Alan Blinder: Who Caused the Mortgage Mess?

Alan Blinder says it's time to start pointing fingers. All six of them:

Six Fingers of Blame in the Mortgage Mess, by Alan S. Blinder, Economic View, NY Times: Something went badly wrong in the subprime mortgage market. In fact, several things did. And now quite a few homeowners, investors and financial institutions are feeling the pain. ...

Finger-pointing is often decried both as mean-spirited and as a distraction from the more important task of finding remedies. I beg to differ. Until we diagnose what went wrong with subprime, we cannot even begin to devise policy changes that might protect us from a repeat performance. ... Because so much went wrong, the fingers on one hand will not be enough.

The first finger points at households who borrowed recklessly to buy homes... They should have known better. But what can we do to guard against it happening again? Not much, I’m afraid. Gullible consumers have been around since Adam consumed that apple. ...

It seems more promising to point a finger directly at lenders. Some lenders sold mortgage products that were plainly inappropriate for customers, and that they did not understand. ...

Here, something can be done. For openers, we need to think about devising a “suitability standard” for everyone who sells mortgage products. Under current law, a stockbroker who persuades Granny to use her last $5,000 to buy a speculative stock on margin is in legal peril because the investment is “unsuitable” for her (though perfectly suitable for Warren Buffett). ...

But who will create and enforce such a standard for mortgages? Roughly half of recent subprime mortgages originated in mortgage companies that were ... outside the federal regulatory system. ... We should place all mortgage lenders under federal regulation.

That said, bank regulators deserve the next finger of blame for not doing a better job of protecting consumers and ensuring that banks followed sound lending practices. ...

Regulators also need to start thinking about how to deal with a serious incentive problem. In old-fashioned finance, a bank that originated a mortgage also held it for years..., giving it a clear incentive to lend carefully. But in newfangled finance, banks and mortgage brokers originate loans and sell them quickly to a big financial firm that “securitizes” them...

Securitization ... has ... made mortgages more affordable. ... But securitization sharply reduces the originator’s incentive to scrutinize the creditworthiness of borrowers. After all, if the loan goes sour, someone else will be holding the bag. We need to find ways to restore that incentive, perhaps by requiring loan originators to retain a share of each mortgage.

But wait. Don’t the ultimate investors have every incentive to scrutinize the credits? ... The answer is yes — which leads me to point a fourth finger of blame. By now, it is abundantly clear that many investors, swept up in the euphoria of the moment, failed to pay close attention to what they were buying.

Why did they behave so foolishly? Part of the answer is that the securities ... were probably too complex for anyone’s good — which points a fifth finger, this one at the investment bankers who dreamed them up and marketed them aggressively.

Another part of the answer merits a sixth finger of blame. Investors placed too much faith in the rating agencies — which, to put it mildly, failed to get it right. It is tempting to take the rating agencies out for a public whipping. But it is more constructive to ask how the rating system might be improved. That’s a tough question because of another serious incentive problem.

Under the current system, the rating agencies are hired and paid by the issuers of the very securities they rate — which creates an obvious potential conflict of interest. ... This needs to change, but precisely how is not clear.

So that’s my list... But as we point all these fingers, let’s remember the sage advice of the late and dearly missed Ned Gramlich, the former Fed governor who saw the emerging subprime problems sooner and clearer than anyone. Yes, the subprime market failed us. But before it blew up, it placed a few million families of modest means in homes they otherwise could not have financed. That accomplishment is worth ... quite a lot.

We don’t have to destroy the subprime market in order to save it.

Comments

[Bill]

There's a lot to be said here, but I'll keep it brief. Investors who messed up are paying the price. Homeowners too (so long as the anti-foreclosure measures don't pass). Ratings agencies? They need a big change. Maybe the govt requirements that they be used should be reconsidered? And appraisers are getting away scot free even though many of them committed fraud - whatever you're paying must be market! And borrowers who committed fraud should do time. And mortgage brokers who aided and abetted the fraud should do lots of time.

[anne]

When there is a specific report on credit agency mis-representation of risk which I continually find mentioned, please do set down the reference. I know only Moodys, and found credit risks there completely transparent and reliable to my understanding. The risks were so evident, I stopped paying attention finding the return possibility in private home mortgage bonds strikingly poor.

Vanguard, even in bond index funds, has carried no private home mortgage bonds for at least 18 months. Shrewd hedge fund managers were openly preparing to take advantage of credit problems that had to come. No; I still do not understand what was happening in the bond market and do not understand why buyers were buying when alternate investments were gleaming.

[anne]

A brilliant international stock and commodity and real estate market, so if missed by professional investors who missed and why? Buying of mortgage bonds was professional buying, but though I have some recent idea who, why is not answered.

[evagrius]

There's still four fingers left which means that we can't throw up our hands in despair....yet.

[anne]

There is reason to be cautious and even worrisome, but no country that has had a bear market in housing these last 7 seven years has had a recession. Investors have actually been cautious for several years, and rightfully so for in caution there was relative value and there have been returns. I am being cautious, but hopeful for the near term. The international economy is awfully robust.

[gordon]

So I can now count Alan Blinder along with James Hamilton as regulationists, against Mark Thoma as an anti-regulationist.

[dd]

Happy to point the finger where it needs to be pointed and that would be banking mergers, derivatives and off-balance sheet vehicles whatever the acronyms. SOX danced mightily around these issues; but the history of financial creationism finds pyramiding ponzis and merged banking/insurance functions to offer to many creative illusory opportunities. Money is a fiction; but piling fiction upon fiction and allowing differing fictional units to merge the differing functions (investment/commercial/retail banking cum insurance) and offer tertiary products results in disaster. Paulson's new global regulatory harmony song might extend the beast another decade with luck.

[calmo]

Thanks dd (10 more years? ...I need to review my meds and get cheery) and I agree sorta with eva that Blinder is barely in charge of those flailing fingers. This bit, mid article:It is tempting to take the rating agencies out for a public whipping. suggests to me that he really is flailing and with this ending, I believe might be his left thumb: We don’t have to destroy the subprime market in order to save it.finding his jugular...just in time.
I don't Gordo...you channeling Mark direct-like to make that pronouncement?

[anne]

What seems needed is bringing mortgage banks under Federal Reserve regulation, not just to monitor credit extension and terms but to protect more against discriminatory lending practices that I am told have still been somewise characteristic of the market in this housing cycle. As for derivative extention, as long as the Fed is aware of leverage afforded by derivative use, I find no problem.

[anne]

Against Republican leanings, I favor broader lending allowances from Fannie Mae and Freddie Mac. Regulation of credit rating services simply strikes me as awfully hard, but was that the problem? Why did I understand there was no relative value in private home mortgage bonds, while European bankers were buying? These folks are smart, so what gives?

[richard]

dd raises the issue of Ponzi schemes. I don't understand dd's comment, but I am going to pick up the thread about Ponzi schemes. The only difference between a sustainable insurance product and a Ponzi scheme are the actuaries; the only difference between any financial product and a Ponzi scheme are the financial engineers. Some financial engineering is good -- actuaries, for example, use the law of large numbers and convert an individual's low risk / high cost exposure into a low cost / no risk exposure by aggregating individual risks and letting the exchange their own risk with the aggregate risk. No arguments there.

At what point does the financial engineering become non-credible and turn into a Ponzi scheme? Is it the math and analysis? Both actuaries and FEs have credible analysis underlying their products. Is it the regulatory environment? Insurance companies have state filings and perhaps federal filings to certify adequate reserves to their products; do other products need the same? Insurance products also have several hundred years experience to draw upon, whereas newer products have literally less than a decade or two of experience.

[dd]

There are derivatives and derivatives and my hope is that Geithner (don't be upset w/me Calmo) has the calculations and ramifications configured albeit it is a mighty task and that he has not spoken gives me pause and increases the odds of another 50 FF/BP cut.

[dd]

Calmo the whole ratings agencies distraction is so WMD. Just as taking Arthur Anderson out was such a nonsense distraction and having it redeemed by the Supremes long after the collapse was so ironically appropriate in terms of distractions over substance. The key is can this exponential beast keep producing and the answer is yes as long as the distractions distracts. So far so good.

[JRip]

Another finger:
FASB and the Auditors of the public mortgage firms. To sign off on the scheme where revenue is recognized immediately as the loans are sold off to Wall Street even though there exists buy-back clauses. Those clauses should also have been audited at Wall Street.

At the mortgage maker this inflated profits and thus their stock prices and the bonuses of management.

At Wall Street it permitted them to presume some coverage in the event of defaults as you had recourse back to the maker. It was pretty clear a couple years ago that the balance sheets of many lenders could not sustain the cost of covering defaults.

More reserves should have been required by auditors on both
sides.

[dd]

Not reserves required by auditors but responsible banking entities ought have allocated such reserves w/o prompting and that is indeed the heart of the matter. What happens when bankers are not prudent; whether they be investment, commercial, retail or insurance?

[calmo]

Ok, I wasn't upset with you before dd, but now, pinning all your hopes on the NYFed head like that, duzzit.
We're through.
And through.
But I agree, (so merely thru and thru, and not thru and thru and thru.) it is only a matter of time before we see more cuts and further dollar devaluation. Get those mortgage rates down so that housing prices don't sink any further. House price decreases in this out-sized consumer economy with its out-sized housing expenditures (masked by OER IMO) tells me that we are already experiencing deflation...the worse alternative to (the bogus)"runaway" inflation. [So how izit that "loosening" is a measure to fight inflation? It is a desperate measure to fuel inflation.]

[gordon]

Calmo: "I don't Gordo...you channeling Mark direct-like to make that pronouncement?"

See my comment in the thread under the linked Mark Thoma post. It seems to me that Prof. Thoma is campaigning against regulation of financial markets (if several posts in a blog amount to a campaign). I give the references in that comment.

[calmo]

Gordo,
Your Mark Thoma link goes to the thread Emotional Finance and Bubbles about which Mark only introduces, asking: "Are we emotionally predisposed to the creation of bubbles?" and then 2 pundits speak beyond their field of competence dividing us anxious types as either depressive or paranoid sphizoids (calmo too depressed at this point to continue with pundits)
So either that is not the right link, or you think Mark was so "anti-regulationist" that this confirmed your suspicions: so anti-regulationist, he let the authors off without any regulation or comment at all.

Izatit?

Or is your view that this regulation business has gone to Mark's head splainin why the blog is so plumb full of regulation articles...and you suspect he's just a control freak that is going to wear us down by sheer osmosis?
Somewhat seriously, 'hangin ten' (surfer) [I just love him here] JDH is maybe further regulatory than Mark, but unless you can show me otherwise, I'd say both these dudes are asking for more regulation. Isn't everyone [so expand your either/or regulations measure] except the successful HF managers?
dd on Blinder is so Scot Ritter:
the whole ratings agencies distraction is so WMD.

[mort_fin]

I do get tired of this "sub prime put millions into homes" meme. In the first place, most sub prime lending is refi, not purchase money. For purchase money, how much sub prime simply supplanted FHA, because the YSP was larger, and doesn't represent any marginal increment to ownership? And for that slice of the subprime purchase originations that do represent an increase in credit, how much was to persons who might have qualified in a year or two with better credit, higher incomes and down payments, and at conventional rates, so that the sub prime simply accelerated home ownership by a year or so? I doubt that there's very much sub prime lending that put people into houses they wouldn't have eventually gotten into anyway. And I haven't even begun my rant about how much of that increase in ownership is sustainable with sub prime underwriting at subprime spreads.

[David Beckworth]

What about pointing a finger at the Fed? Alan Blinder seems to be joining the ranks of Mark Gertler in leaving no role for the Fed in this housing boom-bust cycle. It is interesting how most U.S. economists (some exceptions like John Taylor) have a hard time seeing the Fed as a culprit while the European economists see a big role for the Fed.

[Bob Dobalina]

Blinder is a first-rate economist, no doubt, but this article is terrible. Who is he writing for?

[Bob Dobalina]

And the buyside has learned its lesson. It will forget it, for sure, just has it has forgotten all of the others, but most (all?) medicines proposed will be worse than the disease.

[PrestoPundit]

This is pathetic. The Fed generated an unsustainable boom in the housing market -- and fed coal to a run-away train.

This is econ 101, but Keynesians like Blinder use an "modeling" strategy which excludes from thought all of the the relative price dynamics in the capital and investment structure that matter in the trade cycle. Blinder is literally blinded by his explanatory machinery from understanding what takes place in the macroeconomy. So no wonder we get such nonsense, where the Fed has zero role in the business cycle. As I said, pathetic, and a giant sign of a failed scientific research program -- and a failed scientist.

says...

http://www.ft.com/cms/s/0/920fb34c-6d5e-11dc-ab19-0000779fd2ac.html

‘Cowboy Keynesianism’ that the Fed may soon regret

Published: September 28 2007 03:00 | Last updated: September 28 2007 03:00

From Prof Jeff Frank.

Sir, Martin Wolf makes a good point about how “the Fed must weigh inflation against the risk of recession” (September 26).

The test may come very soon. It is likely that the Fed cut rates by 50 basis points precisely because the window for cutting is short. Prices fell sharply between August and September last year. Next month’s change in the base for year-on-year CPI inflation to September leads to some ugly arithmetic. Even if prices didn’t rise at all in September 2007, headline CPI will rise from 1.97 per cent to 2.47 per cent. But we know that energy prices rose sharply in September, so the headline will rise to nearly 3 per cent. The baseline shift effect is even worse for October! Further, the moderation in core inflation may be due to lagged effects from the fall in energy input costs in the second half of 2006. If so, this is likely to be reversed as well. Inflation may well be over 4 per cent by the end of the year.

The big US inflation of the 1970s was set in motion in 1968. In June 1968, headline CPI crossed over 4 per cent. In September 1968, perhaps under political pressure, the Fed lowered the Fed funds rate by 25 basis points to 5.75 per cent. It reversed this by December and then started raising rates sharply, peaking the next year over 9 per cent. In hindsight, that was viewed as an irresponsibly accommodative Fed. In comparison, the 50bps cut by the Bernanke Fed is “cowboy Keynesianism”.

US public and private debt is hugely out of equilibrium. There are four ways equilibrium can be restored. US consumers and the US government can cut their expenditure to repay the debt. They can default on some of the debt. They can renegotiate some of the debt. Or the Fed can inflate away the real value of the debt.

Mr Wolf recognises that inflation is the easiest course. Realistically, it may be the only option open to a country that finds it difficult to live within its means. The US will have traded toxic debt to China for lead-painted toys.

Jeff Frank,

Professor of Economics,

Royal Holloway,

University of London,

Egham, Surrey TW20 0EX, UK

says...

http://www.ft.com/cms/s/0/92e59746-6bc9-11dc-863b-0000779fd2ac.html

The Fed must weigh inflation against the risk of recession
By Martin Wolf

Published: September 26 2007 03:00 | Last updated: September 26 2007 03:00

"I regret to say that the Federal Reserve independence is not set in stone. FOMC discretion is granted by statute and can be withdrawn by statute." Alan Greenspan, The Age of Turbulence.

To critics it is now the "Bernanke put" - the belief that, as under Alan Greenspan, the US Federal Reserve will always ride to the rescue of Wall Street. The jubilant response of traders to the Fed's 50 basis point cut in the short-term interest rate might justify this suspicion. But saving Wall Street from its follies is not the Fed's objective. It is an (unfortunate) by-product of the attempt to do its job.

It would be wonderful if those responsible for this most absurd of financial crises could be punished without damaging millions of innocent bystanders. But it is impossible. If the Fed does its job, it helps the financial sector. The latter will, no doubt, recover and then find some new, imaginative and currently unforeseen way to generate a possibly bigger crisis several years hence. Whereupon, it will expect the Fed to do its job, as Wall Street sees it: saving the economy, by saving finance. Moral hazard matters, but only for the poor.

Yet will the Fed always be able to oblige? The answer is not so clear. The resolution of each crisis lays the seeds of the next. Thus, the easing by the Fed after the east Asian and Russian crises of 1997 and 1998 contributed to the subsequent stock market bubble. The dramatic easing after its bursting in 2000 contributed to the recent housing boom. The disruption in money markets brought about by the end of that boom has led to last week's sharp cut in rates. The question, then, is what this will lead to.

One possible answer would be a true nightmare: the return of inflation. Over the past quarter of a century, the Fed has enjoyed a benign global environment of falling and then low inflation, and falling and then low nominal and real interest rates (see charts). Credibly low inflation explains the "Greenspan put", which is largely a label for the ability of the Fed to move interest rates in response to shocks without any fear of the inflationary consequences. That freedom has given the Fed the independence and authority Ben Bernanke inherited from his predecessor. But its independence, as Mr Greenspan notes, is not engraved on stone. All central banks are creatures of politics.

Such concerns seem remote today. That is why the Federal open market committee was able to reach its unanimous decision to cut rates, "to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets"*. But, wisely, it also "judges that some inflation risks remain, and it will continue to monitor inflation developments carefully". The Fed seems to have rejected the advice of Martin Feldstein of Harvard University, at this year's Jackson Hole monetary conference, that it cut rates by up to a percentage point and accept the risk of an upsurge in inflation. But it has also gone some way in the direction he recommended.

How significant then are the inflation risks and why might they be important? At present, these risks do still appear small. Year-on-year headline inflation of consumer prices fell to just 1.9 per cent in August, slightly below so-called "core inflation", at 2.1 per cent. Given the likelihood of a significant slowdown in consumer spending, the chances are that the economy will be weak: Goldman Sachs suggests that annualised growth will be 1-1.5 per cent in the next three quarters. For 2008, it forecasts growth at just 1.8 per cent, well below trend. If, as seems probable, consumption slows sharply, the economy will weaken yet further.

Does that mean the Fed can ignore inflation? No, because doubts about its commitment to preserving at least the domestic purchasing power of the currency will make its job far harder. Such doubts are possible, as reactions to last week's cut showed. Stock markets jumped. But so did long-term interest rates, inflation expectations (shown by the gap between index-linked and conventional Treasury bonds) and the price of gold. The dollar tumbled to its lowest level against major currencies. Moreover, unit labour costs rose 4.9 per cent, year-on-year, in the second quarter of 2007, as productivity growth slowed.

True, none of this is yet dramatic. The dollar's declining external value is inevitable. Given the need to offset weak demand at home with a jump in net exports, it also seems desirable. Mr Bernanke may say that a strong dollar is good for the US economy, but that is an aspiration without a policy and, as such, is misleading, if not meaningless. At 4.6 per cent, 10-year Treasury rates are low, while inflation expectations are merely back where they were in July. As for the price of gold, it is certainly not a pure measure of anxiety about the dollar.

Nevertheless, the Fed cannot appear to ignore the risks of inflation, precisely because the temptations to do so are so evident. Domestically, a huge number of highly indebted households find that their principal assets, their houses, are falling in price. A higher price level is then a far less painful way to restore equilibrium than falling nominal prices. Externally, the US is a huge net debtor. A large dollar devaluation is then a far less painful way to turn it into a net creditor than running current account surpluses, since its liabilities are denominated in dollars.

Given these facts, it is going to be an enduring struggle for the Fed to convince those who have put their faith in the dollar that it is safe. This is not some remote danger. In financial markets, the future is now. If holders of the dollar conclude it is no longer a secure store of value they will dump both the currency and assets dependent on its future value. If that were to happen, the Fed would confront a dreadful dilemma - whether or not to cut rates as the dollar plunged and long-term interest rates soared. Its freedom of manoeuvre would be gone, as in 1979, when Paul Volcker became chairman. A political crisis over its independence might also ensue, further undermining its credibility. Moreover, even if it did dare to cut rates, how much would this assist the economy if long-term rates jumped at the same time?

The Fed's ability to delight politicians and investors depends on retaining its credibility over inflation. Without that, the Fed will be unable to respond to crises or keep output in line with potential. The Fed may well have been right to be bold last week. But it cannot be foolhardy about inflation. Painfully won credibility is its greatest asset. It must not be lost.

*Federal open market committee statement, September 18 2007, www.federalreserve.gov

Copyright The Financial Times Limited 2007

[Matthew Brown]

I'm not so sure that these loans actually put families in homes that couldn't otherwise have got them. What it actually did - at least in Southern California, where I live - is allow people to get loans for larger amounts than they could have obtained before, which gave the housing market extra room to go up in price.

After all the fundamentals in housing is the demand, the supply, and how much money people have to spend monthly. Make it easier to get a big loan and more people have more money to spend - at least at first. But the supply is still the same, so people will be mostly buying the exact same home they'd have bought before, but spending more money on it.

[gordon]

Calmo, I’m not going to summarise all the posts and my comments on them. The links are there. Briefly, starting from this post (“Who Should Pay the Price for the Popped Real Estate Bubble?”, Aug.28), where Prof. Thoma said: ” We made mistakes in the regulatory environment, no doubt about it, and I hope we learn and fix the problems…”, I think Prof. Thoma has consistently moved away from a regulatory response. There are some clues as to why, if you read his posts. Maybe he is concerned that any Govt. or Federal Reserve response other than a bailout would be damagingly deflationary. Maybe he thinks there are other (non-regulatory) ways of handling moral hazard. Maybe he thinks enough regulations already exist, but aren’t being enforced. Maybe he thinks that the Govt. isn’t capable of understanding the issues. Maybe he doesn’t trust the US Congress to do much of anything. Maybe he is confused between the need for an emergency bailout and a longer-term response to prevent recurrence of this crisis (I find this a bit hard to believe, but I suppose it's just possible). But overall I think he is now anti-regulationist on this issue.

[wjd123]

But who will create and enforce such a standard for mortgages? Roughly half of recent subprime mortgages originated in mortgage companies that were ... outside the federal regulatory system. ... We should place all mortgage lenders under federal regulation.

That said, bank regulators deserve the next finger of blame for not doing a better job of protecting consumers and ensuring that banks followed sound lending practices. ... Alan Blinder

Let's look inside the federal regulatory system. Who do you appeal to if you believe a federally chartered bank has done you wrong? The Comptroller of the Currency, that's who. And who does the Comptroller of the Currency get to investigate your complaint? The bank with which you have the complaint. And what does the Department of Comptroller of the Currency do with the banks findings? It uses them as the basis on which they make their decision.

What good does it do to put more banks under a regulatory process this weak?

[wjd123]

gordon,

I don't know what Professor Thoma has moved away from because I don't know where he was. However, I agree with you that he seems very concerned with the prospect of regulations going too far, or not actually fixing the problem.

At this point, I would expect most people to be concerned that they won't go far enough. How is congress going to fix the problem unless it has access to what the players are doing? And how are they going to fix the problem if the players are paying them not to?

If the financial industries ends up getting hurt by bad regulations they will have their prior success in escaping regulations and influencing congress to blame. But the smart money says that they'll just continue to succeed in escaping and influencing. That would be the more likely outcome to worry about.

[Lafayette]

Article: They should have known better. But what can we do to guard against it happening again? Not much, I’m afraid. Gullible consumers have been around since Adam consumed that apple. ...

Well, at least he got the first one right.

There is a rule of credit lending for residence purchase/building, which is more or less a Golden Rule: Any repayment of outstanding credits that bring the total to over one third of net income and the individual (or household) is classed as "over-indebted".

People should have to justify their incomes and all loan payments before new credit can be offered. If they are living off their credit card, then that's their business -- but taking on credit to benefit from speculative pricing (when one is already indebted beyond means) is berserk behaviour and should not be permitted.

And, the only way to prevent this idiocy is to assure -- at all times -- that the Golden Rule is observed by credit institutions.

It shouldn't be allowed. Period. And the Fed should have been auditing the market for just such insane credit lending. It wasn't and is therefore blamable. (Such oversight of markets is within their chartered purview.)

[jm]

But before it blew up, it placed a few million families of modest means in homes they otherwise could not have financed. That accomplishment is worth ... quite a lot.

This is outrageous baloney. The injury to people of modest means by the hyperinflation of house prices would outweigh by many times any benefit from placing those families in those homes -- even if the homes were not absurdly overpriced.

Since many of those people of modest means are going to be forced to move by circumstances long before prices recover to the levels they paid, and prices are going to fall 40% or more, a great many of them will be financially ruined.

Blinder is an ass.

[Lafayette]

Article: Roughly half of recent subprime mortgages originated in mortgage companies that were ... outside the federal regulatory system.

The Fed regulatory purview legally extends to ALL credit institutions. Evidently, the Fed has focused traditionally on banks. Have you heard recently the Fed say, "Hey, it's not OUR fault, we don't oversee non-banking credit institutions!"? I think not. It certainly is watching over the abuse of credit card lending.

It is possible that the Fed did not oversee the lending practices (in the matter of credit for property purchase) of non-bank lenders. Frankly, I doubt they were auditing even bank lending. I am sure the banks are no less blameworthy in this latest bout of "exaggerated exuberance" .... that seems to be characteristic of a great many things in the US nowadays.

It is entirely plausible, however, that the Fed is concerned with the sub-prime mess not at its origin but at its destination, meaning the way the pollution has affected bank liquidity. This latter was the Fed's primary concern.

Now that that effect seems passed, at least momentarily, the Fed can turn to inspecting the causes. A couple of well televised "perp walks" for credit fraud indictment might seem in order?

[anne]

International investors have understood for years, the housing or commercial real estate boom in America was preceeded and accompanied and is being followed by booms from Australia and South Africa and Brazil to Britain, Ireland, Spain, France and Germany. Low long term interest rates helped along the boom, but were internationally helpful in ways that could be anticipated and should have been anticipated even if we have not quite understood. That the booms have still nowhere been followed by recession, may be puzzling but is promising.

[Matt]

I like the term "newfangled finance". Is there anywhere I can take a class in it?

[Lafayette]

anne: That the booms have still nowhere been followed by recession, may be puzzling but is promising.

Let's remember that this remark coincides with the Fed's charter. So, for as long as there is no recession, then the Fed was "doing its job" -- according to what has been traditionally expected of it.

May I suggest that the Fed's Job Description changed right under its nose. It is impermissible that an economy atomize risk and get it off the debit column of credit institutions by packaging and selling it as assets.

Abracadabra, the new Magicians of Finance. Modern day alchemists who turn lead into gold.

A pox upon them.

[calmo]

Thanks for that clarification Gordo...and don't we all size up the person (regulationist or anti-regulationist) by reviewing his previous statements (like rdf asking me to read not only the post but the entire opus of Jeff Sachs' stalker, Whatzisface) rather than the latest statement (so handy, so clean (no 'Whatzisface's) but so void of context (that environment which allows us drop Mark in the Regulation Camp ...or The Gulag (anti-regulation)).
So I reserve judgement on your post...until I get a handful and then you're inforit.
Not only that, but having only opined here for several years, I feel that this doesn't really give me enough height to tell yet whether Mark is going through a regulationist phase or merely suffering an anti-regulationist lapse.
It's not that he's a chameleon (or my perceptions unreliably flippant) but that his positions could be responding to careful consideration of changing circumstances (or he could be tired of getting pasted with "regulationist" and wants to see if we are still awake).

You, Gordo, won't be offended if I responded "Who cares?" about someone (Mark Thoma in particular, an authority figure...so long as we make him work for that respect...and not merely defer to the figure, yes?) being labeled (a regulationist) would you? I am more than slightly offended that this question: "What regulations need to be implemented?" is not entertained by you, while Mark's position is something of a fixation.
Seriously, you bring some light to the ad hominem argument...but really, this labeling thingie is too mundane for your talents.
Tis.

[cm]

How about the propagandists of home "owner"ship and (re)financing into ARMs?

[calmo]

Greetings cm.
Yes, that Fannie budget for marketing "The American Dream" while Raines and accomplices scoop up serious $ --the American reality behind the marketed dream. [We need a playwright for this.]
And Greensbum collecting those dinner engagement fees upon his retirement --acknowledgment and remuneration from his tacit clients that he was grossly underpaid for his services. [Sounds so cynical but compare those housing industry CEOs' compensation with AG's stipend.] Not merely condoning ARMs in 2003 when demand was sagging, but marketing them --not the kind of regulation we needed from the Fed.
And times a thousand for derivatives and HFs as dd points out.

[checker]

- What jm said. "But before it blew up, it placed a few million families of modest means in homes they otherwise could not have financed. That accomplishment is worth ... quite a lot" And now they're going to lose them,...but I guess they had a good year or two bouncing around that big house!

- Anne: bubble in Germany? Um ... may want to check your facts. 60% LTV helps prevent bubbles

[S Brennan]

I'm not following all of the above arguments.

Low interest home loans should result from

1] Low inflation

2] A Generous Fed.

3] Excess capitol that needs to find a working home.

4] An investment that seems sound.

1a] So the goverment created numbers [core inflation] that said we have no inflation...and Greenspan reported this with vigor.

2a] The Fed Chairman said, inflation is low, so low, I fear deflation...very bad...must lower prime to unheard of lows...deflation...very bad.

3a] Then the Fed Chairman said: "Hey it would be awful if the US continued to pay down it's debt...tax cuts for the wealthy will solve that." and suddenly a group of people who already had enough money had a lot more money every year...hear the sound of dollars sloshing around?

4a] People will always need a place to live and we have a govermental policy that favors homeowners over renters and a growing population.

What went wrong

1] Greenspan lied 2] Greenspan lied 3] Greenspan lied 4] People are People, just as they always have been.

Why did Greenspan lie? Can you say political hack?

[anne]

Yes; Germany was much in need of a housing boom, notice I never ever have mentioned bubble, and investors correctly anticipated such a boom finally coming for Germany which has significantly spurred growth and, in turn, German investment markets.

Noticed the return on European stcoks these past years? Say superb? Say superb, again? Say what?

[anne]

International investment markets from stocks to real estate have been simply superb, and reflected domestic growth ptterns these last 5 years. This has been an astonishing time, with the laggard actually being America.

[jm]

anne,

It looks to me like all the appreciation in international investment markets has been in Europe, and has been due almost entirely to the direct and indirect effects of the fact that the the major European trading nations have neither pegged their currencies against the dollar (China, Middle Eastern oil exporters), nor implemented zero-interest-rate policies to promote carry trades as a stealth means to the same end (Japan).

As the rise of the Euro vs. the dollar has made ownership of European stocks profitable regardless of their Euro price movements, American investors have been piling into them and driving them still higher. Why does this astonish you?

[gordon]

Calmo, you're welcome to "reserve judgement" until a later date if you want. When you come back, could you please put your cap on the right way 'round, and put away the skateboard? Oh, and tuck in your shirt.

[anne]

We are passing through what is likely the fastest sustained period of international growth in a century, and investment returns to match, and that's with a lagging Japan and a lesser lagging America even mired in an insanely tragic war and occupation, not to mention energy shocks, and characteristic of the period have been the returns of conservative investments. Interesting.

[dd]

The issue is whether housing moves to deflation and the answer is yes in high profile markets: CA, FL,& LV. No one cares about the South (actually upward/stable) or Midwest (down) and for the time being NY is doing fine a victim of its success. So overall the hysterics will be highlighted as famous areas are being impacted and that forces the Feds hand. Then too there is a derivatives unwinding; but reliable information is absent as it is an opaque market. So the Fed must lower.
International markets are not in much better shape as London is the true focus of the great unwinding; but in an opaque market there are many unknown knowns; albeit Northern Rock says much.
The hope is SWF bail the whole thing out and that means foreign integration into traditional Western markets paid in at a premium. Seems this plan will work.

[calmo]

gordon, continues...so must I:Seriously, you bring some light to the ad hominem argument...but really, this labeling thingie is too mundane for your talents. You think I could have over-estimated those talents? {You think I'm over-estimating your intelligence even now?)
But thank you for attributing some youth to my persona...dang if I weren't just feeling like a bag of bones crawling from one day to the next...I mean no harm (meaning don't beat me up because I could fall and accidentally suffocate you) and think I am so enfeebled that I could easily have missed something.
Ok, the force of asserting that Mark Thoma is an anti-regulationist is....(calmo lines himself up to receive blow right between the eyes)...?

S Brennan, are we (this means you, not me) enlarging the importance that the Fed Chair (or even the WH appointed FOMC) in this matter, because this is just so easy (burning the witch at the stake) and gratifying (roasting someone for cultivating and exploiting our vulnerabilities)?
Or because this beats the snot out of investigations, the juicy parts of which are withheld as "classified"?

[anne]

Also, while I consider the problems in the housing and mortgage markets serious I hold them nowhere near as serious as the economic problems we have and are causing ourselves as a result of the horrid waste of the war in and occupation of Iraq. I do not understand the economic consequences, but they are my worry beyond the curse of war and occupation as such.

[dd]

The entire chaos for profit Iraq sadness is greed unbound.

[Lafayette]

DD: International markets are not in much better shape as London is the true focus of the great unwinding; but in an opaque market there are many unknown knowns; albeit Northern Rock says much.

There are "markets" and "markets".

The housing market stateside is not the same animal as European financial markets. Though, in the case of sub-prime, they've become close acquaintances.

The contagion spread from the US, we know that. But, the pest was well known from the outset ... that a great many loans being repackaged as asset instruments to be resold by underlining their "high return".

(Northern Rock is a UK Building Society that deals in mortgages. It was inundated not because of its local mortgage lending, but because it had bought, other banks thought, too many of the dicey American sub-prime "assets". From Wikipedia: On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for an emergency funds facility due to problems in raising funds in the money market to replace maturing money market borrowings. The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank's assets were always sufficient to cover its liabilities, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Sub-prime lending was and still is purely an American idiocy. If anyone can find a European credit institution dealing in sub-prime loans, that institution deserves the European Golden Fleece award.)

If a business, financial or otherwise, cannot regulate itself, then it is up to the incumbent regulatory body to do it. That body was not functioning properly or it would never have allowed such pestilent instruments to be sold as "assets".

A lemon is a lemon is a lemon ... until you repackage and sell it as an "asset"? Yeah, right ... a sucker is born every minute.

[Lafayette]

DD: International markets are not in much better shape as London is the true focus of the great unwinding; but in an opaque market there are many unknown knowns; albeit Northern Rock says much.

There are "markets" and "markets".

The housing market stateside is not the same animal as European financial markets. Though, in the case of sub-prime, they've become close acquaintances.

The contagion spread from the US, we know that. But, the pest was well known from the outset ... that a great many loans being repackaged as asset instruments to be resold by underlining their "high return".

(Northern Rock is a UK Building Society that deals in mortgages. It was inundated not because of its local mortgage lending, but because it had bought, other banks thought, too many of the dicey American sub-prime "assets". From Wikipedia: On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for an emergency funds facility due to problems in raising funds in the money market to replace maturing money market borrowings. The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank's assets were always sufficient to cover its liabilities, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Sub-prime lending was and still is purely an American idiocy. If anyone can find a European credit institution dealing in sub-prime loans, that institution deserves the European Golden Fleece award.)

If a business, financial or otherwise, cannot regulate itself, then it is up to the incumbent regulatory body to do it. That body was not functioning properly or it would never have allowed such pestilent instruments to be sold as "assets".

A lemon is a lemon is a lemon ... until you repackage and sell it as an "asset"? Yeah, right ... a sucker is born every minute.

[Lafayette]

DD: International markets are not in much better shape as London is the true focus of the great unwinding; but in an opaque market there are many unknown knowns; albeit Northern Rock says much.

There are "markets" and "markets".

The housing market stateside is not the same animal as European financial markets. Though, in the case of sub-prime, they've become close acquaintances.

The contagion spread from the US, we know that. But, the pest was well known from the outset ... that a great many loans being repackaged as asset instruments to be resold by underlining their "high return".

(Northern Rock is a UK Building Society that deals in mortgages. It was inundated not because of its local mortgage lending, but because it had bought, other banks thought, too many of the dicey American sub-prime "assets". From Wikipedia: On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for an emergency funds facility due to problems in raising funds in the money market to replace maturing money market borrowings. The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank's assets were always sufficient to cover its liabilities, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Sub-prime lending was and still is purely an American idiocy. If anyone can find a European credit institution dealing in sub-prime loans, that institution deserves the European Golden Fleece award.)

If a business, financial or otherwise, cannot regulate itself, then it is up to the incumbent regulatory body to do it. That body was not functioning properly or it would never have allowed such pestilent instruments to be sold as "assets".

A lemon is a lemon is a lemon ... until you repackage and sell it as an "asset"? Yeah, right ... a sucker is born every minute.

[rasster]

"More reserves should have been required by auditors on both
sides."

That's not the position for an auditor to take. Fundamentally an auditor is there to attest to the firms financial position. They do not have the right nor power to tell the firm what to do (after all they are not elected to do so). The only move they can make is to have a disclosure on their report that they feel the firm's position on such a move could be material to shareholders in the future.