(Link to) * Money As Debt* [Give it 20 seconds to start]
(Link to) *The Financial Crime Scene *
Now that the reader has been persuaded of the value of Nietzschean sophistication in the appreciation of the difficulties involved in the administration of human affairs, and lest this sophistication seem nothing more than merely academic in impact, we might mention one of the rare instances in which a policy recommendation has little in the way of a countervailing consideration.
This is to say, specifically, that our Clintonista retread regime can provide a desperately-needed emergency transfusion of money - presently and hopelessly obstructed in the poisoned banking digestive system - by directly injecting it into the free-flowing but starving commercial circulatory system. It could immediately give every taxpayer as many tens of thousands of dollars, debt-free, as it takes to restore full employment of national resources (thus countering the destructive deflationary effects of the banksters' unstable, pro-cyclical, debt-based money supply), and as cannot be done otherwise with such speed and efficiency.
The shame of the oncoming global commercial disaster is that there is no lack of world-wide physical capacity with which to produce wealth and employment for us all - all that is lacking is the printed paper, distributed to the populace, with which to resume and sustain productive activity in the physical plant that we already have and that is being increasingly unused. We do not need to "save" money or pay down debt as a remedy in a debt-based-money economy - the perversity of such an economy is that saving money and canceling debt simply add immediately to the problem, by taking money out of commerce, returning it to the constipated banking system, and thus further deflating the debt-based money supply.
Ironically, the merit of a fiat-money system, in terms of the public good, is precisely that it obviates the requirement for saving toward investment by immediately producing the transferable currency with which to initiate physical capital creation. And, as said, the current problem is not a lack of physical capital requiring any form of "saving" - as is the solution according to the advice of Libertarian policy wonks in the financial media. We speak here of those who would also recommend allowing bankruptcies and foreclosures to proceed endlessly, in the doctrinally-desired survival of the economically fittest - of which there will be virtually none at the end of a deflationary death-spiral.
The simple remedy for deflation (lack of circulating "paper" - virtual or material), rather, is direct reflation (paper given to those who most urgently need to circulate it). The present circumstance is a product of the fact that debt-based fiat money intrinsically collapses that which it expands - by requiring repayment (plus interest) of the "loans" through which all such currency is created. Therefore, it must constantly and endlessly loan money, however ill-advised such loaning might be otherwise, in order to sustain the money supply and the continuity of commerce. There would be no such requirement for perpetual debt-creation if fiat-money creation involved no requirement for repayment.
But money creation through the loaning mechanism is employed because it is to the multiple advantage of the bankers, as it assures that the ultimate value of their currency is inflation-proof and it provides the pretext for much taxing of the public through interest payments on the use of what ostensibly is their own money. And the system provides employment and profit for bankers far beyond the requirements of society for such service. This bankerster-friendly arrangement comes at the public expense of commercial depressions that are remediable only through the most extraordinary fiscal measures (as in financing a multi-year World War-cum-Reconstruction to be fought with conventional weapons, in a world where little preexisting debt overhangs).
Thus, the only solution to the present crisis is to Take Back Our Money and end its creation in debt.
[And, it should be mentioned in line with our theme regarding moralities, that a secondary and precipitating cause of the present crisis was the slave-morality-based ideological fanaticism and characteristic attendant administrative incompetence involved in the (egalitarian Liberal/Socialist/Communist) affirmative-action mortgage-lending practices recently forced upon the responsible institutions and the relaxation of regulation that enabled irresponsible organizations to exploit the circumstance.]
While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn't too little government intervention that cased the mortgage meltdown, but too much, in the form of activists compelling the government to pressure Freddie Mac and Fannie Mae into unsound – though politically correct – lending practices.
ReplyDelete"Home mortgages have been a political piñata for many decades," writes Stan J. Liebowitz, economics professor at the University of Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.
Liebowitz puts forward an explanation that he admits is "not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown."
In a nutshell, Liebowitz contends that the federal government over the last 20 years pushed the mortgage industry so hard to get minority homeownership up, that it undermined the country's financial foundation to achieve its goal.
"In an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s," Liebowitz writes. "The decline in mortgage underwriting standards was universally praised as 'innovation' in mortgage lending by regulators, academic specialists, (government-sponsored enterprises) and housing activists."
He continues, "Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise."
"As homeownership rates increased there was self-congratulation all around," Liebowitz writes. "The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership."
An article in the Los Angeles Times from the late '90s praised the sudden surge in homeownership among minorities, calling it "one of the hidden success stories of the Clinton era."
John Lott, a senior research scientist at the University of Maryland, however, claimed in a Fox News article yesterday that the success came at a great price.
According to Lott, the Federal Reserve Bank of Boston produced a manual in the early '90s that warned mortgage lenders to no longer deny urban and lower-income minority applicants on such "outdated" criteria as credit history, down payment or employment income.
Furthermore, claims Lott, Fannie Mae and Freddie Mac encouraged and praised lenders – like Countrywide and Bear Stearns – for adopting the slackened policies toward minority applicants.
"Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac," writes Lott, "the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising."
Liebowitz' contention that lenders were under pressure to loosen their standards for racial and political goals was confirmed years ago by the companies at the heart of today's crisis: Fannie Mae and Freddie Mac.
A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply.
An ominous paragraph of the article reads, "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."
Liebowitz likewise predicted in a 1998 paper the risk of sacrificing sound financial policy for social activism.
"After the warm fuzzy glow of 'flexible underwriting standards' has worn off," Liebowitz wrote, "we may discover that they are nothing more than standards that led to bad loans. … It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on a badly mangled idea."
And though some have speculated that lenders in the '90s dove into sub-prime mortgages in an effort to gouge new markets, the president and chief operating officer of Freddie Mac in 1999, David Glenn, confessed his company was pushed by a federal agenda.
"The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership," Glenn said in his remarks at the annual convention of the Mortgage Banker Association of America.
"The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories," Glenn said. "Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low- and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets."
In that same year, Freddie Mac warned of the logical pitfalls of pursuing loans on the basis of skin color and not credit history.
The Washington Post reported that the company conducted a study in which it was found that far more black people have bad credit than white people, even when both have the same incomes. In fact, the study showed a higher percentage of African Americans with incomes of $65,000 to $75,000 had bad credit than white Americans with incomes of below $25,000.
Such data demonstrated that when federal regulators demanded parity between racial groups in lending, the only way to achieve a quota would be to begin making intentionally bad lending decisions.
The study, however, came under brutal attack in the U.S. Congress and was ridiculed with charges of racism.
A few years later, when Greg Mankiw, chairman of President Bush's Council of Economic Advisers, voiced a warning about weakened underwriting standards, Congress rebuffed him as well.
The Wall Street Journal quoted Congressman Barney Frank, D-Mass., in 2003 as criticizing Greg Mankiw "because he is worried about the tiny little matter of safety and soundness rather than 'concern about housing.'"
Frank, chairman of the House Financial Services Committee, rejected a Bush administration and Congressional Republican plan for regulating the mortgage industry in 2003, saying, "These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis." According to a New York Times article, Frank added, "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
By Drew Zahn
© 2008 WorldNetDaily
Last week, President Obama gave a speech noting the anniversary of the mortgage meltdown and the government bailouts that followed. Naturally, he blamed a lack of regulation and called for more of it.
ReplyDeleteAlso last week, I finished reading *The Housing Boom and Bust*, by Thomas Sowell, a economist with a rare gift for explaining economics to laymen. If you want to understand what really sent housing prices on a roller-coaster ride that ended in a crash, I can’t recommend it highly enough.
An economic implosion of this size required a team effort to produce: irresponsible borrowers, speculators, asleep-at-the-switch regulators, and Wall Street gurus taking their jazzy new investment vehicles for a joyride after getting drunk on quick profits, to name just a few. There’s plenty of blame to go around. But the entire meltdown began with one (and only one) root cause: banks lent money to hundreds of thousands of people who couldn’t pay it back.
The story told by the left is that the bankers made those loans because they’re greedy. That’s an interesting explanation. Last time I checked, greedy people don’t like to incur bad debts. Remember Mr. Potter, the greedy banker in “It’s a Wonderful Life”? We hated him because he wouldn’t lend money, not because he lent too much.
But let’s forget Hollywood fiction and look at a real-world example: Back in the 1980s, a friend of mine applied for a mortgage on a modest home. The bank turned him down, even though he’d saved enough to offer a 10% down payment. Since he was a first-time buyer, the bank wanted 20%. That’s how greedy bankers kept their profits up - by being cautious and avoiding bad debts. (We can safely assume their decision wasn’t based on race or class, since my friend was a white attorney with a good income.)
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ReplyDeleteSo what changed? Did mortgage bankers become less greedy? More greedy? Was the primary course in banking school changed from “Assessing and Managing Risk” to “Maximize Profits By Lending Money to Morons”?
No, bankers didn’t become any more or any less greedy. But during the buildup to the housing boom and bust, they were operating under a very different set of incentives, both legal and economic. As Dr. Sowell explains in his book, many of the new incentives were economically perverse - and most of them were created by government. Here are just a few highlights:
* The Carter administration pushed Congress to pass the Community Reinvestment Act, which required banks to “serve” the entire community, including low- and moderate-income neighborhoods. On paper, that’s a fine idea. However …
* Armed with the CRA, “community activist” groups like ACORN began suing banks to force them to make more loans to low-income people - in other words, risky loans. (Yes, I understand it’s not politically correct to say this, but poor people have higher rates of default.) The banks largely resisted because they couldn’t sell those loans to the secondary markets - chiefly, Fannie Mae and Freddie Mac. If the borrowers defaulted, the banks didn’t to want to be left holding the bad debt.
* The community activist groups refocused their efforts on the “affordable housing” crowd in the federal government. Those efforts were successful. The Clinton administration demanded that Fannie and Freddie buy up a far greater share of the sub-prime loans, which created the secondary market the banks wanted. Now that they could earn fees by writing risky loans and then dumping the risk on someone else, they were only too happy to join the party. They were no more greedy than before, but the incentive to be cautious was gone.
* The Clinton Justice Department threatened to prosecute banks if they didn’t make even more loans to minorities. The banks provided proof that their standards were the same for all groups, and that a majority of people from all races who applied for home loans were approved. But that wasn’t good enough for Janet Reno. The word came down: make more loans, or we’ll see you in court. The banks gave in.
* States like California passed sweeping “open space” and “smart growth” laws to limit residential development - thus commandeering land the states didn’t actually own. The result was a shortage of new housing, which in turn drove up prices.
* Meanwhile, the banks - as they were encouraged and sometimes ordered to do - approved hundreds of thousands of loans they would’ve declined in previous decades. This, of course, put hundreds of thousands of new buyers into the competition for a limited supply of homes. The result was a bidding war in states like California, which drove home prices to astronomical levels.
* Faced with artificially high prices that were largely a product of government meddling, more and more buyers opted for “creative financing” arrangements: interest-only loans, adjustable loans, etc. In California, first-time home-buyers ended up spending more than half their incomes on house payments. (Thank goodness for all that “affordable housing” legislation, eh?)
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ReplyDelete* With home prices spiraling up, mortgages became an attractive investment. Fannie and Freddie packaged loans into investment vehicles, which were snapped up by Wall Street. Shouldn’t Wall Street have been more cautious? Yes, obviously. But executives at Fannie and Freddie were cooking the books, and the mortgage-backed securities received AAA ratings from both Moody’s and Standard and Poor’s. (If you think this represents a failure of regulation, keep in mind that it’s already illegal to cook the books.)
* Worried that Fannie and Freddie might be cooking the books, a few members of Congress demanded more oversight. They were slapped down by congressional “affordable housing” advocates like Barney Frank, Maxine Waters and Christopher Dodd, who loved seeing all those former renters buying homes. The housing bubble continued to expand.
* The bubble finally burst. People who’d over-extended themselves to buy homes began to default on their mortgages. The balloon payments on interest-only loans came due, and more buyers defaulted. The market was soon flooded with repossessed homes, which drove down prices, especially in areas where prices had been dramatically inflated. (If we’d sold our home in California in 2005, it would’ve fetched $100,000 more than the eventual sale price two months ago … if only we’d seen it coming.)
* People who’d borrowed against their ever-growing home equity now realized they owed more money than their homes were worth. Thousands of them walked away from the inflated debts, which put even more repossessed houses on the market and drove down prices even more. (I had a neighbor in California who did exactly that - just gave up and left.)
* As more and more mortgages failed, the value of mortgage-backed securities began to plummet, bringing down the Wall Street firms that had invested in them, as well as banks that had either invested in the securities or lent money to the Wall Street firms.
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ReplyDelete* With big investment firms and big banks failing, the economy tanked. In the presidential debates, Barack Obama blamed eight years of Bush-era “de-regulation” for the mortgage crisis. Nancy Pelosi did likewise on the floor of the House. Neither of them could name a rolled-back regulation that would’ve prevented so many mortgages from going bad, but they didn’t have to … our economically-illiterate press bought the story and repeated it endlessly.
* The Bush administration and Congress approved nearly a trillion dollars in bailouts on the theory that some banks and investment firms are “too big to fail” — proving once and for all that Bush was never a fiscal conservative, as many of us said all along.
* The Obama administration pushed through a trillion-dollar “stimulus” bill to prop up the economy. (This means, of course, that our children and grandchildren will have a trillion dollars less to spend in the future.) Some of the stimulus money was earmarked for ACORN, the leftist group that pushed banks into making bad loans. I can’t tell you how happy it makes me to know this group, which has been involved in several cases of voter-registration fraud, is receiving a chunk of my income.
The mortgage meltdown was not a failure of capitalism or free markets. There were plenty of capitalists involved, but if you take away the perverse incentives and the artificially-high prices created by government, nothing like the mortgage implosion would’ve happened. Greedy bankers would’ve continued indulging their lust for profits by being cautious. We might not like Mr. Potter, but he never would’ve required billions in taxpayer dollars to keep from going under, either.
By the way, in the 1990s a community activist group filed a lawsuit against Citibank for not making enough home loans to the “under-served.” Citibank gave in and began writing more of the type of mortgages that eventually imploded. The activist group was ACORN. One of the ACORN attorneys for that lawsuit was named Barack Obama.
Thank goodness he’s in charge of making sure the banks don’t screw up so badly again.
http://www.tomnaughton.com/