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| The Housing Boom & Bust | |
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| Tweet Topic Started: Jun 3 2009, 11:23 AM (211 Views) | |
| Mr Gray | Jun 3 2009, 11:23 AM Post #1 |
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Here are some stats & comments from Thomas Sowell's new book, "The Housing Boom & Bust". Before you ignore this as "partisan hack" material, please read through.....it attacks both sides objectively. The Community Reinvestment Act of 1977, later given teeth during the Bush and Clinton administrations, forced financial institutions to make risky mortgage loans they otherwise would not have made. President Clinton's Attorney General Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions. Bank loan qualification standards, in general, came under criticism as being too stringent regarding down payments, credit histories, and income. Fannie Mae and Freddie Mac, two government-sponsored enterprises, by lowering their standards for the kinds of mortgage paper they would purchase from banks and other mortgage lenders, gave financial institutions further incentive to make risky loans. In 2002, the George W. Bush administration urged Congress to enact the American Dream Down Payment Assistance Act, which subsidized down payments of homebuyers whose income was below a certain level. Bush also urged Congress to pass legislation requiring the Federal Housing Administration to make zero-down-payment loans at low-interest rates to low income Americans. Between 2005 and 2007, Fannie Mae and Freddie Mac acquired an estimated trillion-dollar's worth of subprime loans and guaranteed more than $2 trillion worth of mortgages. That, Sowell points out, is larger than the gross domestic product of all but four nations. There were numerous warnings that went unheeded. In congressional hearings, U.S. Treasury Secretary John Snow said, regarding the risks assumed by Fannie Mae and Freddie Mac, "The concern is, if something unravels, it could cause systemic risk to the whole financial system." Peter J. Wallison, American Enterprise Institute scholar, warned that if Congress did not rein in Fannie Mae and Freddie Mac, "there will be a massive default with huge losses to the taxpayers and systemic effects on the economy." There were many other warnings of pending collapse but Congress and the White House in their push for politically popular "affordable housing" ignored them. Congressman Barney Frank, who is now chairman of the House Committee on Financial Services, said critics "exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see." Chairman Chris Dodd, of the Senate Banking Committee, called Fannie Mae and Freddie Mac "one of the great success stories of all time" and urged "caution" in restricting their activities, out of fear of "doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years." From Walter Williams: Sowell provides numerous examples of government actions at both the federal and state levels that created the housing boom and bust and its devastating impact on domestic and foreign financial markets, but here's what I don't get: What can be said about the intelligence of the news media and the American people who buy into to congressionally created lies that our problems were caused by Wall Street greed and Bush administration deregulation? In the words of Barney Frank, "We are in a worldwide crisis now because of excessive deregulation" and "mortgages made and sold in the unregulated sector led to the crisis." The fact of the matter is our financial sector is the most heavily regulated sector in our economy. In the banking and finance industries, regulatory spending between 1980 and 2007 almost tripled, rising from $725 million to $2.07 billion. I challenge anyone to come up with one thing banks can do that's not covered by a regulation. |
![]() The body knows what fighters don't: how to protect itself. A neck can only twist so far. Twist it just a hair more and the body says, "Hey, I'll take it from here because you obviously don't know what you're doing... Lie down now, rest, and we'll talk about this when you regain your senses." It's called the knockout mechanism. | |
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| Unbiased | Jun 3 2009, 12:31 PM Post #2 |
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Gene Keady providing interest free, forgivable loans to Luther Clay was the start of the credit bubble |
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| brumdog44 | Jun 3 2009, 06:37 PM Post #3 |
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Yes, the housing crisis was a bipartisan fuck up. |
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| troubleatiu | Jun 4 2009, 06:29 AM Post #4 |
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plus, the republican congress under clinton repealed glass-steagall, which aloowed commercial banks to take on properties of investment banks. that was a contributing factor to the derivitive market, which exploded during the housing boom. |
![]() "The illegal we do immediately. The unconstitutional takes a little longer."--Henry Kissinger "What luck for rulers that men do not think."- Adolph Hitler "Terrorists don't want your freedoms--they want your life. It's dictators and tyrants who want your freedoms."-author unidentified | |
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| HoosierLars | Jun 4 2009, 09:05 AM Post #5 |
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arguably one of the biggest mistakes that led to the crisis. I give that Congress much of the credit for balancing the budget, but they deserve all of the blame for that poor decision. |
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| thePhilosopher | Jun 4 2009, 10:03 AM Post #6 |
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Glass-Steagall is minuscule in this whole mess by comparison to the Fed's easy money policies, action to prop up zombie banks, and the use of Fannie and Freddie as reservoirs for bad mortgages. If you don't have near-0% interest rates and bubbles created by the central bank, all of the funny business that occurred in the early part of this decade can't take place. |
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| troubleatiu | Jun 4 2009, 07:15 PM Post #7 |
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glass-steagall wasnt miniscule, it was just another piece. repealing it allowed the commercial banks to take on risk previously confined to investment banks. high risk/high reward. at the time, it was all high reward. had that stayed in effect, i dont think the derivitives would have become so prevalent. it was the perfect storm. easy money by the fed, forced lending to unqualified applicants, and the potential for commercial banks to make huge profits. it took all these factors to get us where we're at. |
![]() "The illegal we do immediately. The unconstitutional takes a little longer."--Henry Kissinger "What luck for rulers that men do not think."- Adolph Hitler "Terrorists don't want your freedoms--they want your life. It's dictators and tyrants who want your freedoms."-author unidentified | |
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| HoosierLars | Jun 4 2009, 08:16 PM Post #8 |
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Well put. Once the line between conventional banks and investment banks was destroyed, it opened the floodgates for Harvard MBA's to come up with bright ideas like MBS's, and ma and pa on mainstreet started investing their money in a "sure thing" and getting unreasonably good returns. In retrospect, it was clearly unsustainable, but too many people couldn't see that, or were too busy making money. |
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| thePhilosopher | Jun 5 2009, 09:45 AM Post #9 |
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Maybe I'm missing something with Glass-Steagall, and I'll be the first to admit my depth of knowledge on this topic is shallow. However, any move to allow businesses to make their own decisions increases the freedom that businesses have to operate. I thought both Lars and trouble believed that gov't regulation is what is partially to blame for industry leaving the country. Feel free to chime in there, but I would think both of you would be more laissez faire. So what if commercial banks want to be investment banks and vice versa? If they fail, they go bankrupt and their competitors think "whoa, company x really screwed up, we either need to be a commercial bank or an investment bank." That is, as long as you don't have a situation of moral hazard where people can do whatever they want because they don't think there will be any consequences. Unfortunately, this played such a front and center role in the bailouts that I don't think American business will ever be the same. And besides, I still think Glass-Steagall is a moot point because if the easy money by the Fed was not available, people wouldn't be swimming in money and the dot-coms and houses in this country would not have been grossly overvalued. |
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| Mr Gray | Jun 5 2009, 09:49 AM Post #10 |
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I agree Phil, and we have briefly discussed this on here before. I am in favor of the repealing of Glass-Steagall, as I don't really see it as the problem. Without loose money and corrupt government, Glass-Steagall would be a non-factor. That's kind of like Lars pushing me down to the ground and then blaming the concrete for my injury. Had I not been on concrete perhaps I would be OK, but the problem is the push, not the ground. |
![]() The body knows what fighters don't: how to protect itself. A neck can only twist so far. Twist it just a hair more and the body says, "Hey, I'll take it from here because you obviously don't know what you're doing... Lie down now, rest, and we'll talk about this when you regain your senses." It's called the knockout mechanism. | |
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| thePhilosopher | Jun 5 2009, 09:53 AM Post #11 |
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I was trying to think of a good analogy, aaronk. I think your analogy will suffice, mostly because Lars is probably a tough guy that likes to push people around. I also wanted to say that I find it disturbing that trouble and Lars are agreeing, on anything... and on top of that they both are disagreeing with me! I feel like I'm taking crazy pills! :) |
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| HoosierLars | Jun 5 2009, 10:19 AM Post #12 |
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Using Aaron's analogy, repealing Glass-Steagall is part of the push, and the easy money turned the hard ground into concrete, making the landing even worse. Using the laissez faire approach, it should be legal for horse racing track owners to also open banks. Ma and Pa are looking for a safe way to get 5-10% returns, and would rush at the chance to get 9% savings account rates from Guido's bank. Of course Guido is trafficking drugs and who knows what to give a those kind of returns, and he's probably running some sort of Ponzi scheme too. Eventually, the scheme comes crashing down, and ma and pa get burned. Without regulations to govern financial institutions, it's far too easy for dishonest people to take advantage of average working folks. If you think it's ok for there to be common bank failures, you are wrong, because our financial system's success depends on trust in the system. |
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| thePhilosopher | Jun 5 2009, 10:36 AM Post #13 |
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I think I need to disambiguate something regarding my point. I think there's a serious difference between protection from fraud and protection in the "regulation" sense. I think if someone is a victim of fraud, the justice system should be able to protect them. This is not "regulation" of business in the sense that it is used so often today, but the Ma and Pa's of the world should be protected from fraud, since all fraud is just a more sophisticated form of robbery. Even in a laissez faire environment, you need equal protection for all parties that participate. However, banking regulation, like all gov't regulation, is counterproductive. If you're in a business, you should be able to run it as you want. Why shouldn't it be legal for horse racing track owners to open banks? Why shouldn't it be legal for commercial banks and investment banks to be one in the same? If you regulate business, you 1) spend money w/ little ability to predict outcomes, and 2) make running a business more expensive. And if you bail out business (another form of regulation), you're susceptible to moral hazard, which creates an uneven playing field in which the State decides who stays in and who is out. I think bank failures would be a welcome alternative to counterproductive and harmful gov't intervention. With Glass-Steagall being removed, interest rates being so low, and the understanding that banking is such an "essential" part of our economy, these banks did whatever they hell they wanted and didn't worry about the consequences. That wasn't a product of people making money or getting greedy, just the result (albeit, unintended) of gov't regulation. |
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| HoosierLars | Jun 5 2009, 10:48 AM Post #14 |
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There should be a clear distinction between a conventional bank where there are savers and borrowers, and the business model is very simple. The bank sets the interest rate spread to make money, and can charge high risk borrowers more interest to compensate them for the increased risk. Investment banking is a completely different animal. Frankly, much of it is legalized gambling, and driven by speculation. People who "invest" in this arena should understand they can make higher returns, but their principle is at risk. When the two types of banking systems were merged, we had the introduction of "mortgage backed securities", which gave more of an investment banking return with the perceived lack of risk of a conventional bank. This led to over investment in this sector of the economy, and helped blow up the real estate bubb.e |
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| thePhilosopher | Jun 5 2009, 11:10 AM Post #15 |
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I know the basic difference between the two types. I think your view of investment banking as "legalized gambling" is a bit much, but whatever. As long as the customers of the bank know that their bank is also an investment bank, I still don't see the problem. What blew up the housing bubble wasn't mortgage backed securities, but the money that was available for those mortgage backed securities to work. Let me ask you this question: do you think any of these sophisticated methods used by the banks would have been possible without the Fed's policies? |
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