On Mon, Jun 13, 2011 at 6:03 AM, James A. Donald <jam...@echeque.com> wrote:
> On 2011-06-13 3:12 PM, Randall Webmail wrote:
>> That's right: POOR PEOPLE caused the Current
>> Unpleasantness!
> Yes they did.  I was at ground zero of the crisis: Sunnyvale
> California.
> And every person I saw buying a seven hundred thousand dollar
> house was a cat eating no hablo english wetback with no
> regular job.

I agree with much else of what you wrote in your post, but I take
issue with two things here.  First, there were plenty of middle class
(and better off) people who used their ever-increasing home values as
an ATM card.  The stories I've seen are hair-raising.  Second, we
don't need to use derogatory terms here.  There's a difference between
being polite and being PC, such as that PC involves choice of ideas,
not just choice of words.

I particularly agree that CRA and Frannie primarily set in motion the
market dynamic that led to either the bubble itself or its ultimate
size, or both.  There's straightforward evidence: total up the amount
in securities sold by Frannie and the amount they were left holding
and the amount pumped in by the feds, and you're up to on the order of
$1 trillion, which is a large portion of the losses in the bubble's
popping.  Of course, the losses have been larger than $1 trillion
(because the $1 trillion provided the necessary momentum to get the
bubble inflating and stay inflating, but much more liquidity flowed
from elsewhere so as to not miss out on the "opportunity"), so one has
to consider whether Frannie was along for the ride in a bubble that
wasn't their fault, or whether Frannie caused the bubble.  But any
time you have a government taking such enormously distorting actions
it's difficult to argue that they couldn't have been the cause of the
crash -- one has to be suspicious of artificial market distortions.

> [...]
> The CRA drives the climate of opinion in the entire mortgage
> industry. If you wanted to be able to buy other banks, you
> had to play ball.
> Practically everybody did. Out of the thousands of banks with
> federal CRA Performance Evaluations, 496 got the highest
> rating of Outstanding, while only five dared to be in
> “Substantial Noncompliance”.

Exactly.  Conformity was enforced, and it wasn't all that hard.
"Look, you have to make bad loans.  Yes, we know that's insane, but
here's the deal: you package them up and sell them immediately, and if
you can't find a buyer in the market, well, that's what Frannie's here
for, they are the buyer of last resort.  So go on, make bad loans
without fear!"  The rest follows.  Though the bargain was never that
explicit.  Liar loans?  Pfeh.  Of course you'll have liar loans in
such an environment, but it hardly gets the government off the hook
that their actions had the consequences that people did predict (well,
I seem to remember arguments in 1992 and 1999 about the wisdom of
these policies -- it's almost certain that there were cassandras).

> Over time, the madness infects the entire culture of finance,
> as the government labels the prudent bankers automatic losers
> in the great game of acquisitions.

It wasn't just acquisitions.  If you needed capital for anything and
your returns were low relative to the rest of the game-playing
industry, then you lost out.  In order to stay competitive when
looking for capital you had to stay competitive in terms of returns,
which could only happen (while the bubble was inflating) if you
participated in the bubble.  This shows that the market distortion
needed to get and keep the bubble going didn't have to be all that
large because there was a leveraging effect in the industry.

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