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Rusty Shackleford
Joined: 08 May 2008
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 Posted: Tue Feb 17, 2009 10:37 pm Post subject: Govt sowed the seeds of credit crisis |
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Here is an interesting article on the origins of the credit crunch and subsequent economic crisis. Interesting reading for those who advocate even more govt intervention in the economy.
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Upside Down Economics
By Thomas Sowell
From television specials to newspaper editorials, the media are pushing the idea that current economic problems were caused by the market and that only the government can rescue us.
What was lacking in the housing market, they say, was government regulation of the market's "greed." That makes great moral melodrama, but it turns the facts upside down.
It was precisely government intervention which turned a thriving industry into a basket case.
An economist specializing in financial markets gave a glimpse of the history of housing markets when he said: "Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century."
That was what the market was like before the government intervened. Like many government interventions, it began small and later grew.
The Community Reinvestment Act of 1977 directed federal regulatory agencies to "encourage" banks and other lending institutions "to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."
That sounds pretty innocent and, in fact, it had little effect for more than a decade. However, its premise was that bureaucrats and politicians know where loans should go, better than people who are in the business of making loans.
The real potential of that premise became apparent in the 1990s, when the Department of Housing and Urban Development (HUD) imposed a requirement that mortgage lenders demonstrate with hard data that they were meeting their responsibilities under the Community Reinvestment Act.
What HUD wanted were numbers showing that mortgage loans were being made to low-income and moderate-income people on a scale that HUD expected, even if this required "innovative or flexible" mortgage eligibility standards.
In other words, quotas were imposed-- and if some people didn't meet the standards, then the standards need to be changed.
Both HUD and the Department of Justice began bringing lawsuits against mortgage bakers when a higher percentage of minority applicants than white applicants were turned down for mortgage loans.
A substantial majority of both black and white mortgage loan applicants had their loans approved but a statistical difference was enough to get a bank sued.
It should also be noted that the same statistical sources from which data on blacks and whites were obtained usually contained data on Asian Americans as well. But those data on Asian Americans were almost never mentioned.
Whites were turned down for mortgage loans more often than Asian Americans. But saying that would undermine the reasoning on which the whole moral melodrama and political crusades were based.
Lawsuits were only part of the pressures put on lenders by government officials. Banks and other lenders are overseen by regulatory agencies and must go to those agencies for approval of many business decisions that other businesses make without needing anyone else's approval.
Government regulators refused to approve such decisions when a lender was under investigation for not producing satisfactory statistics on loans to low-income people or minorities.
Under growing pressures from both the Clinton administration and later the George W. Bush administration, banks began to lower their lending standards.
Mortgage loans with no down payment, no income verification and other "creative" financial arrangements abounded. Although this was done under pressures begun in the name of the poor and minorities, people who were neither could also get these mortgage loans.
With mortgage loans widely available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disaster.
Those who warned of the dangers had their warnings dismissed. Now, apparently, we need more politicians intervening in more industries, if you believe the politicians and the media.
http://www.realclearpolitics.com/articles/2009/02/upside_down_economics.html
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Wed Feb 18, 2009 6:47 am Post subject: |
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Thomas Sowel is a good economist.
He would make a great president or VP. I wish he would run for Congress, Senate or something. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Feb 18, 2009 6:49 am Post subject: |
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Of course the government is responsible.
Here's a better one:
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The Blame Game
Several prominent newspapers have featured articles that blame the current financial crisis on China�s buying U.S. treasuries. As the theory goes, the deficit countries �Australia, Ireland, Spain, the United States, the UK, etc. � are Peking ducks, the surplus countries � China, Japan, Russia, Saudi Arabia, etc. � are duck farmers. The later force-feed the former into bloated debt junkies that eventually blow up.
Of course, both willing lenders and borrowers must exist for a debt bubble to exist. But who do you blame? The borrower, the lender or the middleman? I am sure that stories and theories on all three are plentiful. But accusations against China and other lending nations appears politically convenient, allowing politicians in the crisis countries to blame someone else and avoid making hard choices. However, this theory has the causality wrong.
Finger pointing in the blame game so far is mostly at Wall Street, i.e., the middleman. It is easy to do. Just look at the CEOs of these institutions. They have paid themselves hundreds of millions of dollars on supposed accounting profits that have become today�s write-offs. Their institutions are either already bankrupt or close to it. And on top of that, there was Bernie Madoff�s US$ 50 billion scam to crystallize the problem.
It is easy for common people to see that this crisis has happened because these greedy people have taken advantage of the system and ruined it for their personal gains. I am sure Hollywood will have a feast with the stories that are coming out of Wall Street. Great movies could be made just by faithfully recording what happened.
I have been writing about Greenspan�s guilt for this crisis. In 1999, I focused on how his rate reductions in response to the Asian Financial Crisis led to the IT bubble. In 2000, I wrote that his rate reductions in response to the tech burst would lead to a property bubble or bond bubble or both. And in 2003, I added that a new bubble was emerging with Greenspan pulling the strings. When he took over the Fed in 1987, the U.S. financial sector had US$ 1.9 trillion in debt, or 29 percent of GDP. When he departed in 2005, it had risen to US$ 13 trillion, or 104 percent of GDP.
During a congressional hearing last year, Greenspan professed that he was shocked financial institutions that had borrowed so much didn�t take good care of their money. This was like saying he didn�t know what was going on. But in 1998, when Long Term Capital Management blew up, it nearly brought down the financial system. The problem was excessive leverage as reflected in financial-sector debt. If one fund could bring the system down, imagine how much risk the massive growth of the hedge fund industry and the proliferation of proprietary activities at investment banks could pose to the system. Indeed, the consensus among regulators and analysts after the debacle was that such unbalanced sheet activities should be regulated. But opposition from Greenspan and top officials in Clinton�s administration kept such activities unregulated and laid the foundation for the current crisis.
In a credit bubble, monetary policy plays a dominant role and must be held responsible. A bubble happens somewhere everyday. All that�s needed it for everyone to bids up the price of an asset solely on the expectation someone else will pay more latter. Hello Kitty dolls, pu�er tea, or modern paintings all could become bubbles. As long as supplies cannot increase quickly in response to rising price and something captures the attention of enough people, a bubble can happen. But, such bubbles are small relative to total money supply and can form without the support of monetary policy.
A credit bubble, however, is large relative to total money supply. Without an accommodating monetary authority, a credit bubble cannot possibly occur. For leveraging to increase from 29 percent to 104 percent of GDP couldn�t have happened without the Fed accommodating. If one person could and should have stopped the bubble, it was Greenspan.
But instead of being alarmed, Greenspan repeatedly claimed that the proliferation of derivative products was good for efficiency and failed to acknowledge that it was mostly for speculation. Thus, he is the individual most responsible for the crisis.
A bubble can be an honest mistake. The herd mentality is a human weakness that underpins bubble phenomenon. However, in some bubbles, there are people who try to incite and take advantage of the herd mentality for their personal gains. These are the people who deserve to be prosecuted. We don�t have to look far to see such people. Who pocketed millions on false profits? Who gave worthless derivatives triple-A ratings? Who changed the rules for dubious financial products to be sold?
President Obama spoke eloquently about responsibility. This is what solving the problem all is about. Instead of blaming someone else and asking for assistance, everyone must cut back to help the economy to live within its means. Spending too much got the U.S. into trouble. Spending more won�t get it out of its problem. |
http://english.caijing.com.cn/2009-02-18/110069881.html
I cut out quite a bit of the piece and it is worth reading in whole. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Wed Feb 18, 2009 7:11 am Post subject: |
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| A credit bubble, however, is large relative to total money supply. Without an accommodating monetary authority, a credit bubble cannot possibly occur. For leveraging to increase from 29 percent to 104 percent of GDP couldn�t have happened without the Fed accommodating. |
In otherwords, if the government hadn't inflated the money supply, there would have been no credit bubble.
Blame the Fed. Blame the government.
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| Spending too much got the U.S. into trouble. Spending more won�t get it out of its problem. |
If only Obama and his pinheaded Posse of Ponzi economists understood these facts. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Feb 18, 2009 7:20 am Post subject: |
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| For the record, Andy Xie is no quack. PhD at MIT, was lead Asian economist at Morgan and now an independent economist in Shanghai/Hong Kong. He is separated from the Krugman lovefest and juvenile public debate in the US. |
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