Russ Roberts on why Gingrich is kind of scary.
First, they are for Freddie Mac who paid him something around $1.6 million for his “services.” He described this work originally as being payment for his historical knowledge of housing. Cue laughter, folks. This interview gives you a glimpse of the real reason he was hired. He was hired, of course, to provide cover for Freddie Mac.
Because they were thought to had an implicit guarantee of government support, they were able to issue bonds at relatively low rates of interest. They were very eager to use that money to buy more mortgages. The problem was that because of that implicit guarantee, they were constrained by regulation to only buy fairly safe mortgages with 20% downpayments. Starting in the mid-1990′s, Clinton (and then Bush) required them to relax their standards. They didn’t end up buying a lot of sub-prime, just a lot of low down-payment mortgages that were very prone to end up underwater if housing prices ever fell. This injection of credit into the market pushed up the price of housing (starting around 1995) launched the housing bubble and along with other government programs, helped make speculative subprime lending.
AM: Russ Roberts really knows a lot about this issue. (Check out his essay: Other people's money) He really does a good job of laying out exactly how these entities caused the housing bubble. It wasn't really through sub-prime lending. They were exposed to this, but not that much. It was the low-downpayment mortgages, and the expansion of credit. And, it was political. It wasn't just greed from lenders or investors: it was a government policy to give houses to poor people. That's a fact. All of the people who talk about failures of capitalism and deregulation miss this fundamental point. it was a policy, and the policy makers had good intentions.
Was the "implicit guarantee of government support" specifically that they would not be allowed to go bankrupt?
ReplyDeleteDoesn't that scream fraud on a massive scale?
I don't disagree with you that it was a policy error which was the issue, but does poor policy mean private banks in turn disregard their business acumen and make poor decisions (ie lending relatively poor people massive amounts of money)?
They should have tanked - it was only fair. It was their [banks] decision in the end to loan that money, no?
Exactly. So they could be more risky: that was the policy, give people loans with little money down. that sounds fine in practice, but it's a recipe for disaster if the value of the asset falls even a little bit the buyer has nothing at all invested and can basically walk away. Not so with 20 percent down, obviously.
ReplyDeleteIt is no more fraudulent than 'too big to fail.' So I don't know but that's a baseline for comparison. Of course, this is a bit worse - Gingrich's role in the whole thing proves it, I think.
I don't think it was poor business acumen: commerical bankers (who issue mortgages) disregard loss potential b/c they are selling the loans to these entities. Risk is subsidized by the tax payer, rewards, no so much.
The policy makers had good intentions?? Really? The people who make the policies are the ones whose election funds are paid for by corporate lobbyists.
ReplyDeleteYou can't separate the policy makers from the corporations here. The government didn't just decide, "Hey, poor people should be able to own houses too."
Corporations that knew they would get wealthy from deregulation influenced policy makers to ease up on the rules.
In the world of high finance it's virtually impossible to separate the corporations from the policy makers - hell, often times even from the professors of economics who guide the policy makers and school the next generation of financiers.
I can assure you with near certainty that no one involved in setting in motion the policies that caused the financial meltdown was acting with the interests of "poor people" in their minds.
This probably deserves its own post - but yes, there were interests and people in American politics that were pushing cheap housing to help the poor. Also, yes, it was government policy. Freddy and Fanny were instruments here, but there were other concrete initiatives: mortgage tax deductions, restrictions on what banks could do to defaulters (paradoxically, more regulation, not less) Anyway, it wasn't evil banks either. Nice people like Barney Frank were behind this (he hates this story btw, for obvious reasons), other special interests like ACORN, which lobbies for the interests of the poor and lower middle class.
ReplyDeleteI don't think the corporate interest story works here. It works better from the high finance side of things.