This post is "Part 2" of my post "Blame the Homebuyers Only if You Reject Your Doctor's Advice…."
• http://corpania.blogspot.com/2011/12/blame-homebuyers-only-if-you-reject.html
Please only read the following post after having read "Part 1". Thank you.
Here is PART 2:
• http://en.wikipedia.org/wiki/Government-sponsored_enterprise
• http://corpania.blogspot.com/2011/12/blame-homebuyers-only-if-you-reject.html
Please only read the following post after having read "Part 1". Thank you.
Here is PART 2:
Regarding Libertarian Banker-Apologists' second specious point:
- "It's not the banks' fault at all. The government 'MADE' the banks loan to non-creditworthy homebuyers."
The federal government law to which those bank-apologists are referring is primarily the "Community Reinvestment Act" that requires banks to make loans inside their respective communities. Basically, a bank can't take all the deposits from one neighborhood (e.g. the ghetto) and then exclusively make loans to a different neighborhood (e.g. the suburbs).
http://en.wikipedia.org/wiki/Community_Reinvestment_Act BUT THAT LAW HAS FUNDAMENTALLY BEEN IN EFFECT SINCE 1977!
So the libertarian bank-apologists really think that the cause of the housing bubble/bust of the GWBush years was only the community-reinvestment regulations that have been substantially identical for 30+ years?
No, that's simply laughably absurd.
Instead, all should consider the legitimate possibility that a major cause was the changes in regulations (i.e. the REDUCTION and RELAXATION of REGULATIONS) around 1999 & 2000. Yes, that's right, I'm blaming Bill Clinton and his Treasury Secretary Robert Rubin. While Phil Graham and the Republicans primarily were championing these horrible deregulations and strong-arming the Democrats to go along, they couldn't have done it without Bill Clinton. For you policy wonks, here's what they passed:
• http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act (which repealed the decades-long successful Glass-Steagal protections)
• http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 (which enabled the proliferation of dangerously leveraged derivatives that Warren Buffet calls "Financial Weapons of Mass Destruction").
So when trying to diagnose the cause of a problem do you look at the nearest cause or the farthest cause? If you get food poisoning tonight do you think it was from today's lunch or from the cake you had on your seventh birthday?
Yes, I will concede that government action helped cause the GWBush financial crisis but it was the Republican-led government action of DEREGULATION that allowed the banks to ruin our economy in the 21st century.
Let's think practically here.
Say you control a casino.
Would you allow someone who is worth $1 million to bet $100k on credit you extend to him?
How about gambling $1 million on your credit? How about $6 million? How about $32 million?
How much would it matter if the gambler was a purportedly very successful poker player and only wanted to use your extended credit to play poker?
What if that poker player somehow lost half the $32 million he borrowed from you?
But since the fundamental existence of the poker game in your casino was at stake when he lost that money, you fronted him the $16 million loss. His accountants then count that $16 million example of taxpayer generosity to fortify the gambler's balance sheet and ensure he appears to be profitable (despite the $16 million he lost).
Would you then be OK with him paying himself a $1 million bonus? How about a $2 million bonus?
Well that's all highly analogous to what the banks did to the American people.
Their "capital requirement" / "capital asset ratio" regulations were relaxed so that they could use depositors' funds as collateral for massive risk. And on that collateral they were allowed to "leverage" themselves and gamble at 32 times the amount they actually had (including their depositors' investments which don't even belong to the bank). This new, massive increase in leverage was tantamount to a commensurate (artificial) increase in "demand". That much more money being loaned out to buy stocks & real estate during the GWBush years meant increased prices (i.e. an artificial bubble).
Then, when the bust inevitably occurred the banks required the TARP bailout from us taxpayers (which, to be fair, they largely paid back already). But concurrently these banks also required the unprecedented moving of "toxic assets" off their balance sheets in the TRILLIONS with a "T" (not billions with a "B"). With these absurdly "cleaned-up balance sheets" they got to claim massive profitability and therefore shamelessly "justify" giving themselves gigantic bonuses that are virtually entirely unearned.
Please read Matt Taibbi and Robert Scheer for more about this…
But in the interest of true fairness and balance…
I will concede that the GSEs Fannie & Freddie must also share in the blame.
And, of course, the microscopic percentage of homebuyers who actively deceived their loan officers in a criminal attempt to get a bigger loan (that they knew they couldn't afford to repay) - well, sure, they're guilty, too.
But before you blow that miniscule fact out of proportion consider the ramifications. A mortgage is virtually always more expensive than rent. In a standard loan, you pay some interest PLUS SOME PRINCIPLE. Taking out a bigger loan than you can afford necessarily means eventually getting evicted (for being so "upside down" = owing more than the home is worth). Once you get caught like that you get evicted and all of your principle is lost. So you will have paid more in the form of a mortgage than you would have if you rented! Under normal/historic circumstances, even for a criminal there is no upside to getting a bigger loan than he can afford.
The only ways to "game" such a normal/historic system are to either:
a) "deliberately not pay until they actually evict you" (thus getting "free rent" until eviction).
a) "deliberately not pay until they actually evict you" (thus getting "free rent" until eviction).
OR…
b) get an "interest only loan", paying that artificially lower mortgage until the principal payments kick-in, years later, and then stop paying & move out (thus getting de facto "subsidized rent").
But both such immoral actions are minimally dangerous under 1960s/70s/80s style financial regulations. Whereas they are significant risks thanks to GOP-led deregulation.
In any event, you can't blame the homebuyers for the GWBush financial meltdown.
Firstly - The banks should have only given loans to those who could afford to pay. It's the banks' primary job to find good lenders. Otherwise you shouldn't want banks to exist and instead you should prefer only a system of "safety deposit boxes" coupled with a paypal-like money transfer system. When unemployment spikes to 9% the effect on the financial system should be tolerable. When in a massively-leveraged bubble (due to deregulation) such cyclical shifts can threaten to become cataclysmic dangers.
Secondly - The government/regulators shouldn't allow any industry to threaten the existence of America. Remember Warren Buffet's repeated warning that massively leveraged derivatives are still "Financial Weapons of Mass Destruction". We simply shouldn't let banks gamble at such absurd multiples of their net worth. And if one does need a bailout then draconian strings should be attached (e.g. I think "In the event of financial bailout, every one of the bank's management should be personally financially 'wiped out' to no more than $1million in net worth before a single dollar is borrowed from the taxpayer."). It's crazy "reverse-Robin Hood" GOP thinking that a school teacher should pay 20% of their 50K annual salary so that a foolish trader on Wall Street (who has lost more in his career than he has made) can keep his millions in ill-gotten gains (and pay a lower percentage tax rate).
For the record: I'm really not against Wall Street traders/investors/hedge fund managers etc. Some are good friends of mine (since high school). Those who, over the years, earn more on their investments than they lose should be well-compensated. Those whose clients' investments, over the years, earn an ROI greater than the market (e.g. S&P) deserve substantially greater compensation. Conversely, those so called "investment professionals" who underperform the market shouldn't be well compensated at all. In my opinion those who underperform are worth less than minimum wage because the clients would have been better off investing in a mindless index fund. It should be obvious to all with at least a minimal understanding of finance that, in a normal statistical distribution, the majority can't beat the average.
In a purported meritocracy, only those who excel should profit. The market can't fix this problem no matter what the delusional ivory tower libertarian economists think. We need regulation to protect us. We need a democratic government seeking to protect the 99% from the fundamental corruptions that naturally spring up in all markets.
Again, if you haven't yet, please read my post about how "Libertarianism is a Quaint Anachronism".
• http://corpania.blogspot.com/2008/10/regulations-are-crucial-libertarianism.html
_____________
LINKS:
• http://en.wikipedia.org/wiki/Community_Reinvestment_Act - Basically, a bank can't take all the deposits from one neighborhood (e.g. the ghetto) and then exclusively make loans to a different neighborhood (e.g. the suburbs).
• http://en.wikipedia.org/wiki/Community_Reinvestment_Act - Basically, a bank can't take all the deposits from one neighborhood (e.g. the ghetto) and then exclusively make loans to a different neighborhood (e.g. the suburbs).
• http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act - which repealed the decades-long successful Glass-Steagal protections.
• http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 - which enabled the proliferation of dangerously leveraged derivatives that Warren Buffet calls "Financial Weapons of Mass Destruction".
• http://en.wikipedia.org/wiki/Capital_requirement & http://en.wikipedia.org/wiki/Capital_adequacy_ratio
• http://en.wikipedia.org/wiki/Government-sponsored_enterprise
Again, if you haven't yet, please read my post about how "Libertarianism is a Quaint Anachronism".
• http://corpania.blogspot.com/2008/10/regulations-are-crucial-libertarianism.html
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