Fiat Money. Fractional-reserve banking.
Everything else is just a symptom.
I’m sure there are studies out there with an optimal level of safe risk. IIRC, 20% is about what the long term minimum down payment has been in countries like Hong Kong, Singapore and China. That’s seems to be about the right level to prevent systemic banking risk in the system.
I do know that it’s not effectively zero or negative such as the worst excesses of the bubble. There was a significant number of buyers with self reported income getting interest only mortgages and more or less no money down that had little in the way of either assets nor iincome. That was a failure by everyone including the free market and government regulators.
Securitization is not necessarily a bad thing. Just like junk bonds are not necessarily a bad thing. The issue is that the underlying security was in many cases toxic crap knowingly repacked for the sole purpose of an “investment grade” rating in what was a dubious practice at best and outright fraud at worst. Coupled with the fact that every decade or so investors have to learn the hard way that outlier risk is very real. This was true in 1987, in 1997 and then in 2008. This learning curve is something that a libertarian nor free market economy prevents either
And yet it will happen again soon, and again after that. With or without government regulation it will continue to happen.
0% mortgages (or even negative) are fine when house prices are going up. Just like borrowing to invest worked great in the 20’s.
But when house prices are falling even 20% down might not be enough to maintain equity. Lots of people I know bought in 2006 and saw the value fall more than 20%.
What your said is exactly right, outlier risk is very real. I used to love watching roulette tables to see how often double zero ruined everyone’s day.
The sad reality is that nothing the government does will prevent that. Canada had lots of extremely effective banking regulations, and as a result weathered the storm incredibly well. They were held as an example of what to do, plenty of conferences focused on the Canadian system as a means to avoid financial disaster. But even still Canadians weren’t immune to worldwide effects.
So Obama’s coercively taking our money to give it to the makers of wussy-ass Yurpeen cars? Well, that tears it, where do I sign up for the newsletter.
Systemic risk exists, but the degree of that exposure is very material. Canada had reduced the systemic risk considerably (and benefited from high commodity prices, which is a natural Canadian hedge) compared with the US.
Interestingly enough, I see in the UK that the regulators announced they are going to ring fence commercial bank operations from that of investment banks, and will raise the capital adequacy ratio above that required by BIS. Probably up to 10% instead of the BIS 7%. The US is busy trying to cut the balls out of the Dodd Frank act.
This is Great Debates. Random nonsense is down the hall, to the right, then out that door marked ‘exit.’
Now, that is an example of an extremely simple yet highly effective regulation.
Remember that libertarianism does not mean no regulation, and it is not the absence of regulation.
A lot of this mess could have been avoided by requiring banks hold more in capital. But that would have meant fewer loans, which means fewer poor people would have owned homes and a slower economy. It was the anti-libertarians on both sides of the isle that pushed for government intervention in the mortgage markets. The left wanted poor people to own homes, the right wanted businesses to make money off those sales, neither represents a libertarian mindset.
So instead the government (Fannie and Freddy) bought the loans from the banks freeing them up to buy more, and making them a lot of money in the process. This encouraged banks to go out and give more loans, and eliminated their risk. Without risk, why would they care what loans they offered, it’s all going to get sold.
If you went to the track and placed a bet you’d probably do a bit of research. If I then paid you a premium for your bet, allowing you to bet more, would you continue to do as much research?
The problem should then be obvious. Me buying your risk needs to work twice as hard, because not only do I need to evaluate the initial risk, but I have you in the middle as an added risk. You obviously have an incentive to diminish the perceived risk, it’s in your best interest. I have provided you an incentive to lie.
Going back to mortgages, the government created an incentive for banks to give out crappy mortgages. Libertarian mindset is to avoid such actions, because the results are all to obvious.
It’s late but I wanted to address some of these points:
That’s right, but think back to pre-2007 when the US economy was red hot and Canada’s was trailing. There was plenty of chatter within Canadian politics, where it was said that Canada should follow suit. Canada looked like a failure, our heavily regulated system was sluggish, our requirements kept poor people from buying houses, and kept rich people from buying second and third.
My brother and sister both rented well into their thirties before finally saving enough to buy. That was normal. Meanwhile, my wife and I moved to the US where friends in their early 20’s were buying condos and townhouses, then buying rental properties. We were considered weird for renting. “you’re losing out on all that equity” We didn’t have the 20% we assumed was required and got laughed at when we mentioned that. “all you need is 5%, and you can borrow that” we were told.
Repeat that a few more times. Neither party is libertarian.
No, that is very very relevent. Fraud is a crime, it needs to be dealt with. Selling a junk bond as AAA is fraud as far as I’m concerned. What you describe are the very reasons why it doesn’t help to get government MORE involved. What’s the point of more regulations if they aren’t enforced, or if the people making them don’t understand what’s going on?
No, that’s not a libertarian mindset, quite the opposite. That was the government manipulating the markets. Both parties wanted more mortgages, so they meddled, and fiddled, and fucked around with things they didn’t understand.
Again, remember that regulations will always alter behavior. So as far as your quote there is concerned the regulations put in place caused people to become complacent with regards to the mortgage world. Once people become complacent failing to enforce, or removing the regulations is a recipe for disaster.
So consider this: you no doubt drive through many “regulated” intersections where cross traffic has a stop sign. Pretty typical of a major street where there are connecting streets. The regulation can be said to improve safety and speed up traffic. But they make you complacent, you assume that cross traffic will stop and give you right of way. As a result you blindly trust the regulations in place.
If the government took out the stop sign without properly notifying you, you would no doubt continue to blindly trust the intersection. Problem is that the cross traffic that paid to have the sign taken down is happy to have their path unimpeded. (see what I did there?) The result is disaster, you’ve gotten used to that intersection being regulated. The removal of the regulation will make you considerably less safe.
But the intersection doesn’t need to be regulated. If both drivers involved understand that the intersection is unregulated they were both treat it as a 4 way stop. They will both have to take responsibility for their role in the process. This may be less safe, it may be slower. But it does actually work.
When I’m on a bike or motorcycle I know to take personal responsibility. I treat every intersection as potential death. I don’t assume a guy backing out of his driveway will bother to look for me.
Can’t be prevented. But it definitely needs to be investigated and prosecuted.
That’s right. It could actually mean a lot less regulation, since most of it is piles on top of other piles. Strip it down, figure out what’s important, and then enforce what you put in place.
Those people are morons.
This is very true, which is why you should be very wary of new or changes to regulations. 9 times of of 10 they are to someone’s benefit, and 10 times out of 10 that someone isn’t you. Dems wanted regulations that helped poor people buy homes, Republics wanted regulations that helped banks sell more mortgages. Neither is a libertarian mindset.
I haven’t read your link, but my point all along has been that you can’t trust the politicians making the regulations. They aren’t looking out for you.
No, “accurate” is not the requirement any more than Ebert and Roper. They give their opinion, and people can choose to listen. They are only slightly more reputable than a guy telling you which horse to bet on. Also keep in mind that MBS were just a small part of the massive amount of ratings they were offering. As a poster recently said, “you have to put it in context of all the other ratings that were right.”
Let’s pretend that’s the case, what regulations would you propose? What were the regulations that were on the rating agencies that you’d like to reinstate?
Corrupted in what way? The market put too much trust in the rating agencies, I see that has a failure. It’s not about regulations, it’s about trust.
They’ve already forgotten. The big three rating agencies continue to be the dominant players in the market. I honestly don’t know why. If Rotten Tomatoes kept giving 95% to Vin Diesel movies wouldn’t you at some point stop going to their site?
Would you want to see those government officials in jail?
These is at odds with what I understand as the basic Libertarian tenents that say smaller government is better, and the free market can do it better than the government.
We wouldn’t be in this big of a mess and probably a much more normal business cycle recession if a 20% mortgage downpayment was required, captial adequacy ratio was more like 10%, and Glass-Steagal still in effect. 3 pretty basic things.
As a libertarian, would you agree that the 3 points above would in a perfect world be a good thing to have or can the free market effectively have a similar outcome?
Wow, I mostly agree. This is a pretty good summary of what happened. However, it is not clear to me that the mortgage companies accurately described the terms under which some of these mortgages were written. People buying them should have been suspicious that low risk instruments were paying high yields, but as I’ve described before it is easy to fool oneself when doing so makes the stockholders happy. Plus, the banks had risk departments who thought the housing market would never go down.
I agree here also. They were for-profit companies, with executives highly motivated to make huge profits, and quasi-government entities with an advantage. They worked much better as purely government entities, but it was thought that privatizing them would somehow make them better. We wound up with the worst of both worlds.
In the US the biggest mortgage writing culprits were companies like Countrywide, which were not banks and which were not covered by the FDIC. A lot of the local banks did much better, though they are now being hurt by the general downturn also.
Banks getting this kind of protection must be regulated so it is not abused; we saw what happens when they aren’t during the '80s.
So lost that even the banks who supposedly owned the mortgages didn’t know what was going on. However, just as in the Madoff scam, there were plenty of warning signs if anyone had wanted to listen. Greenspan ideologically could not see the problem. The execs at the banks were making lots of money. Ditto the execs at Fannie and Freddie. If almost everyone profits from underestimating risk, it will be underestimated.
Definitely agree that government screwed up also. If the role of government is seen as helping the private sector make more money, as opposed to protecting the economy as a whole, it will happen. This much money guarantees some forms of corruption, whether payments, campaign donations, or lobbying, but I content that if no banks had ever made ethically doubtful payments to anyone the problem would still have occurred.
I don’t think the securitization of mortgages is the actual problem. That can distribute risk and make the market more efficient by making it bigger. The problem was the lack of information about the mortgages, and the distortion of information. If people want to buy mortgages that are clearly marked as being given to people who did not have to state their income or assets, more power to them. Just don’t rate them AAA.
Ahem. Who owns Chrysler? 
I think IMM should bump his tone arm, since his record appears to be stuck in one groove.
(Younger Dopers, ask your parents.)
I’m delighted you’ve actually chosen to take part in the debate on this debate forum instead of continuing to run away. I’m guessing it won’t be long before you run away again though.
- No, let’s just call it 20%. A figure that canada had used to successfully avoid catastrophic housing bubbles/financial meltdowns.
I agree that governments were complicit in the meltdown. They gradually abolished all effective regulation of both mortgages and the financial industry over a period of decades. By the early 2000s all effective regulation had ended. banks could bet on the markets with their customers’ deposits, they could issue mortgages with no standards and the whole ethos of the banks, politicians and regulators was to prevent any kind of intervention getting in the way of making profits. We both agree on this. So, in light of the fact that the scrapping/non-enforcement of regul;ation led to the biggest financial meltdown in history, do you agree with me that the markets now need to be re-regulated and that corruption ogf government by the financial industry needs to be stopped?
And are you seriously claiming that the 2008 meltdown was a government failure? You mean because they didn’t regulate the financial industry so that the financial industry could blow up the economy? I’ll agreee absolutely that the government failed if you accept that, left to their own devices and absent of government regulation, the financial industry melted down the financial system and needed to be saved from total destruction by… government.
And ratings agencies made mistakes? They weren’t working hand-in-hand with the banks to cook up AAA ratings for junk, for a fat fee?
2. I agree with you that governments were complicit with the free market in the meltdown. So surely that means that you want to see the free market regulated properly to prevent future meltdowns, no? Whether the government do it or not, the markets clearly need regulation, no?
Fannie and Freddie were biot-part players in the whole thing. If they’d never existed the exact same thing would have happened. The major players in this were all private firms like Countrywide, Ameriquest, AIG, Citibank, etc. and they too were also backed by the full faith and credit of the government.
3. Not everybody underestimated the risk. Lots of people estimated it correctly and bet against the market, and did quite well.
I would take your commentary about the government drowning in debt more seriously if they weren’t drowning in debt due to bailing out the failure of the free market.
Whether there was chatter in Canada or not, canda maintained their highly suiccessful 20% policy and iot worked gangbusters for them compared to the US, no?
Both parties have adopted a libertarian mindset to the financial industry without question. They’ve both taken the unquestioning attitude that regulation is bad and firms should be allowed to unleash the power of the free market to its fullest extent. That’s been the mindset in Washington for some time now.
As far as what regulation worked, the stuff puit in place in the 1930s resulted in the longest period of financial stability and preosperity ever seen and only came unglued when it started getting scrapped in the 1980s. So how about going back to New Deal-era regulation?
The private mortgage guarantee market has completely collapsed since 2008. If it wasn’t for the government guaranteeing new mortgages via F and F, no new mortgages would be being issued.
F and F were bit-part players in the whole thing which was absolutely dominated by private firms. there have been attempts by the right to blame F and F for the whole thing but there isn’t a single serious credible study that has actually done so, basically becase they really were peripheral players in the whole thing.
You couldn’t possibly be more wrong if you had simply punched random letters on your keyboard.
Fanny and Freddy bought mortgages from all those evil banks that you listed. I have a mortgage with Wells Fargo that was subsequently bought by one of them.
Please familiarize yourself with at least one of them before posting more nonsense:
Those represent government intervention in the markets, the exact opposite of libertarianism.
Yes, requiring a down payment is a good thing, but that’s not what set Canada apart, because even in Canada people could skirt that rule by getting a loan for the down payment. It’s the absence of Fannie and Freddie that saved Canada. You see, in Canada when the 5 banks (or is it 4 now) issue a mortgage they hold on to it. That gives them an incentive to be selective with who they give loans too because they only have so much money they can lend at any given time. The obvious result here is that it’s harder to get a mortgage in Canada than it is (was?) in the US. Politicians (both R and D) in the US didn’t like that, they wanted everyone to have a mortgage, it’s part of the American Dream™.
But how do you convince banks to issue more loans? There are two ways, one is to lower the capital requirements, the other is to set up a quasi-government agency that buys mortgages from banks freeing them to loan more. The US used both of these approaches, neither represent a libertarian mindset, I hope you can understand that. Those two actions represent government intervention in the marketplace. So when it all crashes, it’s not a “failure of the free market” it’s a failure of government. The libertarian mindset is to stay the fuck out of the way, and put in minimal (yet effective) regulations as necessary. Neither party had that mindset, both parties used (abused) government power to try and direct the market. Both parties wanted more mortgages, but realistically everyone that qualified already had one, so both parties meddled with the free market to get mortgages for unqualified people. That’s government failure.
[QUOTE=Dick Dastardly;13918901Both parties have adopted a libertarian mindset to the financial industry without question. [/QUOTE]
Wrong. A libertarian mindset would have meant getting the government out of the mortgage industry. I assume you’re Canadian, so you don’t know about FHA mortgages, they are government backed and only require a 5% down payment. That right there is the opposite of a libertarian mindset. Both parties made the conscious decision to manipulate the markets so that more people could get mortgages. Just because one way to do that was changing regulations doesn’t make it libertarian.
[QUOTE=Dick Dastardly;13918901They’ve both taken the unquestioning attitude that regulation is bad and firms should be allowed to unleash the power of the free market to its fullest extent. That’s been the mindset in Washington for some time now. [/QUOTE]
Wrong, Washington doesn’t want the free market to work, because that would have meant fewer mortgages. The attitude in Washington is to try and manipulate the free market in every way possible to serve their agendas.
[QUOTE=Dick Dastardly;13918901As far as what regulation worked, the stuff puit in place in the 1930s resulted in the longest period of financial stability and preosperity ever seen and only came unglued when it started getting scrapped in the 1980s. So how about going back to New Deal-era regulation?[/QUOTE]
Yes, that would probably work. But if you look at the data you’ll see growth as very, very slow. It also means that fewer people could get mortgages.
Exactly! New mortgages should NOT have been issued. Everyone that qualified had one. The new mortgages went to people that should not have one. People with low/no credit, little to no down payment, unverifiable income. And worst of all they went to people buying second and third properties. Now do you see how government intervened? That’s not libertarianism. A libertarian mindset would have been okay with the free market not issuing new mortgages, because as it turns out, the free market was really good at figuring out who should and should not have a mortgage.
[QUOTE=Dick Dastardly;13918901F and F were bit-part players in the whole thing which was absolutely dominated by private firms. there have been attempts by the right to blame F and F for the whole thing but there isn’t a single serious credible study that has actually done so, basically becase they really were peripheral players in the whole thing.[/QUOTE]
I included this quote to point out how insanely wrong you are.
http://www.bankingmyway.com/real-estate/mortgages/fannie-mae-vs-freddie-mac-what-are-they
That’s because you don’t quite understand the basic Libertarian tenets. Proper and effective regulations can be necessary, and do not require a lot of government intervention. It’s simply the straw man fallacy everyone here relies on to bitch about libertarianism. They think that if they can show one good regulation it disproves libertarianism, but that’s not the way it works.
I’m not a libertarian, but as I pointed out in my previous post, it wasn’t simply the change in regulations that fucked everything up. The government was heavily involved in the mortgage market, meaning that it was anything but free.
I personally think 20% down payment makes sense, but as pointed out that’s not a magic number. Some times it should be 90% some times 1%. What many here have failed to understand is that without regulations (and that includes government manipulation) the bank and the client would come to an agreement on their own. The more money you put down the lower your risk of default, which would usually translate into a cheaper mortgage. In a free market the client would present their case for why they deserve a mortgage. They would show proof of income and assets, they would put money down thus creating equity in the home, they would have an agreement as to what happens if they fail to pay. And it’s entirely possible that in a free market there wouldn’t be enough trust to have a mortgages. Can you imagine owing/lending someone $500,000 to be repaid over 30 years?
Capital adequacy ratios don’t really need to be regulated although they probably should. Personally I think they just need to be posted on a huge sign like gas prices. It is then up to the individual consumer to decide if they want to give their money to bank that’s lent either 90% or 10% of it’s capital. The problems arise, over and over, when people don’t give a shit. When they blindly sign up for a savings account because it comes with a free toaster. Capital adequacy ratios should be important, they should be something banks advertise to get customers.
The Hyundai Pony is such a perfect example of how this plays out in the real world. That was a horribly shitty car that cost Hyundai its reputation and nearly destroyed them. It took over a decade to revamp the company and re-brand it by offering one of the best warranties in the business. They fought to make people trust them again, and it paid off. Now other car companies are forced to match or beat their warranty, meaning they have to make better cars to avoid losing money. Government regulation wasn’t required.
Fannie and Freddie did indeed buy mortgages from all those evil banks. they bought mortgages that the evil banks should never have issued because they were bad mortgage deals, QED.
When the housing bubble really got going F and F’s normal business got swamped by private firms selling their mortgages direct to the securities firms. In 2006 alone Fannie lost 56% of her market share to Wall Street firms who were buying the mortgages direct from the issuers.
Some stuff for you to read :
http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html
I absolutely agree with you that the government use F and F to interfere in the markets. They’re doing that right now by using F and F to buy up all the toxic debt from the banks in a gigantic, current, ongoing backdoor bailout to the banks :
If you’re wondering whether the Ritholtz guy I’m citing here is some lefty then goggle his bio. Also google his $100 000 of his own money challenge to any of the nuts who were blaming Fannie, Freddie, Jimmy carter etc. for the meltdown to a winner-takes-all debate and how many people challenged him.
I’d like to put more of this into my own words and I’d especially like to get a reply from SAM who appears to have put his Nikes on again but I’m pushed for time. I’m off for a few days to the socialist workers’ paradise of Nice and I can’t see me getting on the internet much but will return and hope to continue this discussion then with you and SAM.
Thanks for trying to destroy the housing market even more. So, no people graduated from college, or started families, or got money since 2008? No people who aren’t qualified should get mortgages, but that is indeed happening.
I make it a practice not to debate libertarians anywhere but BBQ Pit.
But I’m bookmarking this post in case any dare show their face in that forum and pretend that some libertarians are capable of sincere sensible rhetoric.
Just for clarification:
The government was not a factor in integrated circuit development.
The Apollo computer used commercial grade IBM hybrid devices. These were not integrated circuits in the sense the term is used today. Any ICs that flew on Apollo were passengers. The most common semiconductor was the Federal Electric 2N107 transistor. I know because I was a component engineer on the program.
Lee Boysel made the first IC computer at Four Phase Systems in the early 70s. It was strictly a commercial application.
The military is just another customer of the IC industry.
Crane