Reviewing the financial crisis
Economist, Arnold Kling, looks at the causes of the financial crisis at the Hoover Institution's Policy Review:
"Some pundits wish to blame the financial crisis on a “general atmosphere of deregulation” and “free-market ideology.”But they usually avoid citing specific policies.The fact is that securitization, house price inflation, and the lack of understanding of risk-taking on the part of executives were little influenced by specific relaxation of financial regulation. The most powerful regulatory impetus — the anomaly in risk-based capital standards — was subtle and cannot be attributed to any particular regulatory ideology.
Another narrative is that the Community Reinvestment Act and the promotion of lending to racial minorities and borrowers with bad credit histories was a critical factor. But it was the nature of the mortgage loans — in particular,the relaxation of requirements concerning making a significant down payment — that caused the housing cycle to get out of control. The problem with the loans made in 2003–07"was not the color of the borrower’s skin or the content of his credit report. It was the fact that public policy so heavily favored mortgage indebtedness and, hence, housing speculation rather than true home ownership. Had the subsidies and mandates instead been geared toward encouraging new home buyers to save for down payments, the impact would have been less destabilizing and better for all concerned.
Read the rest here.
"Some pundits wish to blame the financial crisis on a “general atmosphere of deregulation” and “free-market ideology.”But they usually avoid citing specific policies.The fact is that securitization, house price inflation, and the lack of understanding of risk-taking on the part of executives were little influenced by specific relaxation of financial regulation. The most powerful regulatory impetus — the anomaly in risk-based capital standards — was subtle and cannot be attributed to any particular regulatory ideology.
Another narrative is that the Community Reinvestment Act and the promotion of lending to racial minorities and borrowers with bad credit histories was a critical factor. But it was the nature of the mortgage loans — in particular,the relaxation of requirements concerning making a significant down payment — that caused the housing cycle to get out of control. The problem with the loans made in 2003–07"was not the color of the borrower’s skin or the content of his credit report. It was the fact that public policy so heavily favored mortgage indebtedness and, hence, housing speculation rather than true home ownership. Had the subsidies and mandates instead been geared toward encouraging new home buyers to save for down payments, the impact would have been less destabilizing and better for all concerned.
Read the rest here.
Not to long ago I was delivering locally made trusses for houses. They were made by Americans with precision equipment and decent lumber. The business was booming.
Then, they fired all of the American workers(who were not highly paid) and hired immigrant workers. The trusses would sometimes fall apart as they were rolled off the trucks, but the newly hired immigrant construction workers would rig them back together.
The shoddy trusses were making $300,000 houses that were being sold to people making $75k on combined household incomes. The people buying the houses were working at places I considered loose footing. They were being built right next to recently foreclosed homes.
The housing market stops dead in it's tracks. So I start hauling steel and aluminum for foreign owned companies. I can see that my company is hauling these at a loss, so I bail.
I take a job making credit card offer mailings going to people who are already over their head in debt. The government brings that job to a halt.
The point of all that job history is that I hear these pundits and all of the grand knowledge of the economy and I think they need to venture out of their office and head out to get their penny loafers dirty.
If a truck driver known to write huge run-on sentences can take a look at illegal workers, making over-priced shoddy houses, to sell to people that can't afford the loan from their shaky jobs in the "service" sector or selling goods made from foreign owned raw material producers that people are buying on over-extended credit that charges interest rates that would make a Trenton, NJ Loan Shark blush, and think, "Wow, we're all in BIG trouble! We better let all of this fail and start over with some common sense.", why can't these elitist think the same thing? What's the point in arguing who is at fault? Are there any politicians on any side that are innocent? Ron Paul is the only one I can think of that will acknowledge the insanity of it all, and it's not a stretch to believe that he himself is insane.
The Community Reinvestment Act is a prime example of the problem. In the end, we will have created some of the finest looking slums in the world.
I was instructed in the 10th grade that to buy a house, one should have 20% down and the house price for a 30 year loan should roughly equal their yearly salary. I understood it and remember it to this day. Why can't an economist from Harvard figure out that 0 down on a house that cost 4 times your yearly salary and a payment which balloons to more than 100% of your monthly salary
is bad?
The housing market is just the most glaring economic failure. We have a strong push to service economy when we are running out of customers who need any services as they are unemployed.
The only answers our leaders are coming up with are to spend more that we don't have and call it a savings.
I think I'll just go listen to an economist on TV inform me that a recovery is just around the corner.
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