David :
I'm impressed. Thoughtful essay, backed up with all kinds of specific
information. And NOT -as far as I know at this time- available
anywhere else. That is, I simply don't know of anyone else
who so thoroughly rakes Fanny and Freddie over the coals.
A real contribution to RC.org.
This said, I am not 100 % sold. But I am approximately 50 % sold.
That is, thanks to Kevin Phillips to begin with, and this dates to
the early 90s in my life, I definitely do demonize not "Wall Street"
in total, but "Wall Street" as shorthand for finance capital only.
See my e-mail to Ernie for short form critique that deserves lengthy
elucidation that, for now, I cannot invest that kind of time to carry out.
In any event I more-or-less picture finance capital along the lines
of the movie "Wall Street" with many or most finance capital types
as different versions of Gekko in the film.
HOWEVER, after months of prodding by you and now this well-said
essay, I am happy to announce that Fannie and Freddie also deserve
to be demonized. Maybe not the institutions per se, which date to
the late 1930s and served useful purposes for many years when
they were modest size institutions, but certainly management.
My skepticism began when seeing a TV interview some years ago
when "Herman Cain" was appointed to run Fannie.
No, it wasn't "the" Herman Cain but it was someone who
was obviously unqualified for the position, who oozed special pleading
in his mindset, at least to the extent that the interview / news segment
allowed anyone to say. Clearly his was a political appointment
to serve as appeasement / payment to the "minority community."
Forgotten exactly when this was but at some point in the Clinton era.
It either took place when I was in the midst of 3 years of research
into economics, or was something that contributed to deciding
to spend that time doing economic research.
OK., the next stage in the process, but no way to know when I can
finally get around to this, should be "testing" your theory.
This cannot be soon, we are talking weeks from now,
but this is useful stuff.
But throw whatever can be found against it and see if it breaks.
That's pretty much what any researcher would do with anyone's theory
about something important. But there is a good deal of testable material
to work with and a hard hitting point of view.
I will say this much for today : I may not end up being convinced by
the totality of your theory but it certainly has real value and if I did
not use at least parts of it in any analysis of the crisis of 2008 I would
be remiss
in my responsibility.
Billy
======================================
4/12/2012 [email protected] writes:
This is to answer some questions that some might have about my somewhat
regular panning of Freddie and Fannie and their role in the Housing boom and
bust.
Full disclosure: I currently work for CoreLogic, the largest producer of
housing market data and analytical products. CoreLogic also has a Tax Escrow
Service (that's my piece), flood insurance, Relocation unit, and the
currently growing Default unit (gee, I wonder why?).
Derivatives and Credit Default Swaps: I don't think that derivatives (or
Credit Default Swaps) stem from direct orders by Freddie and Fannie. I DO
believe that if those sub-prime mortgages had not been so encouraged (by
their interpretation of the Community Reinvestment Act) that their numbers
would be lower and the attendant risk lower as well. The Derivatives and the
Credit Default Swaps-both intended to be "ass covering" by the financial
institutions-spread further and wider due to their volume. A volume that
Freddie
and Fannie encouraged to grow.
Having the underlying mortgages government insured in the first place was
an attempt to play down the risk. With hindsight the only thing that can
reasonably be said about how that worked out is EPIC FAIL. It was not
realized by the institutions or the regulators that instead of mitigating the
risk, all that the Derivatives and Credit Default swaps did was amplify the
damage. In most other areas, the volume and the corresponding dollar amount of
the Derivatives and Credit Default Swaps is much lower. The Law of
Unintended Consequences is a bitch.
Housing Bubble: With more folks getting these relatively easy mortgages,
buyers entered the market that otherwise strict credit standards would have
kept out. So the price of housing steadily went up as the demand went up.
Until, that is, the buyers could no longer afford the prices no matter how
sweet that mortgage deal sounded. Then the prices came down a little, and
builders quit building. Guess who the builders employ? Folks on the lower end
of the pay scale. As their adjustable rate mortgage was adjusting upward,
their jobs and income were adjusting downward. That's not a good thing. And
the contraction fed itself, even to the point of endangering the very
banks that had originated those mortgages-with a little government prodding.
It
all came crashing down and in some places continues to come down. The
Dallas, TX market is a lagging indicator. Detroit is a leading indicator.
Blaming Freddie and Fannie exclusively: Saying that there is more bile and
venom in the mortgage industry against Freddie and Fannie than Wall Street
is not to exonerate Wall Street. In our business, our customers are the
Banks and Mortgage companies, and only secondarily the people paying the
mortgages. The people paying the mortgages get more attention from us if the
bank has outsourced their escrow processing to us. We even have folks that
answer the Phone with the Name of the bank that they support. I am not
unsympathetic to their plight, but neither am I unsympathetic to the Bankers
who
were "following directions" and then kicked out in the morning when it came
crashing down like the hooker who overstayed her welcome. Had the bankers
just said "no," and taken their lumps, who knows where we would be today??
So they have the spine of a jellyfish.
>From the Viewpoint of the Bankers and the Mortgage industry: The banks
see, with some reason, that Freddie and Fannie encouraged the extreme risk
taking and then with the rest of the Obama and Bush administrations turned on
them and demonized them for doing exactly what Fannie and Freddie
encouraged that they do. This is not "Do as I say not as I do," but rather "Do
as I
say and if it works out you will not get sued for race discrimination in
lending, and if it doesn't work out it is ALL your fault." Lord knows that
with Franks over the oversight committee, it's not going to be Fannie and
Freddie holding the bag. The bag will be put in the hands of the banks,
post-haste. As the tour buses of protestors at AIG executives' houses
demonstrated.
Nice to see that the strategy of Obama and the Commiecrats to demonize
Wall Street has been so successful. Or, you know, not.
Chronology: Some may trace this back to the early 1970s, but the Community
Reinvestment Act was passed under Carter in 1977. So to hang this Act on
Johnson, Nixon or Ford does not fit the chronology. See Wikipedia.
_http://en.wikipedia.org/wiki/Community_Reinvestment_Act_
(http://en.wikipedia.org/wiki/Community_Reinvestment_Act)
There's that small matter of an election in 1976 won by Carter, so this
baby, passed by an almost 2/3 Democratic House, belongs solely to the
Democratic Party. Others may have pushed it for their own political ends, but
it
only traces back to Jimmy.
This Wikipedia article lists some positions, pro and con, on the
origination of sub-prime loans being primarily from unregulated mortgage
companies
vs those from CRA covered banks. Independent mortgage companies like
Countrywide of Dallas (one of our "competitors" because they did their own tax
service and offered it to others). Countrywide failed and was taken over by
Bank of America (BofA went to Countrywide's Tax Service and left our Tax
Service in 2010). So there was an apparent need for regulation of independent
mortgage companies. No mention is made of any attempt, either successful or
failed, at regulating these institutions.
Seeing that Ron Paul agrees with me does give me pause. :-)
David
--
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