Yesterday the President spoke about the economy at a “backyard discussion” in Albuquerque. He made some interesting comments on housing which I’m going to analyze today.
I like when the President does unscripted Q&A because I can learn how he thinks about an issue and sometimes figure out how his advisors have briefed him. This is one of those cases.
I will intersperse my observations within the President’s long comment. You might be surprised at how much I agree with the President’s remarks on this topic. I know I was.
Q: And I guess my question is, what are we doing to prevent people from losing their homes?
THE PRESIDENT: Well, the housing crisis helped to trigger the financial crisis.
I agree. There’s a difference between “trigger” and “cause.” I think trigger is right.
THE PRESIDENT: And it’s a complicated story, but essentially what happened was, banks started seeing money in peddling what looked like these very low-interest-rate mortgages, no money down. Started peddling these things to folks. A lot of people didn’t read the fine print, where they had adjustable-rate mortgages or balloon payments, and they ended up being in situations where they were in homes that they couldn’t necessarily afford.
Close but not quite. Mortgage brokers were providing much of the increased volume of new mortgages, especially adjustable rate mortgages (ARMs) to “subprime” borrowers. Some banks were on the front end of this increased volume, but to just say banks is incomplete and a bit inaccurate.
With the word “peddling” the President emphasizes the theme of unscrupulous and shady lenders taking advantage of unwitting and uneducated borrowers. This is correct in many cases but it’s far from the whole story. Your bailed-out neighbor with the home-equity-withdrawal-financed boat in his driveway is another part of the story, and he knew exactly what he was doing. I wonder if the questioner wants the government to subsidize that knowing neighbor as well as the unsuspecting lending victim. In practice a government policy cannot easily distinguish between the two.
I also wonder how much we should excuse from responsibility a borrower who “didn’t read the fine print.” If you’re borrowing several hundred thousand dollars from someone, I think you should read and make sure you understand the fine print. Similarly, I hold the view that you are primarily responsible for figuring out how much home you can afford, not your lender. Your lender has an obligation to disclose and explain the terms of the loan, to provide you with complete and accurate information, and to not deceive you. We didn’t have strong enough rules in place to require that, and we now know that was a mistake. At the same time, if the borrower has complete and accurate information, it is his responsibility to act in a financially prudent manner.
Please don’t think I’m excusing or minimizing the importance of corrupt and shady mortgage brokers and in some cases bankers – there were some really bad actors who helped create this problem.
THE PRESIDENT: The banks made a whole bunch of money on all these mortgages that were being generated. But what happened was — is that when the housing market started going down, then all these financial instruments that were built on a steady stream of payments for mortgages, they all went bust, and that helped to trigger the entire crisis.
True, but again he’s incomplete with “the banks.” Many firms and players at all points along the financial chain “made a whole bunch of money on all these mortgages that were being generated.” The banks were part of this chain, as were the mortgage brokers who initiated the loans, Fannie Mae and Freddie Mac that securitized many of them, as well as hedge funds, insurance companies, pension funds, university endowments, foreign investors, and everyone else who bought securities derived from these mortgages. Bankers are a more attractive political target than, say, pension funds or university endowments. The President’s statement is correct but incomplete, and in a politically convenient way.
The President says “when the housing market started going down … they all went bust, and that helped to trigger the entire crisis.” This isn’t quite right. Even before home prices started to decline, there were problems caused by the terms of Adjustable Rate Mortgages. Many subprime ARMs had a low fixed teaser rate for the first 2-3 years, after which the interest rate would “reset” upwards. Those borrowers who understood what they were buying hoped that their home would appreciate in value during that first 2-3 years, allowing them to refinance into a fixed rate mortgage before the interest rate reset, using the higher home value as equity to support the new mortgage. The President is therefore correct that housing prices were an important factor in the collapse in value of housing-related assets, but again it’s not the whole story. That story begins with interest rate resets in subprime ARMs.
We therefore had (1) housing problems triggered by the terms of a particular type of mortgage, and (2) housing problems caused by local housing construction bubbles bursting. (1) and (2) interacted – as subprime ARM homeowners began to default, it drove down the prices of their neighbors’ homes and amplified broader housing price declines. These two problems are interrelated, but they’re not the same problem. As an example, there were subprime ARM default problems in Michigan where there was a weak regional economy but almost no housing construction bubble.
THE PRESIDENT: So the housing issue has been at the heart of the economic crisis that we’re in right now. It is a big problem because part of what happened over the last several years is, is that we built more homes than we had families to absorb them. And what’s happened now is, is that housing values have declined around the country, in some places worse than others. In Nevada, in Arizona, they’ve been very badly hit. In New Mexico, I don’t think we had the same bubble, and so prices have not been as badly affected here. But overall across the country, housing lost a lot of value.
This part is really good: “We built more homes than we had families to absorb them.” He’s absolutely right. The problem was not just mortgages, it was the actual buildings we live in. We had a housing bubble in some markets, and we still have an oversupply of homes relative to demand. As long as supply >> demand, prices will fall. That’s why I was taught by experts to watch the inventory of unsold homes. As long as that inventory remains significantly higher than the historic average, we still have an imbalance and the housing market won’t recover.
The President also knows which housing markets saw the biggest bubbles. Kudos to his staff. The big four were California, Nevada, Arizona and Florida. I still have seen no good explanation of why these four markets were so much more extreme than others.
THE PRESIDENT: Now, this is a multitrillion-dollar market, so there’s no government program where we can just make sure that whoever is losing their home that we can just pick up the tab and make sure that they can pay. And frankly there are some people who really bought more home than they could afford, and they’d be better off renting, or they’re going to have to make adjustments in terms of their house.
This part is excellent. The President is right – the housing market is so big that we can’t bail out every homeowner who lost value. And while the President is gentle about it, I can be more direct since I’m not in campaign mode. I don’t think the government should bail out someone who bought a bigger house than they can afford, especially if they had no down payment. I think doing so is unfair to the taxpayers who finance that bailout, and unfair to responsible homeowners who didn’t borrow recklessly.
THE PRESIDENT: What we have tried to do, though, is to make sure that people who had been making their payments regularly, who are meeting their responsibilities, if they could have a little bit of an adjustment with the banks, if some of the principal was reduced, if some of the interest was reduced on their mortgage payment, they could keep on making payments. The bank would be better off than if the home was foreclosed on, obviously they’d be better off, and as the housing market starts picking back up again — which it will do over time, although not in the same trajectory as it used to, right; it’s going to be more much gradual — then potentially the bank could recoup some of the money that it had lost by making the adjustments on the mortgages.
This is correct in theory, and every reporter can find cases where this is true and makes sense. But it’s really hard to scale this up. Also, advocates for these policies often conflate their justifications – should we do this because we want to help these particular homeowners, or because we believe doing so will have broader benefits for the economy?
I feel empathy for the homeowner hoodwinked into a ARM by an unscrupulous mortgage broker. To the extent we believe that many borrowers were unfairly surprised by their interest rate resets from deceptive lenders, and to the extent we feel some governmental responsibility for that surprise / bad news, then it makes sense to help them. This is the genuinely deserving case that the media likes to show us, leading us to mistakenly conclude that everyone at risk of losing his home is a victim deserving of taxpayer help.
Depending on the numbers, I can be comfortable using some taxpayer funds to help move that person into a more affordable mortgage. But since we can’t distinguish between this deserving case and the savvy-for-profit-flipper, any subsidy program will also mean we’re subsidizing people whom we all can agree don’t deserve empathy or subsidies. This is a thorny problem to which there’s no easy answer.
Then we get to the place where I disagree not just with the President’s comment, but with much of the accepted wisdom in Washington about which homeowners we should help. Remember that a homeowner with a fixed rate mortgage doesn’t see his monthly mortgage payments change, even if the market value of his home drops so far that he is underwater on his mortgage.
Example: At the height of the housing bubble, Fred bought a $500,000 Florida home with a $475,000 fixed rate mortgage. He has been making fixed monthly mortgage payments since he moved in. Now the Florida housing bubble has collapsed.Fred has $450,000 left on his mortgage, but today he could sell his home for at most $400,000. He is “underwater” $50,000, and it will take years for him to recoup that loss.
Many in Washington want to subsidize Fred, to bail him out. Some talk about paying the lender to reduce the principal on his mortgage. Others want to force his lender to write down the value of his mortgage. But while Fred has taken an enormous paper loss, he is at zero risk of involuntarily losing his home. Since his mortgage is fixed rate, his monthly mortgage payments haven’t changed, so he’s not at risk of foreclosure. He is no worse off than his cousin George in Iowa who lost $100K investing in tech stocks back in the late 90s. In fact, Fred has an option that George did not have – if he wants he can default on his mortgage, leave the house to the bank, and take the long-term hit to his credit rating. That sucks for Fred, but that’s an option George the bad-stock-investor didn’t have.
Note also the President’s “If they could have a little bit of an adjustment with the banks” language. When you look at borrowers you can divide them into three groups: (1) those who don’t need help to stay in their home, (2) those on the bubble who cannot afford to keep their home without help, but could with just a little bit of assistance, and (3) those who would need so much help from the bank or taxpayers that it’s unreasonable to assume they can ever dig out. You don’t want to spend money on group (1), and money spent on group (3) is a waste. So you try to target your policies at just group (2). That’s hard to do.
THE PRESIDENT: So we’ve set up a number of these mortgage modification programs that are out there. But I don’t want to lie to you — we’ve probably had hundreds of thousands of people who’ve been helped by it. I think there have been a couple of million who’ve applied. But that doesn’t meet the entire need because this is such a huge housing market.
Translation: The quantitative results for these mortgage modification programs are terrible. In the President’s defense, we the Bush team didn’t have much success in this either. It’s very hard for government to effectively influence mortgage modification on a large scale. Q: If a program is directionally correct and politically useful, but ineffective and inefficient with taxpayer dollars, and if you cannot design a better alternative, do you continue it or kill it?
THE PRESIDENT: And what really is probably the most important thing I can do right now to keep people in their homes is to make sure the economy is growing so that they don’t feel job insecurity. That’s probably the thing that’s going to strengthen the housing market the most over the next couple of years. If we’ve got a growing economy, unemployment is gradually being reduced, then people are going to feel more confident; they’re going to be able to make their mortgage payments; new — homeowners, people who are potentially buyers of homes, are going to say, you know what, I don’t mind entering the market because I think things have sort of bottomed out — that starts lifting prices and that gets us on a virtuous cycle instead of a negative cycle.
Good again, but I’d add something else. The foreclosure prevention programs and other housing-related interventions are helping some people keep their homes. At the same time, these programs have the side effect of slowing down the painful but necessary adjustment in housing supply. Especially after witnessing the past three years of struggling housing policy interventions, I lean toward applying the Band-Aid philosophy. Every child knows there are two ways to pull off a Band-Aid: slow and really fast. And every child learns that really fast means less total pain, but it’s scary and difficult to do.
It would be painful in the short run and politically risky to stop intervening in housing markets and let housing prices continue to fall until the excess housing supply is finally bought by bargain hunters. But once this happens we’ll be back on a gradual upward trend. It may be better for us to get the pain out of the way as quickly as possible so the healing can begin, rather than trying to artificially “bridge the gap” with ineffective policies, in hopes that we can protect a few more tens of thousands of homeowners from losing their homes. Dozens of smart people have suggested alternative policies to avoid or mitigate further housing price declines, and there is an argument that government needs to intervene to stop a self-reinforcing downward spiral. I don’t buy this argument.
This is a harsh numbers game with no easy answers. My instinct is for government to stop trying to fix the problem and just let the darn housing market find its natural bottom. I think this means more pain now, but less total pain over time. I think the recovery will come sooner and stronger if we stop trying to patch the housing market and get the painful adjustment behind us.
THE PRESIDENT: But it’s going to take some time. We’re working our way out of overbuilding in the housing market, a lot of not very sensible financial arrangements in the housing market. And we’ve got to get back to sort of a traditional, more commonsense way of thinking about housing which is, if you want a house you got to save for a while. You got to wait until you have 20 percent down. You should go for a mortgage that you know you can afford. You’ve got to — there shouldn’t be any surprises out there, right? That kind of traditional thinking about saving and thinking about the house not as something that is always going up 20 percent every year and you’re going to flip and take out home equity loans and all that — we’ve got to have a different attitude, which reflects what you talked about, more of an attitude that this is your home. This is not just a way to make quick money.
I strongly agree with the President here. I hope he’s willing to tell Members of his party that this means they have to stop insisting that the Federal Housing Administration facilitate zero down payment loans and seller-funded down payments. All homeowners need to have some skin in the game, even if this means that some people won’t be able to afford to buy homes. Certain important Congressional Democrats are the roadblock here.
While at the beginning of his answer the President focused on unscrupulous lenders, here he focuses on the gamblers/flippers. This is a different thought process than the “Banks did it to the people” model with which he began. I think there’s some truth in both stories.
I’m impressed by the depth of the President’s understanding and his thought process. I disagree with his Administration’s policies in many cases, and that includes his housing policies, but I think he gave a good answer yesterday in this Albuquerque backyard conversation.
(photo credit: Moth)
Let me offer a few suggestions relative to CA, NV, AZ,and FL.
Retirees, retirees. Easterners gravitate to FL, others to the southwest.
No or low state taxes in NV, AZ, FL.
CA has a long tradition of house flipping.
The southwest has long had an attraction for snowbirds who buy overpriced second homes on a golf course. Many of them are under water as are the unsold homes in these areas.
There are undoubtedly other factors that I don’t see on the spur of the moment, but what I have listed could be significant.
Jeff, that's why I referred to the layers of an onion. I suspect that KH could write a book-length post if he chose to include all his thoughts and opinions about the financial mess. I daresay, it's simply not feasible to do so in a blog post that's primarily about what Obama said in a campaign speech.
One could go all the way back to redlining and CRA and Frank and Dodd and Raines and Fan and Fred and too-low interest rates and capital chasing higher return and subprime and Alt-A and mortgage brokers going wild and all the permutations of mortgage-based derivatives and yadda yadda yadda.
…and I'm sure someone will. But not in a blog post.
The story should begin with the FED and their injection of credit which spurred the credit boom. How convenient Obama left that out since it had nothing to do with bush
To make money from a scam, you have to sell something for more than it is worth to a sucker who is willing to buy it. In the housing crisis, who was selling and what sucker was buying?
We have heard the term “predatory lending”. So, the evil bank or broker loans money to Fred, who buys a nice house with little or no money down (borrows nearly the full value of the house) and then either can’t make the payments or loses value on his house. Then, the bank makes out like a bandit when it forcloses on the house and collects, after expenses, between 30%-80% of the amount loaned.
Wait a second. The bank gave $100K to Fred, and eventually gets $30K – 80K back. The bank lost money. That isn’t a great scam for the bank. They are a really bad predator. How were they supposed to make outsized profits on this deal?
Let’s understand what really happens when a loan is created. We think of Fred “receiving a loan from the bank”. In reality, Fred is selling a repayment obligation to the bank in exchange for the money which the bank gives him. The bank then “owns the loan”. The bank owns the right to be paid monthly for 30 years, in exchange for the cash originally given to Fred.
The bank created a loan agreement and then bought that agreement from Fred. Fred sold that agreement for the price of the loan amount. The mortgage is a separate document pledging Fred’s house as collateral if Fred doesn’t or can’t repay.
The bank or mortgage broker can hold the loan (the loan agreement) or can sell that loan to another institution, typically for a few percent more than the amount loaned.
Fred was not scammed in this transaction. Fred sold a loan agreement. He received money to buy a house. If Fred did not understand that transaction, then it was despite mountains of government regulation and requirements that Fred sign in detail. If Fred was misled, it was probably because he was too trusting of the safeguards that the government advertises but doesn’t enforce.
Anyway, Fred sold the loan, and the mortgage broker bought the loan. The mortgage broker gave money to Fred, who in many cases did not have a verified income or credit history. It was the mortgage broker who was scammed!
The mortgage broker in this story is certainly scamming someone in turn, but that is not Fred. The mortgage broker scammed the people who in turn bought the loan from him, namely Fannie Mae, Freddie Mac, and other large institutions. Why were they so gullible?
Fannie and Freddie (FanFred) didn’t care. They were implementing policy set by the House Financial Services Committee chaired by Barney Frank (D. MA), and the parallel committee in the Senate chaired by Christopher Dodd. Our Congress wanted poorer people to own houses, and set decreasing standards over time for the resources and credit history they needed to supply for a “conforming loan” (a loan which FanFred would buy).
FanFred advertised their decreasing standards, and mortgage brokers were happy to create those loans and sell them to FanFred and others. The brokers were happy to create any loans which they could sell immediately to FanFred, and the politically connected executives at FanFred made big bonuses on the increase volume of transactions.
FanFred was a Government Sponsored Enterprise, but received little money from the government. It borrowed money from private institutions and governments. Why would those institutional lenders invest with FanFred? Because the Government guaranteed repayment of principal and interest on any mortgage bonds (repackaged pools of housing loans) resold by FanFred.
The circle was complete. Congress guaranteed FanFred mortgage bonds, supporting huge flows of money into FanFred, to buy increasing volumes of housing loans, at lower and lower standards for repayments. Everyone made money, except the taxpayer. When these substandard loans collapsed, the huge losses were placed on the taxpayer by bailing out the institutions which lost money on these transactions. The Congress made good on its implicit guarantee to all of the institutions who supplied money for this ponzi scheme of sub-prime lending.
Why do we not see the prosecution of the banks and mortgage brokers who created all of these bad loans? There are very few to prosecute. They were almost all following the idiotic rules set by Congress. They were scamming FanFred with the full cooperation of FanFred and Congress.
Our recession was promoted by collapsing home prices and mortgage losses, after an extended period of government providing easy money and guarantees to support Fannie Mae and Freddie Mac. The government is still doing this. The bad housing policy was designed, encouraged, and required by government, mostly by Democrats.
See → We Guarantee It – The Government Caused the Economic Crisis
Mr. Garland,
While I can’t fault your ultimate assignment of responsibilities, your description of a mortgage loan contract is not only excessively verbose, but conceptually wrong. While a bank might “create” the loan document such that the subsequent contract becomes a contract of adhesion, it doesn’t “buy” that document from the borrower. Very simply, a contract is an exchange of “consideration” (something of value) and this consideration can include a promise. In this case, the bank agrees to give the borrower money in return for a promise from the borrower to return that sum in installments, with interest, over a certain period of time. It’s really that simple.
I see. Not only was I wrong, but I took too many words to be wrong, a double sin.
You say that "it is really that simple". But, my point is that mortgage loans are transferable, saleable assets. I doesn't make much difference whether BrokerA sells a loan to BrokerB, or Fred sells a loan to BrokerB. In each case, an obligation to make payments is transferred to a buyer in exchange for a lump sum. Fred gets that lump sum in the loan origination, and BrokerA gets that sum when he resells the loan to BrokerB (or to Fannie Mae).
In each case, the seller of the loan, originally Fred, is getting cash. It is the buyer who must beware of Fred's credit rating and ability to pay.
The main point, which you acknowledge, is that Fannie Mae and other institutions appear to be the suckers, buying risky loans. I explain why they did that, because they expected (correctly) that they could dump any losses onto the government (taxpayers).
What is "conceptually" wrong with that analysis?
What is wrong, conceptually, with the analysis, is that Fred is not "selling" anything directly to Broker A, much less indirectly to Broker B. Fred might have mislead Broker A in his dealings with that Broker, but the only thing he is "selling" is a story. Most contracts are transferrable. Your subsequent explanation here that the contract is transferrable in this regard is much more to the point. In this sense, Broker A could "sell" its existing intangible (the contract) to Broker B, Fannie Mae, etc. The issue here, it seems, is whether Fred, Broker A, Broker B, etc. are dealing honestly with each other and whether the system discouraged them from doing so.
I think the housing crisis has demonstrated that Fred may have been less than honest in representing his financial status when entering into the original contract with Broker A. Broker A also may have been less than forthright with Fred in explaining the terms and dangers of the mortgage contract in his dealings with Fred. Broker A may also have been less than diligent in exploring Fred's financial condition. Broker A's action and inaction may have been motivated in part by his knowledge that he would later sell the mortgage contract to Broker B without revealing the lack of due diligence he did with respect to Fred. And Broker B may have not down his due diligence either in failing to examine the original loan documentation with respect to Fred. And Broker B may have not done the required due diligence because Broker B had every intention of synidicating Fred's loan, along with many others, in a mortgage backed security. The purchasers of that mortgage backed security, who may have been, say, German banks, probably relied on the evaluation of the mortgage pool by a rating agency who had completely lost the trail on Fred and didn"t bother to check his financial credentials. Alternatively, Fred's loan could have been snapped up by Fannie, who didn't bother to check Fred out, either.
And, of course, all of this may have been unwittingly encouraged by Congress who encouraged Fannie to buy up more mortgages from low income homeowners, like Fred, who couldn't afford those mortgages in the first place.
And, to add to the above comment, Fred cannot "sell" anything to Broker A because until Fred and Broker A enter into the contract, nothing exists to sell. I hope I'm not being too pedantic to write that I've never heard of a borrower "selling a loan". All Fred is interested in is getting his money from Broker A to buy a house, hopefully a house bigger than the one his friend bought a couple months before. More than 99 percent of the Freds out there have absolutely no idea that his mortgage contract can be sold by Broker A to another. The point that I think you are trying to make, although I think you could have done so more concisely and precisely , is that once the contract has been made between Fred and his bank, that loan is transferable. Importantly, the more times the loan has been transferred the further from the important facts regarding Fred's creditworthiness the holder becomes. But, let's not put too much emphasis on Fred for the transfer problem. He might be deceptive, but a "seller" he is not.
The fact here is that due to a number of decisions made by very different parties independent of each other, the ideal circumstances arose to create the economic equivalent of a Ponzi scheme. I say economic equivalent because technically a Ponzi scheme involves intent or "scienter" which is lacking here. But then, what does it matter to a homicide victim if we classify the crime as manslaughter or murder in the first degree? Nevertheless, it is the economic equivalent which likely contributed to spirally prices benefitting those who were fortunate enough to enter at the base of the pyramid. I posit that while Fred had no idea he was engaged in such a scheme, the more sophisticated parties down stream recognized it as such, eventually. As with any Ponzi scheme, handsome profits can be had until the whole thing collapses. Most of the sophisticated players, I think, thought they could time the market and get out before the collapse, but greed got the better of them and most of them stayed on too long. The players who are supposed to be among the most sophisticated, however, apparently didn't recognize the scheme at all. I'm talking here about the Fed and Treasury, primarily. They seem to have been as clueless as Fred.
I always find it strange when I read about bailout versus bad actor (in mortgages) and don't find comparisons to the obvious precedent — TARP?
I believe KBH and most analysts believe TARP had positive effects. So I'm curious what logic details specifically differentiate the opposition to mortgage adjustment from the parallel support of financial bailout?
To me, motivations for embarking or not embarking on such policy seem to fall into the following categories #1 Help those who operated in good faith but suffered damage #2 Avoid helping bad faith negotiators #3 Cost of the policy #4 Value of the policy
cont'd
#1 Good faith (the intentionally subsidized) — Good faith actors meant to make prudent investments, but through poor information or understanding ended up in a bad situation. For TARP, these are fund managers, financial experts, cream of the crop with lots of resources — their ratings information was bad, their understanding (models) incorrect… but this is mitigated by the fact that they had every resource possible to bring to bear, financially and with the brightest minds of a generation. For mortgage owners, these are people that did not understanding the interest terms, had bad information about future housing prices, or bad information about their future employment… I see this as largely unmitigated ignorance, there is a lot of innumeracy in the public, and any analyst the average person could afford was egging them on. To me, this weighs in favor of mortgage adjustment.
cont'd
#2 % Bad faith (unintentionally subsidized) — Gaming the system. To a large extent, see above. However, bad informational issues probably are reversed … arguably it was hard to get accurate information from the top level on sustainability of the housing markets (in spite of resources), due to opacity of financial markets and a deluge of unfounded optimistic modeling. It's more likely that a home owner knew he was writing a bad check… but it's not obvious why this would increase from the low normal percentage. (lower income groups are less likely to cheat on taxes, etc). Anyway, how many bad actors seems to depend on personal perceptions of what is bad — whether most of the financial market players should have been considered bad for fostering the low transparency environment which led to its problems..? or pessimism/skepticism about the indebted public and human nature leads you to believe there are inordinately many cheats.
cont'd
#3 Potential Cost: Seems likely this falls against adjustment, but it's unclear exactly how many dollars.
#4 Potential Value: This is of course just a matter of how you are modeling your economic universe, but I'd hazard a guess that no matter what numbers you cook with, both proposals do very well here. Tallying up all the lost growth from our household demand constriction gives a very large number, as did the theoretical numbers for financial catastrophe without TARP.
For KBH, I am really curious how you consider the motivations of the two programs in comparative terms. Is the comparison inappropriate? Poorly stated?
A big picture comment is that the Fed kept interest rates too low for too long (2002 to 2005). That encouraged risky investments, including what we saw in the housing market with its bubble. Government policies subsidized interest payments on home mortgages by allowing one to deduct them from your taxable income. Fannie & Freddie were pressured into relaxing their standards for qualifying for a home mortgage relentlessly over several decades, esp. in the 1990s and then very hard in the 2000s. D's in Congress such as Barney Frank, Chris Dodd, plus many more, pushed for this for many years. Community activist organizations such as ACORN, the CRA, were active pushing for this for decades. Recall Alan Greenspan and the Fed belatedly recognizing the risks associated with Fan, Fred, and the whole subprime mortgage business, but getting stonewalled in Congress by Frank, Dodd, et al, when they proposed reining them in. The WSJ has crusaded against Fan & Fred for years.
I hope this experience leads us to completely rethink how we provide charity for the needy via government!
Giving charity to the poor, lower-income, and middle-classes via these kind of taxpayer-funded housing subsidies is an incredibly inefficient way to help the poor IMO. As public policy it's foolishness on steroids.
We should draw a bright line between public policy for the non-poor, ordinary citizen and charity for the poor. The non-poor should be expected to take responsibility for their actions; suffer the consequences of foolish decisions. We should stop treating homeownership as this incredibly wonderful thing that it needs to be so lavishly subsidized. It isn't. Over time, we should move towards a neutral policy towards homeownership. Our neighbor to the north, Canada, has never gone away from the traditional 10% or 20% down and regular terms for home mortgages. Consequently, they never suffered the housing bubble and the financial crisis that we did. Their homeownership percentage is about the same as ours: 66%. Actually, it's a little higher than ours.
Profit-making corporations – banks, S&Ls, financial institutions in general – have a fiduciary duty to make as big a profit for their owners as they can – consistent with proper treatment of customers and within the laws and regulations of the land. They should not be forced or bullied into providing charity for the poor as a cheap/easy way for politicians to give out charity without explicitly setting up a government program to do that directly.
If a private company wants to provide charity for some of its customers and its stockholders are aware of it, that's perfectly fine to do. But the government should not be in the business of dictating charitable contributions by regular, private, profit-making companies. (I understand their are non-profit financial institutions that are tax-exempt that must provide charitable donations to retain their tax-exempt status, but they're a special case.)
A comment on the Fed's inflation management policy. With a fiat currency, the Fed uses the CPI as its measure of inflation. It doesn't adequately reflect inflation in asset prices, such as the stock market, commodities, and (lately) the real estate bubble. BUT, those bubbles surely represent a money supply that has been growing too fast just as increases in consumer prices. Also, the method for calculating the cost of housing was changed to a measure of what a rental home or apartment is rather than direct homeownership costs. This began understating housing costs in a serious way in the late 1990s. This led the Fed to increase the money supply too much, partially causing both the dot.com bubble and then the real estate bubble.
Another factor is that labor productivity has been going up at 2% to 5% per year since the mid-1990s. This is a natural price deflation factor if the Fed doesn't expand the money supply. Under a commodity-based monetary standard (i.e., gold or silver), it would result in price deflation. But with a fiat currency the Fed uses that as an opportunity to further expand the money supply. The average consumer doesn't see any increase in consumer prices, but it is a form of "cheapening" the currency and added substantially to the asset bubbles we've experienced. The U.S. has seen an accumulative 40%+ in labor productivity growth since 1995. The Fed expanded the money supply that much and fueled those bubbles accordingly.
There are two kinds of people: Those who finish what they start and……..