sure to go bad, the amount in each of the instruments was so small as to not matter relative to the return. Most companies felt obligated to get into these since otherwise their rate of return would lag behind those who did. (I think Shearson was the one exception.) And everything was just dandy until the one assumption - that the default rate would be low - got invalidated.
I thought this was all meltdown 101.
This is a prime example of the oscillation of a totally unregulated market. Everyone is making the same amount on investments at a certain level of risk. Then a company invents a slightly riskier investment, and makes more. All the others follow, and then another company, for market advantage, tries something riskier still. Since everything seems fine it is very hard for the risk management division to stop it, especially when there is a new product that no one really understands. This repeats until conditions change, they all find they are on the edge of the cliff, and they fall off, holding a sign saying “uh oh” as the plummet to the canyon bottom. Government puts a fence in front of the edge, pissing off everyone who thinks they can get a better view or better grass by going past it right to the edge.
And the reason that it fell off the edge is because a higher and higher percentage of the bonds were bad risk, until finally the tipping point was reached. And the big reason that a higher percentage of mortgages were junk was because of the lending practices of Fannie and Freddie, who were trying to “increase home ownership” at any cost.
Did they meet that mandate, Weirddave? Has home ownership increased, particularly in the last year or two?
You seem to be blaming the goal that Fannie Mae and Freddie Mac were trying to achieve. It seems to me that the problem has more to do with their incompetence in achieving it.
I didn’t respond to the not allowed to fail part since that had nothing to do with the failure of Countrywide and the smaller mortgage lenders. I wouldn’t be surprised if you were somewhat right about Fannie and Freddie. That’s why regulation is necessary - otherwise companies expecting rewards for taking risks and no punishment will go out on a limb, resulting in the taxpayers getting screwed. But remember their investments fell apart only after the broader market did.
You realize that Fannie and Freddie have been around for a long time, right? How come things didn’t fall apart before? if they were mostly responsible, where did all the bad paper which is killing the banks come from? Not from them, definitely.
What do you think is going to stop a lender from making risky loans if he can offload the loans onto others? That’s the part I don’t get. Yeah, the market will eventually punish them, but with all the collateral damage we’re seeing.
The problem is the method. If you want to have the government encourage home ownership, then it can be done simply and directly by offering tax credits and cuts. Simple and effective.
And Voyager, I am not, nor have I ever, argued against all governmental regulation, just that it should be limited to creating a fair playing field, ensuring even competition and preventing and punishing fraud. Beyond that it should butt out.
Okay, but then what prevents the private mortgage industry, purely in the pursuit of profit, from following the same course that got us where we are today?
The F&Fs never fully realized (not as in knowledge, but rather as in their assessment of it, because they were backed by the government) the risk they took on in making/guaranteeing the loans. They had two huge comparative advantages because of it: they had lower bowering costs (they were considered to be nearly risk free because of the government backing), and they had lower capital requirements allowing them to take on or leverage more of their cash to back the mortgages.
With these two comparative advantages, the F&Fs could compete better in the mortgage market. In order for private companies to compete, they had to take on more risk. Also, since there were only two institutions, it became so large that it fulfilled the only saying, that it became too big to fail.
To make matters worse, as the liquidity crisis started to unfold, Congress (another great reason why governments should not interfere in the markets) allowed the F&Fs to increase the mortgages they bought from $400k to like $750k (I forgot actual numbers), which only exasperates the current problem. The reason, as they are so well informed :sarcasm:, for the increase was to allow for the institutions to grow themselves out of the problem (except the underlying problem itself was the risk mortgages it helped create in the first place :smack:.)
Well put. That’s a pretty good SDMB-tailored summary right there. The limit was also raised due to pressure from high cost-of-living area Congressmen/women who’s constituents were screaming at them to ‘do something’. As always, it made the problem worse.
Good. Does that include regulations forbidding the sort of undocumented loans we saw so much of? Because if they had been in place, and enforced, we’d be in much better shape.
As for F&F, they were supposed to offer a base to the industry. Either there should be no government involvement, or government involvement with strict regulation to protect the taxpayers.
Do you have any cites about people saying F&F competing unfairly had anything to do with the meltdown? I am aware that there were people upset about the lower rates being offered due to the backing of the government, and that had some merit when they started buying loans that didn’t meet their previous standards.
The reduction in capital requirements was a problem. However, the change in jumbo mortgages wasn’t done for that reason at all. F&F were meant to help the average home buyer, not the buyer of mansions, so the limit was reasonable. However, where I live the average sale price of even a moderate house was in jumbo territory, so lack of access to these mortgages was a real problem. You can’t blame them for the increase, that happened before the increase in the cap.
BTW, the foreclosure notices I’ve seen are mostly on the low end, so it doesn’t seem that many purchasers of houses affected by this have gotten into trouble - not yet, anyway.
Thanks. My post wasn’t to any one person in particular, but rather to all those posts that think government influence in the market is typically a beneficial thing.
Taxes and wealth transfers are probably the only things that the government can do best to affect the economy. Everything else distorts prices, creates perverse incentives, and supply shocks and less inflation.
It’s possible to regulate without influencing too much. For example, here in Florida at the height of the housing bubble, we had thousands of felons working in real estate, mostly as mortgage brokers. Regulating (and enforcing) who could work in this industry would have likely saved billions of dollars, while adding relatively little cost to the price of a home purchase. What a surprise that high dollar transactions and a boom market would attract criminals!
Not all government influence is bad (nor is it all good).
Jeez, this thread has gone off the rails!
My OP was intended to ask if the Reagan-era mantra of Government = Ruination of America that Sarah Palin has been spouting (long before the latest Wall Street crisis) was resonating with today’s GOPers? The cry sounded so old and, well… dated… to me.
It would be great if we could get back to the original question. Thanks.
Well, didn’t the discussion kinda answer your question? I’m not a Republican, but I am a McCain supporter, and it certainly resonates with me. It doesn’t sound old and dated, it sounds like the values we should be returning to, in other words good change rather than bad change.
Wasilla, Alaska is an incorporated city that gets millions in tax revenue from strip malls, but city government is very small. For example, they have only very basic, and extremely permissive zoning and subdivision regulations (I’ve seen them). Building permits or inspections aren’t required for any construction in the city. Everything I could find said that Wasilla is an ugly hole of a town, and the residents actually like it that way, because residents prefer gub’mint staying the hell out of their way rather than having fancy-dancy regulations that might result in an attractive, livable community.
In my experience, communities that are very liberal or very conservative usually have strict zoning regulations. Those that are politically conservative, but blue-collar, usually look like hell; zoning may be in place, but it’s permissive and ineffective, and quite unpopular.
I wasn’t particularly talking about the current banking difficulties, rather talking in general terms, but this seems a particularly naive approach to take, in the modern world. The UK’s banking system is feeling the full force of the current American trouble, with huge banks like HBOS having 40% of their share value wiped away in a single day, despite the UK having no equivalent of FDMA or FNMA. Absent mandating that every government in the world refrains from interfering in their internal markets, how does your approach help deal with outside pressure, like is currently being seen in the UK?