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Who caused the housing crisis? Why do people not believe all the studies?

15 November 2011

Summary:  Among our most serious problems is the success of well-funded engines of propaganda at manipulating public opinion, making effective public policy reforms almost impossible.  Here we examine one example, convincing Americans that the government caused the housing bubble.  This is a follow-up to Facts are an obstacle to the reform of America and Who should we blame for the mortgage crisis?

People become easily led once they are trained to believe appealing lies.   Not just the occasional myths in the belief structure of every political movement, such as the Left’s doomster exaggerations about global warming, and their faith in the phantasm of the Social Security Trust Fund.  Sometimes a movement’s leaders find that their followers have abandoned their skepticism, lost confidence in society’s experts, and become credulous about stories that confirm their biases.

It’s a national tragedy that this has happened to America’s conservatives.  Their leaders investment large sums wisely and patiently, building a structure of plausible-sounding institutions to propagate well-constructed propaganda.  After years of indoctrination, gradually they’ve spun increasingly wilder falsehoods.  From misrepresentations about the adequacy of western europe’s healthcare to outright lies about Obama’s religion and citizenship.

So most discussions about public policy, especially economics, devolve into a debate about interlocking layers of falsehoods, exaggerations, and misrepresentations.  Worse, conservative positions have become solidified — immune to facts.  Obama’s citizenship is the extreme example.  Here we look at another:  the government’s role in the housing bubble and collapse.

Below are links to reports that examine the role of the and the 1977 Community Reinvestment Act (CRA) and Government-sponsored enterprises (GSE).  I am aware of no analytical works coming to conclusions other than those shown.  There are many books and articles blaming the government, mostly anecdotal in nature — and not remotely similar in depth of data and analysis to these studies.  Yet to no effect, as faith-based conservatives hold to comforting stories told them by well-funded engines of disinformation.

Introduction to the subject

(1)  An excellent introduction to the subject: “Did Fannie Cause the Disaster?” Frank Partnoy (Professor of Law and Finance at the U of San Diego) and Jeff Madrick, New York Review of Books, 27 October 2011

(2)  One of the two most extensive studies done today: Report of the Financial Crisis Inquiry Commission, a bi-partisan inquiry, January 2011 — Excerpt:

In conducting our inquiry, we took a careful look at HUD’s affordable housing goals, as noted above, and the Community Reinvestment Act (CRA). The CRA was enacted in 1977 to combat “redlining” by banks — the practice of denying credit to individuals and businesses in certain neighborhoods without regard to their creditworthiness. The CRA requires banks and savings and loans to lend, invest, and provide services to the communities from which they take deposits, consistent with bank safety and soundness.

The Commission concludes the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans — a proxy for subprime loans — had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.

(3)  The other definitive analysis to date about the effect of the CRA on the housing bust: “CRA Lending During the Subprime Meltdown“, Elizabeth Laderman and Carolina Reid, Federal Reserve Bank of San Francisco, November 2008. It based on this Fed Working Paper: Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown. Excerpt:

… {We} believe that this research should help to quell if not fully lay to rest the arguments that the CRA caused the current subprime lending boom by requiring banks to lend irresponsibly in low- and moderate-income areas.

First, the data show that overall, lending to low- and moderate-income communities comprised only a small share of total lending by CRA lenders, even during the height of subprime lending in California. Second, we find loans originated by lenders regulated under the CRA in general were significantly less likely to be in foreclosure than those originated by IMCs. This held true even after controlling for a wide variety of borrower and loan characteristics, including credit score,income, and whether or not the loan was higher priced.

More important, we find that whether or not a loan was originated by a CRA lender within its assessment area is an even more important predictor of foreclosure. In general, loans made by CRA lenders within their assessment areas were half as likely to go into foreclosure as those made by IMCs (Table 2). While certainly not conclusive, this suggests that the CRA, and particularly its emphasis on loans made within a lender’s assessment area, helped to ensure responsible lending, even during a period of overall declines in underwriting standards.

(4)  Some conservatives argued before the crash that the CRA was ineffective, and blocking access to credit by low-income households: “Should CRA Stand for ‘Community Redundancy Act?’”, Jeffery W. Gunther, Regulation, Cato Institute, 2000.

(5)  Update:  The global nature of the housing bubble shows little role for US-specific factors, such as the Community Reinvestment Act and the government-sponsored enterprises

(a) A Global View of the Housing Bubble“, McKinsey Quarterly, October 2009:

Although the current crisis started with the bursting of the US housing bubble, other economies around the world are feeling the effects of their own real-estate booms and busts. From 2000 through 2007, a remarkable run-up in global home prices occurred (see exhibit). But that trend has reversed abruptly. In 2008, the value of US residential real estate fell 10 percent; the global average fared only somewhat better, declining by almost 4%. We estimate that falling home prices erased more than $3.4 trillion of household wealth in 2008. And because home prices are slow to correct, the current slide may persist for some time, which could depress global consumption.

(b) Global Household Leverage, House Prices, and Consumption“, Reuven Glick, and Kevin J. Lansing, Economic Letter of the Federal Reserve Bank of San Francisco, 11 January 2010 — Summary:

Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.

Other studies

(6)  Here is a pre-crash paper. Note that it does not even mention the CRA (blaming the CRA was a post-crash exercise): “The Evolution of the Subprime Mortgage Market“, Souphala Chomsisengphet and Anthony Pennington-Cross, Federal Reserve Bank of St. Louis Review, January/February 2006 — Abstract:

This paper describes subprime lending in the mortgage market and how it has evolved through time. Subprime lending has introduced a substantial amount of risk-based pricing into the mortgage market by creating a myriad of prices and product choices largely determined by borrower credit history (mortgage and rental payments, foreclosures and bankruptcies, and overall credit scores) and down payment requirements. Although subprime lending still differs from prime lending in many ways, much of the growth (at least in the securitized portion of the market) has come in the least-risky (A–) segment of the market. In addition, lenders have imposed prepayment penalties to extend the duration of loans and required larger down payments to lower their credit risk exposure from high-risk loans.

(7) The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis“, Traiger & Hinckley (attorneys), 7 January 2008 — “Indications that the CRA Deterred Irresponsible Lending in the 15 Most Populous U.S. Metropolitan Areas” (PDF, 21 pages).

(8) No, Larry, CRA Didn’t Cause the Sub-Prime Mess“, Ellen Seidman, New American Foundation, 15 April 2008. Seidman headed the Office of Thrift Supervision from 1997 – 2001, and has long experience in this area (bio), and this article has links to additional evidence.

(9)  Another early look at the problem. It does not even mention the CRA, and gives little blame to the GSEs. “Understanding the Securitization of Subprime Mortgage Credit“, Adam B. Ashcraft and Til Schuermann, Staff Report of the Federal Reserve Bank of New York, March 2008 — Abstract:

In this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, we draw upon the example of a mortgage pool securitized by New Century Financial during 2006.

(10)  Remarks by Governor Randall S. Kroszner (Governor of the Federal Reserve System) At the Confronting Concentrated Poverty Policy Forum, 3 December 2008 — Excerpt:

Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. In the remainder of my remarks, I will discuss some of our experiences with the CRA. I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis . . .

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.

(11)  Housing Policy, Subprime Markets and Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don’t Know“, Jason Thomas and Robert Van Order (Prof Finance, George Washington U), Federal Reserve Bank of St Louis, November 2010 — Abstract

We explore the role of housing policy in the collapse of Fannie Mae and Freddie Mac, the role of Fannie and Freddie in subprime markets and the sources of their default losses. We do not find evidence that their crash was due much to government housing policy or that they had an essential role in the development of the subprime mortgage-backed securities market, which occurred outside of the normal mortgage origination channels and which was funded by non agency or “private label” securities (PLS).

They did build a large portfolio of AAA-rated PLS, probably in response to affordable housing goals, but such investments were unlikely to have had much of an impact on subprime mortgage origination volume because the AAA pieces f PLS deals were not the important part of the deals. Rather than brewing for a long time, their downfall was quick and had to do with purchases of risky-but-not-subprime mortgages and insufficient capital to cover the decline in property values.

Other posts about the housing bubble

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. “Idiots Fiddle While Rome Burns” – comforting and facile rhetoric, 24 July 2008
  3. A must-read for every American citizen: “The Fannie Mae Gang”, 25 July 2008
  4. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  5. Knocking down houses in order to save the village, 20 October 2008
  6. Destroying houses in order to boost home prices, 16 December 2008
  7. The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009
  8. Another step to solving the housing crisis: downsize cities by destroying neighborhoods, 2 April 2009
  9. Sparks of justice still live in America – cherish them and perhaps they’ll spread, 11 September 2009 — About foreclosures.
  10. Who should we blame for the mortgage crisis?, 16 January 2010
  11. Cutting through the fog to clearly understand the housing crisis, 8 July 2010
  12. Housing Update – dynamite to blast us out of our lethargy?, 27 July 2010
  13. Here’s an opportunity for the Tea Party: fighting foreclosure fraud by banks!, 22 September 2010
  14. A briefing about the foreclosure fraud crisis: its origin and impacts, 14 October 2010
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29 Comments leave one →
  1. 15 November 2011 12:21 am

    Absolutely great review of the analysis. We will want to repost this in the not too distant future.

    Like

    • jonh permalink
      15 November 2011 12:28 am

      Agreed. Great post.

      Like

  2. Marvin permalink
    15 November 2011 12:49 am

    I’m reading the book “Guaranteed to FAIL : Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance” by Acharaya et al. (c) 2011 by Princeton Univ Press.

    The book goes into great detail in the FNM, FRE time-out after accounting irregularities that sidelined these agencies until approx 2006. The restart of FRE and FNM after this time-out had a lot to do with the mortgage crisis.

    In a nutshell, securities issued by FNM and FRE needed far less capital to hold on their books by investment banks because of accounting rules enshrined by law. The agencies became involved in a “race to the bottom” of credit quality with the investment banks that eventually failed. The authors say that a lot of the debt was not sold on to “pension plans in Norway” but stayed on the books due to far-to-lenient captitalization rules. The agency/investment bank system apparently choked on on its own toxic products when the housing bubble burst.

    Its complex… but its hard not to lay the mortgage finance mess a the feet of those that profited by it: the securitizers of MBS/CDO’s, the complicit rating agencies, and the regulators themselves. The regulators were not disinterested bystanders – they were part and parcel of the industry “in” group.

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    • 15 November 2011 2:09 am

      That’s a great book. Thank you for mentioning it. It is available for FREE download from the Fed website.

      Here is an interview with the authors.

      Who caused the housing bubble?

      It was a systemic failure, and like most such (the Titanic being my favorite example) it required multiple failures — that allowed the system to fail.

      After the long post-WWII run in housing prices the entire system was rotten. Appraisals were corrupt, as mortgage lenders sent business only to cooperative appraisers. Many of the post-Depression reforms (eg, strong restrictions on interest-only loans, high downpayment requirements) were abandoned. Regulators were owned by the industry, as was Congress.

      It ran like organized crime in New York CIty. Everybody got a taste. Everyone was in on the scam. Like long large scams, many participants forgot it was a scam (the reason con men often fail to run in time).

      How to prevent these failures? This is part of the larger question of preventing regulatory capture. When government is for sale, nothing is safe or reliable — as commerce will run wild in a destructive way (as it did in post-Civil War America, crushing the small farmer and business classes). I’ve seen no solutions.

      Like

  3. whirlwind21 permalink
    15 November 2011 2:01 am

    They still want more bailouts it seems.

    Like

  4. Greg Connolly permalink
    15 November 2011 6:22 am

    “Its complex… but its hard not to lay the mortgage finance mess a the feet of those that profited by it: the securitizers of MBS/CDO’s, the complicit rating agencies, and the regulators themselves.”

    It really is all that simple. It is only “complex” in regards to CDOs (backed up by CDS’s); and it was designed that way. The securitizers were making such great profits (in the immediate term and were compensated immediately for 30 year Loans?) AND many financial entities were so typically chasing high yields that the demand for MORE Securitized Loans was the driving force behind the Originations.

    Think about it. There were NOT enough Loans to satisfy the demand by the Purchasers of the Securitized Packages so the Investment Securitizers created these simply unsustainable Loan Products. Unregulated Bankers run amok. Thanks is all due to these Gents!

    Like

    • 15 November 2011 6:37 am

      You see it as simple because you ignore the many other participants. The appraisers. The mortgage originators — banks and brokers. The mortgage insurers. The rating agencies. The government-sponsored agencies. The consultants advising the investors. Wall Street’s equity and fixed income research staff. The builders who ignored the many warning signs of massive excess capacity in housing. The regulators (many of them), both public and ngo (eg, profiessional societies). And our elected representatives, who ignored the many warnings — glutted with campaign contributions from the housing and finance industries.

      And the general public, most of whom were enjoying the profits of rising home prices — and so were at least passive participants.

      Like

  5. Greg Connolly permalink
    15 November 2011 6:58 am

    No. I do not ignore any of them….why type out a Masters Thesis ? They are inextricably involved and connected by the process itself, by definition. If you understand Mortgages but then. No need to state the obvious. Bit players are always a part of the Play.

    However, to use a metaphysical simile, there is a First Cause. Now some may wish to push all such pieces into a corner but Regulations try to subvert such tricks. And some Judges have noted this.

    Like

    • 15 November 2011 7:37 am

      I believe that the housing bubble and bust was NOT a simple story, but a complex and interlocking series of failures. There was no “first cause” in either the Aristotlean (unmoved mover of events), telological (caused to occur, as destiny), or modern legal sense. Probably not even in a chronological sense (eg, the chicken or egg problem).

      Attempts to create public policy by use of metaphors or poetry are IMO one reason our governmental systems are experiencing so many failures. A moral basis is necessary for laws, but also is an understanding of the systems involved.

      Like

  6. Marvin permalink
    15 November 2011 8:03 am

    There are two other as-yet unmentioned precursors to the mortgage bubble mess:

    1. The warnings in 2006 of the FBI about fraud by captive appraisers and the loan origination process itself. These warnings were ignored by the DOJ. Source: Mortgage Fraud Report 2006, FBI

    2. Federal courts took away the state regulatory functions that would have prosecuted fraud in the inducement of some of the most egregious predatory loans. The federal regulatory agencies took no action. I can only presume that its easy to perform regulatory capture on one central agency than 50 individual state agencies.

    For links see STUDY: Federal Pre-emption of State Anti-Predatory Lending Laws Led to More Mortgage Defaults, Barry Ritholtz, 7 October 2009.

    Like

  7. 15 November 2011 11:41 am

    IMO The cause of the housing bubble is/was a simple matter of supply and demand, but this explanation is largely rejected in economic forums.

    The housing bubble was caused by population growth — a fairly simple supply/demand problem. The excess in population growth did not come from births, as citizens tend to instinctvely know how many children they can support. An immigration-boom, larger than the babyboom, has occurred over the last several decades. This was no accident, Greenspan’s more recent statements, allude to decades old policy of using immigration demand to inflate housing values and use immigrants as a price-control on wages.

    The (immigrant) population growth causes inflation in rental markets, very few migrants live and work in the fields, citizens were encouraged to fix their housing costs by purchasing a home, subsidized with tax exemptions. Wages on the other hand, have not kept up with inflation, equity borrowing basically sustained the economy for the late 1990 and early 2000s. Policy makers were not unaware of wage-equity borrowing situation and were naturally compelled/pressured to support banking degregulation (repeal of Glass Steagall primarily).

    For the portion of the labor force that could command cost of living increases, of which inflated housing costs are the largest burden, salary requirements are now beyond globally competitive levels. Offshore outsourcing and temporary business immigration programs have sprung up to attempt to control these wages. So the labor arbitrage is climbing the social ladder.

    I have found a few written statements supporting the Greenspan growth policy (immigrant/housing) thesis, but the proof is in the pudding. The Comprehensive Immigration Reform (CIR) legislation’s failure resulted in the investor class pulling their support for the MBS vehicle. In addition to amnesty, the CIR was written to double permanent immigration levels and double guest-worker programs, this was the “growth” stimulus that investors knew was required to maintain property valuation. I recall it only took around a month before the economic-shock of the CIR rejection hit the stock-markets.

    There appears to be a point of diminishing return concerning the benefits of immigration. When I compared the Great Depression and the Great Recession, in terms of foreign born employed in the labor force, it appears that the saturation point is about 15%. (Both periods are the only time in Census data where homeownership rates have significantly declined.)

    I’ve done a state by state ranking, that indicates that fiscally responsible states have lower percentages of foreign born in the labor force.

    ====================================
    How much immigration is too much immigration?

    “He [David Ricardo] posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.” (Wikipedia: Economics)

    http://immigration-weaver.blogspot.com/2010/06/how-much-immigration-is-too-much.html

    ====================================

    Like

    • 15 November 2011 12:20 pm

      On Wages:

      The minimum wage in 1964 was $1.25 per hour. No matter how you feel about minimum wage laws, we have a record of the customary wage of the day. (I’m told that journeyman construction workers earned $20.00 per day or $2.50 per hour.)

      If we look at the silver melt value of five 1964 silver quarters, the comparable minimum wage today would be about $30.00 per hour. However, with the devaluation of the USD in this market, silver may be an unfair comparison. If we look at the purchasing power in terms of gasoline (a little over 4 gallons per work-hour in 1964), today’s minimum wage would be about $15.00 per hour.

      According to the 2007 Census, the 1960s and 1970s had the lowest rate of foreign born in the labor force for the entire Century — 5.9 and 5.2 percent respectively.

      Fiat currency may or may not have a hand in the decline in the value of work, but the major contributor comes from “shocking” the economic equalibrium with immigration.

      Like

  8. 15 November 2011 1:18 pm

    It would appear that the core strategy is Nixonian and goes back to 1968… the one thing ridiculous statements about Obama’s religion and origin have in common with turgid oversimplifications about the CRA and Congress being to blame for the housing people… is that it’s all about race. Sad to say but quite obvious. Clearly though, the major errors and profits from the housing bubble all can be laid at the feet of Caucasians. As if it matters at this point, given we all have to live with just about whatever loony thing anyone can get away with. The systems are too complex, overall, in every domain, and thus inherently unstable, and until we simplify, that’s how life is going to be on a given day… your pension or IRA worth 3% less due to what the Slovakian legislature votes on, or depending on the outcome of a meeting in Greece.

    Absurd.

    Like

  9. A Global View of the Housing Bubble shows little role for the government permalink
    16 November 2011 1:35 am

    The global nature of the housing bubble shows little role for US-specific factors, such as the Community Reinvestment Act and the government-sponsored enterprises: “A Global View of the Housing Bubble“, McKinsie Quarterly, October 2009

    Although the current crisis started with the bursting of the US housing bubble, other economies around the world are feeling the effects of their own real-estate booms and busts. From 2000 through 2007, a remarkable run-up in global home prices occurred (see exhibit). But that trend has reversed abruptly. In 2008, the value of US residential real estate fell 10 percent; the global average fared only somewhat better, declining by almost 4%. We estimate that falling home prices erased more than $3.4 trillion of household wealth in 2008. And because home prices are slow to correct, the current slide may persist for some time, which could depress global consumption.

    McKinsey Global house prices

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  10. nikon permalink
    16 November 2011 4:09 am

    The government certainly was also complicit

    “The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
    - Paul Krugman in 2002

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    • 16 November 2011 4:58 am

      You have been reading conservative myth-makers. Rather than Krugman telling us what McCulley said that Greenspan said, let’s let them speak for themselves:

      The Krugman quote is from “Dubya’s Double Dip?“, New York Times, 2 August 2001. He is citing Paul McCulley: “Show A Little Passion, Baby“, July 2001:

      The average American also owns a home. In fact, the home ownership rate in America is at a record high 68%. And while most of those homes are levered, there is room to lever them even more, from both a balance sheet and an income statement perspective, as shown in Figure 4. Most important, perhaps, valuation of homes – the price of a home divided by the shelter services that it provides – is secularly cheap, as shown in Figure 1 on the cover. There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so …

      He quotes Greenspan in a latter article” “Getting Traction In Your Vision“, August 2001. Let’s let Greenspan speak for himself. From the Q&A to his testimony before the Sebate Committee on Banking, Housing, and Urban Affairs, 24 July 2001.

      I think one of the things that’s occurring in this country is the evolution of housing into a very sophisticated, complex industry, in the sense that we not only have got standard home building aspects of homeownership-related activities, but we’re also beginning to find that as homeownership rises and as the market value of homes continues to rise, even in a period when stock prices are falling, we’re observing a rather remarkable employment of that so-called home equity wealth in all sorts of household decisions.

      … I think one of the things that’s occurring in this country is the evolution of housing into a very sophisticated, complex industry, in the sense that we not only have got standard home building aspects of homeownership-related activities, but we’re also beginning to find that as homeownership rises and as the market value of homes continues to rise, even in a period when stock prices are falling, we’re observing a rather remarkable employment of that so-called home equity wealth in all sorts of household decisions.

      That’s the entire quote. No mention of creating a housing bubble. Not a strong basis for the dozens of conservative articles generating fantasy from these few words. Nothing in Greenspan’s policies did as much damage as our credulity and gullibility.

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  11. 19 November 2011 4:04 am

    The mortgage industry has become quite complicated, but the housing bubble was basic supply and demand. The MBOs and derrivatives are basically re-insurance techniques gone mad.

    Rental Housing growth compared to growth in the labor force.1993 through 2007 (source)

    1. Growth Rental Housing (Occupied Plus Vacant for rent) = 1,002,000
    2. BLS Growth Civ NonInstitutionalized Labor Force (16 and over) = 39,372,000

    Effectively, we’ve attempted to put 39 people (new entrant in the workforce) into each new rental unit added to the inventory. The “growth” policy was a signal to the market that homeownership was to be subsidized and the industry complied with urban sprawl and creative financing. When the currency isn’t backed by gold, silver or some other tradable commodity, the currency is then backed by the land. (Basically, Greece is currently being reposed.)

    A couple pre-recession quotes

    “Fankly, the study hypothetical dealing with the relationship of both increasing immigration from 1 million to 2 million (per year) and entitlement costs, must be revisited with offsetting economics from both homeownership from new and existing immigrant family members, and increased subprime homeownership.
    — Professor Richard Ivar Rydstrom, Esq.

    STATEMENT BY Greenspan FOR THE RECORD BEFORE THE House Ways and Means Committee, Chairman Charles B. Rangel
    Hearing on Economic Challenges Facing Middle Class Families (source):

    One thing the country could do to improve things speaking to recession] is to allow more immigration of skilled workers… “Significantly opening up immigration to skilled workers solves two problems,” he said. The companies could hire the educated workers they need. And those workers would compete with high-income people, driving more income equality, he said.

    Greenspan’s problem with high skill immigration is that it would target employed high-skill Americans who are already servicing mortgages. Even STEM occupational levels have declined by a couple hundred thousand in 2009-2010. So bringing in business migrants under a “must be employed” condition will only cause more foreclosures.

    Finally, I read an interesting statistic at RealtyTrac, only 50% of homeowners have a First mortgage. There is a lot of equity out there that the Central Banks still covet.

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    • 19 November 2011 4:51 am

      (1) “but the housing bubble was basic supply and demand.”

      Yes. Now it’s a commonplace observation, but it has taken even experts an astonishingly long time to realize that. In September 2008 I wrote “The core of the housing crisis is overbuilding, which has created an excess supply of housing units (broadly defined).” It was greeted with astonishment and outrage.

      But I don’t understand the rest of your comment. Almost each line looks odd. Here are a few highpoints.

      (2) “Rental Housing growth compared to growth in the labor force.1993 through 2007″

      Why look only at rental units? Only aprox 1/3 of housing units are rentals. And the housing bubble was mostly a single-family home problem, not multi-units (which are under-supplied today).

      (3) “The ‘growth’ policy was a signal to the market that homeownership was to be subsidized and the industry complied with urban sprawl and creative financing.”

      Do you have any evidence for this? Some evidence of this “signal”?

      (4) “When the currency isn’t backed by gold, silver or some other tradable commodity, the currency is then backed by the land”

      Really bizarre. The nature of a trading medium is complex to define or explain. On the most simple level, the US currency is backed by the US governments — its legitimacy and authority (eg, to tax, to enact laws). On a broader level, the US currency is backed by the human and material resources of the American people, working together. In no sense is the land — either that owned by the government or its individual citizens — the most significant factor.

      (5) The two quotes provided don’t link to any specific policies, let alone policies related to housing. Two relevant facts:

      1. Open borders and high immigration are long-standing bipartisan policies, long predating the housing bubble.
      2. As Chairman of the Federal Reserve, Greenspan had relatively little influence on the housing bubble — and none on immigration policy or enforcement.

      (6) “There is a lot of equity out there that the Central Banks still covet.”

      Too bizarre to comment on. Do you have any evidence for such an odd statement

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  12. 20 November 2011 11:15 pm

    I think you will find that the almost no fractional reserve “Federal Reserve” system and its manipulation of the cost of money in the form of very low interest rates provides ample explanation to support the whole edifice. (Most people see this as govt.)

    Certainly the Freddies and Fannies created a moral hazard for lending standards. (Most see this as govt.)

    Another issue is related to Elizabeth Warrens research on the middle class–basically if one of the two earners encounters unemployment, then the family unit is economically unviable. (Result of economic policies that are largely governed by the federal govt.–such as insourcing and outsourcing.)

    Of course the Community Reinvestment Act meme is just code terminology for thinly veiled racism. But then again the Limbaugh’s of the world need a demon to attack. I refer to him as “Hutu radio.”

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    • 20 November 2011 11:52 pm

      (1) “Certainly the Freddies and Fannies created a moral hazard for lending standards.”

      I have found statements starting with “certainly” to be unreliable, esp when unsupported with evidence.

      (2) “no fractional reserve “Federal Reserve” system and its manipulation of the cost of money in the form of very low interest rates provides ample explanation to support the whole edifice”

      No it doesn’t.

      1. Many nations had aggressive fractional reserve banking systems with no housing bubble.
      2. Many nations have had aggressive fractional reserve banking systems for a long time without a housing bubble. It’s occurence does not mean the long-standing banking regime is the cause.
      3. The housing bubble was a multinational event, ocurring under a wide range of regulatory and monetary regimes.
      4. Banking crisis dynamics are well-understood, largely resulting from poor regulation.

      (3) “Another issue is related to Elizabeth Warrens research on the middle class–basically if one of the two earners encounters unemployment {then high odds of bankruptcy}”

      Agreed. Some of the best research about this was done by the Levy Institute, such as Asset Poverty in the United States, Asena Caner and Edward N. Wolff, April 2004. It showed that roughly 40% of US households are 3 months or less from bankruptcy.

      But the cause is not government policy. It results from too-high spending. The resulting high debts and low savings mean they cannot withstand even brief periods of unemployment. Outsourcing and such increase the ODDs of unemployment — not the results of unemployment.

      Like

  13. 22 November 2011 8:31 am

    I guess you expect to write a research paper for a few points . . . but you provide little data to back up your views. You refer to CRA in the article. Sure CRA is a minor point in the Bubble/Crash but Govt involvement is not limited to the question of CRA impact. However, to say CRA is not the culprit therefore Govt in not the culprit is not logical. Govt is everywhere in the housing economy. Still even Govt alone is not the sole factor in the bubble/collapse. There was not only one irreducable/reductive cause of the bubble/bust. However, one could argue that Govt broadly construed is the largest component.

    1) Moral hazards/eat your own dogfood:
    The GSEs bought “conforming” on its face loans that a banker from the 1950s would NEVER had made. (Because they would have been fired if found out and there would have been an investigation.) Lenders are there to assess the ability of the individual to repay a loan–they stopped doing that effectively. Why? Because lenders would not keep these on the books they did not care what happened. In addition the end result is that the FED and the GSEs are supporting the whole house of cards mortgage/housing valuations this very minute. QED.

    2) “Banking crisis dynamics are well-understood, largely resulting from poor regulation.” Meaning?

    The FED SYSTEM
    a) speculative bubbles are generally the result of credit and leverage
    b) low interest rates in the form of “lower” mortgage payments is a form of consumer leverage

    If the Fed was running positive real fed funds rates 4-5% over a real inflation rate then this bubble (if any) in the US would have been very muted. The populace could quite simply not have afforded to drive prices up so far.

    3) “But the cause is not government policy.” Very incorrect. Plenty of govt policy from local to federal. Everything from zoning and how GSE mortgages must “conform” to insurance and taxes to transportation funding. I serve on Town and County planning commissions–I see it up close and in action.

    “Outsourcing and [insourcing: legal and illegal immigration] such increase the ODDs of unemployment — not the results of unemployment.” Yes and increases wage stagnation, wage base destruction, economic marginalization due to lack of benefits and employment security.

    Like

    • 22 November 2011 2:33 pm

      I cite some of a large body of research. You make large assertions. The two sides are not equivalent. I suggest reading the research and responding to their conclusions.

      Also, many of your assertions are just making stuff up, and not worth rebuttal. Some are obviously false: “speculative bubbles are generally the result of credit and leverage”

      Investment and malinvestment bubbles are inherent aspects of free market systems. They occurred under 19th century gold-based monetary systems. They happen with or without credit. For an excellent introduction to the history of bubbles see “Charles Mackay’s own extraordinary popular delusions and the Railway Mania“, Andrew Odlyzko (U MI), 14 September 2011.

      Some are weird: “If the Fed was running positive real fed funds rates 4-5% over a real inflation rate then this bubble (if any) in the US would have been very muted”

      How would the US economy have performed with such high rates? Also, the US dollar was (and is) too strong — as shown by our trade deficit. Such high rates would have strengthened the dollar, making our exports even less competitive.

      Like

    • 22 November 2011 6:56 pm

      About raising interest rates to prevent the housing bubble

      I suspect the real purpose to blaming Fed monetary policy for the hosing bubble is to distract attention from the near-total regulatory capture of the bank regulatory machinery by banks. Which the Republicans wish to continue (oddly enough, this may be one of the major effects of the Tea Party movement, which began in opposition to bank bailouts).

      As for interest rates — The Taylor Rule, a fairly conservative guideline, suggests the Fed Fund rate should have been increased to 5% (not 7-8%, as the above comment appear to recommend) during 2002-2005. The Fed in fact did so, but during the 2004-2006 period.

      Of course, hindsight is a wonderful thing. Perhaps they should have raised rates sooner. But we have regulatory mechanisms so that mistakes in moetary policy (which are inevitable) will not result in disasterous lending bubbles.

      Like

  14. lee kane permalink
    23 November 2011 1:42 pm

    Here is a pretty good rebuttal to your post on Econobrowswer: “Did Fannie and Freddie cause the mortgage crisis?“, James Hamilton, 15 July 2008.

    Essentially, limiting the scope of your inquiry regarding the role of GSE’s (Fannie and Freddie) in the subprime debacle to specific aspects of the CRA allows you to claim the government did not play a key role in the subprime mess. Obviously, an absurd claim, since the government is involved at every level of the mortgage market as both (indirect) underwriter and regulator.

    Just to put it another way, readers should not be deceived by your (rather silly) bait-and-switch rhetorical technique in which you start off saying “the government” played no role in the mortgage market. But then your entire case rests on disproving the involvement of “Fannie and Freddie” (rather than the wider range of government activity) and then, in fact, you zero in on only one aspect of even Fannie and Freddie activity (CRA loans).

    I’d add that any article that starts off with how deceptive conservatives are instead of an honest attempt to investigate is probably doomed from the start.

    Like

    • 23 November 2011 2:33 pm

      Thank you for your contribution, which demonstrates my point about the reasoning that has become so common among conservatives (Buckley must be rolling in his grave).

      (1) “in which you start off saying “the government” played no role in the mortgage market. ”

      I say no such thing. In fact, the post doesn’t state my view, but rather quotes the conclusions of a wide range of experts and inquiry boards. Do you see the difference?

      In any case, it’s a daft statement — a fine example of the “making stuff up” form of reasoning. These reports repeatedly mention that the capture of the government requlatory agencies by the banks played a LARGE role in the bubble. However obvious, this is useless information to conservatives — as it does nothing for their bank supporters — and so is ignored in favor of baseless allegations about the CRA, and exaggerations about the role of the GSEs.

      (2) Read the end of the July 2008 article by economist James Hamilton, which you cite as a rebuttal:

      For my part, I have two questions for those who take the position that the GSEs played no significant role in causing our current mortgage problems. First, what economic justification is there for the dramatic increase in the share of loans guaranteed or held by the GSEs between 1980 and 2003 that is seen in the first graph presented above? What sense did it make to increase the ratio of such loans to GDP by a factor of 12 over this period?

      He gives no rebuttal to anything in this post. Instead he asks excellent questions. In the three years since then research has answered his questions. If you read the reports cited here (which you obviously have not) you will learn something.

      Like

  15. 23 November 2011 3:24 pm

    I believe we have an answer to the question posted in the title of this post. Why don’t people believe the studies? Because they do not read the studies. Fox News and other conservative organs have told them the truth. They refuse to read contrary information, no matter how authorative the source.

    This has become a serious problem for America. God only knows how this will work out for us.

    Like

  16. NYT: The Big Lie about the housing bubble, chapter XCV permalink
    24 December 2011 6:23 pm

    The Big Lie“, Joe Nocera, op-ed in the New York Times, 23 December 2011 — Opening:

    So this is how the Big Lie works.

    You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.

    You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

    Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.

    Allies? Start with Congressional Republicans, who have vowed to eliminate Fannie and Freddie — because, after all, they caused the crisis! Throw in The Wall Street Journal’s editorial page, which, on Wednesday, published one of Wallison’s many articles repeating the Big Lie. It was followed on Thursday by an editorial in The Journal making essentially the same point. Repetition is all-important to spreading a Big Lie.

    In Wallison’s article, he claimed that the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives last week prove him right. This is another favorite tactic: He takes a victory lap whenever events cast Fannie and Freddie in a bad light. Rarely, however, has his intellectual dishonesty been on such vivid display. In fact, what the S.E.C.’s allegations show is that the Big Lie is, well, a lie.

    Central to Wallison’s argument is that the government’s effort to encourage homeownership among low- and moderate-income Americans is what led to the crisis. Fannie and Freddie, which were required by law to meet certain “affordable housing mandates,” were the primary instruments of that government policy; their need to meet those mandates, says Wallison, is what caused them to dive so heavily into those “risky” mortgages. And because they were powerful forces in the housing market, their entry into subprime dragged along the rest of the mortgage industry.

    But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.

    Like

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