swishnicholson wrote:

drsmooth wrote:

TomatoPie wrote:Bottom line, though - it was government policy that established the rules of the game, tossing aside fundamental market principles and sensible risk management in making housing loans.

You repeatedly demonstrate that you don't know a bottom line from your bottom. Do you know who establishes the rules of any game mediated by our representative form of government?

Regulatory capture - LOOK. IT. UP. #$!&@.

It's you that have it all topsy-turvy Doctor. The poor are constantly taking advantage of the government and twisting it to their own ends, while major banks and corporations are its sad victims, being buffeted this way and that.

TenuredVulture wrote:A lot of people conspired to create the sub prime lending crisis--builders who kept building, realtors and others who insisted it's always better to buy than rent NO MATTER WHAT and that you should spend as much as you can borrow even if you won't end up paying any principle because real estate is an investment and you can't lose look property values have doubled over the last five years, mortgage brokers who had no real incentive to evaluate the credit worthiness of borrowers because they were simply going to sell the mortgage in a package of CDOs dreamed up by financial engineers which were supposed to be risk free and government policy (and not just the lending stuff but the distorting mortgage interest tax deduction, HGTV, and yes, borrowers who took on more debt than they could afford bear some responsibility too. Only the latter though really end up suffering.

pacino wrote:Uhm, yes, they did makes the rules. You dont seem to understand how the us government actually works.

dajafi wrote:

pacino wrote:Uhm, yes, they did makes the rules. You dont seem to understand how the us government actually works.

This. Matt Taibbi among others showed pretty conclusively that this was one of the more extreme examples of regulatory capture you will ever see. Post Glass-Steagall repeal--for which, yes, I do blame the Clintons and the neoliberals--the vicious exploitation of low-information consumers and obscene profit-taking was probably more the point than an unintended consequence of Barney Frank's do-goodery.

dajafi wrote:The ad hominem is cute because it so obviously seeks to distract from the absence of an opposing argument. So: do you really believe this was less about regulatory capture enabling sociopathic greed than about the unintended consequences of liberal aspirations, or however the fairytale goes on the WSJ editorial page?

1. Private markets, rather than the GSEs, created the subprime mortgage boom.

The subprime mortgage boom and the subsequent crash are very much concentrated in the private market, not the public market. Subprime is a creature of the private label securitization channel (PLS) market, instead of the Government-Sponsored Entities (GSEs, or Fannie and Freddie). The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.

Here's some data to back that up: "More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions... Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year."

As University of California, Irvine law professor David Min has argued, saying the government directly created either the housing bubble or subprime loans has a serious problem with the timing. "From 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50 percent to just under 30 percent of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10 percent to about 40 percent over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans."
…
2. The Community Reinvestment Act and the GSE's affordability mission didn't cause the crisis.

Many conservatives argue that the "affordability goals" of the GSEs, as well as the Community Reinvestment Act (CRA), which was created in the 1970s to make sure poor communities had access to credit, either directly or indirectly led to subprime loans.

Research from the Federal Reserve by Neil Bhutta and Glenn B. Canner (helpfully summarized in this Randy Kroszner speech), argues that the CRA couldn't have been behind the subprime and housing bubbles. "The very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis." Only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods.

A recent paper found that while the CRA might have introduced slightly larger risks in lending portfolios, extra loans done to meet CRA compliance weren't more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, or hold other subprime characteristics. So it is unlikely that the CRA was priming the pump for subprime, or subtly encouraging subprime mortgages to be made by private lenders.

Jason Thomas and Robert Van Order's research argues that subprime loans were only 5 percent of the GSEs' losses. The GSEs' affordability mission led them to buy the highly rated tranches of mortgage bonds, for which there was already a ton of demand and were not essential to the completion of the deals.
…
4. Conservatives arguments tend to blur the definition of subprime. Some, such as Ed Pinto of AEI, argue that the GSEs had huge subprime exposure if you create a new category that represents the risks of subprime more accurately. He created a new "high risk" category, which he then argues these high-risk loans were held by the GSEs. This argument blur categories together and obscures more than it reveals. …
…
The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up finding it doesn't work. So those who blame the GSEs can't get the numbers to work when they make up categories.

(Fun fact: These same conservatives sang a different tune before the crash. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers. See Should CRA Stand for 'Community Redundancy Act? from Cato in 2000 or AEI's Peter Wallison in 2004 arguing "study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing.")

5. The government policy that likely made an impact were deregulatory actions.

In 2000, Congress passed the Commodity Futures Modernization Act, which deregulated the derivatives market, in a lame duck session as a rider to an 11,000 page omnibus appropriation bill. A banking capital "recourse rule" in 2001 allowed the ratings agencies and private bank risk modelers to decide what banks should hold against risk. In 2003 the OCC preempted and overruled Georgia’s new anti-predatory lending laws. Alan Greenspan refused to enforce regulations on, or even investigate the wrongdoing of, the new subprime market during the 2000s. The 2005 bankruptcy reforms in BAPCPA, widely viewed as friendly if not written by the financial industry, codified the market practice of letting derivatives go to the front of the line in bankruptcy, helping create the conditions for shadow banking runs.

These government actions all fall under the rubric of deregulation, or "letting the market decide" how to manage the rules of the financial sector, and they are more relevant to the actual crisis. Though these are government policies, and they were reckless, I doubt they are what conservatives like Rubio mean.

3. There's a lot of research to back this up and little against it.

The United States' housing market is one of the most intensely studied capital markets in the world. What has other research found? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data..including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve [also here], have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

Wallison’s conclusion that federal affordable housing policies are primarily responsible for the financial crisis is based entirely on the research conclusions of Pinto, who finds that there are 27 million “subprime” or “high-risk” loans outstanding, with approximately 19.25 million of these attributable to the federal government’s affordable housing policies. As I point out in “Faulty Conclusions,” Pinto only gets to these numbers (which are radically divergent from all other estimates—for example, the nonpartisan Government Accountability Office estimates that there are only 4.59 million high-risk loans outstanding) by making a series of very problematic and unjustified assumptions.

Case in point: To support his claim that the Community Reinvestment Act, which requires regulated banks and thrifts to provide credit nondiscriminatorily to low- and moderate-income borrowers, caused the origination of 2.24 million outstanding “high-risk” mortgages, Pinto includes many loans originated by lenders who were not even subject to CRA. In fact, most of the “high-risk” loans Pinto attributes to CRA were not eligible for CRA credit.

Similarly, in arguing that Fannie and Freddie’s affordable housing goals caused the origination of 12 million “subprime” and equivalently “high-risk” loans, Pinto includes millions of loans that would not typically qualify for those goals. In fact, the vast majority (65 percent) of the “high-risk” loans Pinto attributes to the affordable housing goals of Fannie and Freddie fall into this category.

dajafi wrote:I had a longer response, but probably just best to link and clip from the (long) article. Emphases mine.

No, Government Didn't Cause the Housing Crisis

1. Private markets, rather than the GSEs, created the subprime mortgage boom.

The subprime mortgage boom and the subsequent crash are very much concentrated in the private market, not the public market. Subprime is a creature of the private label securitization channel (PLS) market, instead of the Government-Sponsored Entities (GSEs, or Fannie and Freddie). The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.

Here's some data to back that up: "More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions... Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year."

As University of California, Irvine law professor David Min has argued, saying the government directly created either the housing bubble or subprime loans has a serious problem with the timing. "From 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50 percent to just under 30 percent of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10 percent to about 40 percent over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans."
…
2. The Community Reinvestment Act and the GSE's affordability mission didn't cause the crisis.

Many conservatives argue that the "affordability goals" of the GSEs, as well as the Community Reinvestment Act (CRA), which was created in the 1970s to make sure poor communities had access to credit, either directly or indirectly led to subprime loans.

Research from the Federal Reserve by Neil Bhutta and Glenn B. Canner (helpfully summarized in this Randy Kroszner speech), argues that the CRA couldn't have been behind the subprime and housing bubbles. "The very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis." Only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods.

A recent paper found that while the CRA might have introduced slightly larger risks in lending portfolios, extra loans done to meet CRA compliance weren't more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, or hold other subprime characteristics. So it is unlikely that the CRA was priming the pump for subprime, or subtly encouraging subprime mortgages to be made by private lenders.

Jason Thomas and Robert Van Order's research argues that subprime loans were only 5 percent of the GSEs' losses. The GSEs' affordability mission led them to buy the highly rated tranches of mortgage bonds, for which there was already a ton of demand and were not essential to the completion of the deals.
…
4. Conservatives arguments tend to blur the definition of subprime. Some, such as Ed Pinto of AEI, argue that the GSEs had huge subprime exposure if you create a new category that represents the risks of subprime more accurately. He created a new "high risk" category, which he then argues these high-risk loans were held by the GSEs. This argument blur categories together and obscures more than it reveals. …
…
The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up finding it doesn't work. So those who blame the GSEs can't get the numbers to work when they make up categories.

(Fun fact: These same conservatives sang a different tune before the crash. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers. See Should CRA Stand for 'Community Redundancy Act? from Cato in 2000 or AEI's Peter Wallison in 2004 arguing "study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing.")

5. The government policy that likely made an impact were deregulatory actions.

In 2000, Congress passed the Commodity Futures Modernization Act, which deregulated the derivatives market, in a lame duck session as a rider to an 11,000 page omnibus appropriation bill. A banking capital "recourse rule" in 2001 allowed the ratings agencies and private bank risk modelers to decide what banks should hold against risk. In 2003 the OCC preempted and overruled Georgia’s new anti-predatory lending laws. Alan Greenspan refused to enforce regulations on, or even investigate the wrongdoing of, the new subprime market during the 2000s. The 2005 bankruptcy reforms in BAPCPA, widely viewed as friendly if not written by the financial industry, codified the market practice of letting derivatives go to the front of the line in bankruptcy, helping create the conditions for shadow banking runs.

These government actions all fall under the rubric of deregulation, or "letting the market decide" how to manage the rules of the financial sector, and they are more relevant to the actual crisis. Though these are government policies, and they were reckless, I doubt they are what conservatives like Rubio mean.

The missing #3 is probably worth copying in full:

3. There's a lot of research to back this up and little against it.

The United States' housing market is one of the most intensely studied capital markets in the world. What has other research found? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data..including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve [also here], have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

edit: and this article takes on the "gummit libs did it" argument more directly. Boring, but thorough:

Wallison’s conclusion that federal affordable housing policies are primarily responsible for the financial crisis is based entirely on the research conclusions of Pinto, who finds that there are 27 million “subprime” or “high-risk” loans outstanding, with approximately 19.25 million of these attributable to the federal government’s affordable housing policies. As I point out in “Faulty Conclusions,” Pinto only gets to these numbers (which are radically divergent from all other estimates—for example, the nonpartisan Government Accountability Office estimates that there are only 4.59 million high-risk loans outstanding) by making a series of very problematic and unjustified assumptions.

Case in point: To support his claim that the Community Reinvestment Act, which requires regulated banks and thrifts to provide credit nondiscriminatorily to low- and moderate-income borrowers, caused the origination of 2.24 million outstanding “high-risk” mortgages, Pinto includes many loans originated by lenders who were not even subject to CRA. In fact, most of the “high-risk” loans Pinto attributes to CRA were not eligible for CRA credit.

Similarly, in arguing that Fannie and Freddie’s affordable housing goals caused the origination of 12 million “subprime” and equivalently “high-risk” loans, Pinto includes millions of loans that would not typically qualify for those goals. In fact, the vast majority (65 percent) of the “high-risk” loans Pinto attributes to the affordable housing goals of Fannie and Freddie fall into this category.

So the liberal commentary is now that the Community Reinvestment Act did not force banks to lower underwriting standards that increased the number of subprime loans. Hogwash
The exclusion of profits on sales of residential real estate from capital gains taxation in 1996 did not spark a speculative stampede in the housing market didn't feed the bubble. Nonsense.
The artificially low interest rates of the Federal Reserve under Alan Greenspan didn't fuel the speculative explosion in the real estate market. Of course it did. It was pouring gas on the fire.
The refusal of Greenspan, Rubin and Summers.to regulate derivatives despite the repeated warnings of Brooksley Born didn't create a mountain of risk undetected by regulators on either side of the Atlantic wasn't government's fault. Pure delusion.
And the straw that broke the camel's back, Fannie Mae and Freddie Mac buying hundreds of billions of dollars of mortgages to clear the books of private lenders so they could write hundreds of billions of dollars of more mortgages didn't create a powder keg ready to explode. Insanity.

dajafi wrote:I don't think you read what I posted. (Actually, I think you skimmed it until you found the comment at the end of your post, which offers nothing other than a restatement of your position without any data or logical argument.) Konczal's point 2--"The Community Reinvestment Act and the GSE's affordability mission didn't cause the crisis"--directly engages your argument. Most of those who've looked closely at it found that it was groundless.

TomatoPie wrote:Fundamentally, there is no problem with securitizing loans. There are grade AAA bonds and there are junk bonds. Putting the junk together in a fund makes sense, where the high yield helps offset the high risk. There are "Grade AAA" mortgages, like mine, which any lender is glad to hold. Similar concept to package the junk loans. The problem wasn't securitizing the sketchier loans - but that that sketchiest loans were ever made in the first place. Those loans violated everything taught by experience and common sense. But Barney and soft-hearted liberals required it.

Those who fancy big benevolent government will never learn that messing with markets always has side effects. When you distort the normal supply and demand, you get nasty results you didn't anticipate -- whether you mandate that we burn food as fuel, pump billions into college and healthcare funding, or make loans to unqualified borrowers.

TomatoPie wrote:
Still, none of it happens without government changing the game. The players are guilty, but they didn't make the rules.

drsmooth wrote:

TomatoPie wrote:
Still, none of it happens without government changing the game. The players are guilty, but they didn't make the rules.

WHO. WANTED.THE.GAME.CHANGED.THAT.MOST.BENEFITED.FROM.THE.CHANGE.