Further evidence in favor of the multiverse theory

Radio telescopes recently picked up this conversation, which seems to have come through a wormhole from a universe very much like our own:

What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

And then there was this reply:

Your mistake is to assume the monetary authorities will sabotage the fiscal stimulus, by failing to accommodate it with faster inflation.  The fiscal stimulus will boost Japan’s inflation from 0% to 2%, and the BOJ will take over from there.  What makes you think that the monetary policymakers will fail to sustain the faster growth in demand, once the fiscal stimulus has run its course?

And now I have an admission to make.  The first message wasn’t actually from another universe, unless you consider Paul Krugman’s writings from 1999 to now be part of some alternative universe, produced by a quantum fluctuation in a Higgs energy field.

And the second passage is my pathetic attempt to imitate the views of my critics.

By the way, here’s Wikipedia on multiverses:

Tegmark argues that a level III multiverse does not contain more possibilities in the Hubble volume than a level I-II multiverse. In effect, all the different “worlds” created by “splits” in a level III multiverse with the same physical constants can be found in some Hubble volume in a level I multiverse. Tegmark writes that “The only difference between Level I and Level III is where your doppelgängers reside. In Level I they live elsewhere in good old three-dimensional space. In Level III they live on another quantum branch in infinite-dimensional Hilbert space.” Similarly, all level II bubble universes with different physical constants can in effect be found as “worlds” created by “splits” at the moment of spontaneous symmetry breaking in a level III multiverse.

I love how scientists can tell us that ”nothing matters at all” in such technical language (“another quantum branch of infinite-dimensional Hilbert spaces.”)  Don’t ya just hate it when everything happens?

And people think my zero fiscal multiplier is far-fetched.  Multiverse theory implies that in another universe there is still a neoliberal Paul Krugman out there bashing fiscal stimulus, and a lonely blogger from the “University of Bentleys” vainly trying to resurrect Keynesian theory during a long dark age of new classical dogma.  Krugman fancies the Foundation Trilogy, but Asimov had nothing on our modern scientists.  As the post-modernists like to say; who needs science fiction when all of science is just storytelling?

A Merry Christmas to my readers as they veer off onto their nice and cozy alternative quantum branches.

PS.  I don’t plan on blogging for a few days.


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67 Responses to “Further evidence in favor of the multiverse theory”

  1. Gravatar of William Luther William Luther
    24. December 2011 at 22:03

    Merry Christmas, Scott. And thanks for another year of blogging!

  2. Gravatar of Josiah Neeley Josiah Neeley
    25. December 2011 at 07:43

    If the multiverse theory is correct, then utilitarianism would have to be abandoned, since it would be literally impossible to either increase or decrease utility; all you could do is shift it around.

    And with that happy thought, I wish you a merry Christmas.

  3. Gravatar of ssumner ssumner
    25. December 2011 at 08:14

    Thanks William.

    Josiah, If the multiverse is true, then utilitarianism cannot be abandoned, just shifted around.

  4. Gravatar of Benjamin Cole Benjamin Cole
    25. December 2011 at 09:20

    A top of the holidays to Scott Sumner and all my fellow Market Monetarists!

    Next year is ours!

    The need for Market Monetarism has become redundantly obvious, from Japan to Europe to the USA. If anybody believes tight money works, a cursory review of Japan should give them white hair—-of course, you do have to undertake a cursory review.

    The arguments against Market Monetarism increasingly appear feeble, shrill, peevish or partisan (through Market Monetarism is apolitical, it is mistakenly assumed by some to be government activism, and therefore “bad”).

    I call on Market Monetarists to be active, to contact officials, to write letters to the editors, to keep blogging. Yes, these are small and dull tools we have—but a year ago, Market Monetarism was all but invisible. Today we own the Internet and beginning to own the print world.

    Next year we must begin to own the policy world. The Fed must be ours!

    The inanity of not going the Market Monetarism route is expressed in Sumner’s brief review of Japan in this very post (yet another excellent post, btw).

    Do the USA and Europe want to go the way of Japan? Industrial production is down 20 percent in Japan since 1995, and stock and property markets are off 80 percent, and they have enormous federal debts (although they owe themselves).

    The reason for macroeconomic policy is not to fight inflation, preserve bondholders, or reward partisan supporters. The reason for macroeconomic policy is sustained prosperity. That’s it!

    And a prosperous New Year to all in Scott Sumner-land!

  5. Gravatar of William A. Barnett William A. Barnett
    25. December 2011 at 11:56

    I think this will interest you:

    http://www.centerforfinancialstability.org/amfm.php

    Especially see the figures and data on the new Divisia M4.

  6. Gravatar of Lucas Lucas
    25. December 2011 at 14:42

    Merry Christmas, Scott.
    Here’s your Christmas present, courtesy of Paul Krugman:
    ” there is now overwhelming evidence that fiscal policy does in fact work when it’s not offset by monetary policy. And since we’re now in a liquidity trap in which conventional monetary policy has no traction, that’s the world we’re in.” [1]
    In other words, fiscal policy only works when the CB fails to do its job.

    1- http://krugman.blogs.nytimes.com/2011/12/24/fiscal-policy-works/

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. December 2011 at 14:57

    Seasons greetings from the land of the Summer Solstice to the land of the Winter Solstice :)

    I like good alternate history fiction (which is sort-of multiversing): the trouble is, I often find the presumptions highly implausible. I can recommend S.M.Stirling, however.

  8. Gravatar of ssumner ssumner
    26. December 2011 at 08:56

    Thanks Ben, Let’s hope it’s the year of market monetarism.

    Thanks William, It looks to me that M4 excluding T-bills tracks NGDP pretty closely during 2008-09. I’m on vacation now, but will take a closer look when I return.

    Lucas, But if we are in a liquidity trap why does Krugman keep asking for the Fed to do more?

    Thanks Lorenzo. I believe all good history is about counterfactuals (at least by implication.) Otherwise what has the historian actually explained?

  9. Gravatar of StatsGuy StatsGuy
    27. December 2011 at 06:55

    Some alternative worlds already exist in the same world in which we live. Or, at least, alternate histories…

    Via Krugman:

    http://www.nytimes.com/2011/12/24/opinion/nocera-the-big-lie.html?_r=2&hp

    I wonder if, given this, you’d be willing to reconsider your thoughts that government pressure to extend loans to lower-credit-worthy minorities was a significant contributor to the financial crisis?

    SEC hearings are bringing out two primary contributors:

    1) Fraud on the part of senior management which failed to disclose the true riskiness of loan portfolios

    2) The big actors lost market share to private actors using “innovative” free market loan constructs, and then only began extending aggressive loans when they sought to regain share from the likes of WaMu.

  10. Gravatar of StatsGuy StatsGuy
    27. December 2011 at 07:06

    For reference, your earlier take, which was quite tempered and thoughtful, but still leaned a bit towards the RTP (republican talking points) argument:

    http://www.themoneyillusion.com/?p=4041

    So the counter-factual questions: In the alternate universe where F&F were not required to support minority loans, did they still aggressively pursue market share in response to private sector innovation? And if they were fully privatized, would it have made a difference (assuming the lack of banking regulation, banking lobby influence, etc. remained unchanged).

    @ Lorenzo:

    Why bother paying money for revisionist histories when you can read them for free on the front page every day. ? :)

    Right now, after all, hyperinflation is gutting our economy…

  11. Gravatar of Scott Sumner Scott Sumner
    27. December 2011 at 08:10

    Statsguy, You said;

    “I wonder if, given this, you’d be willing to reconsider your thoughts that government pressure to extend loans to lower-credit-worthy minorities was a significant contributor to the financial crisis?”

    Good question, and while you are at it why not ask me when I plan to stop beating my wife?

  12. Gravatar of Scott Sumner Scott Sumner
    27. December 2011 at 08:18

    Statsguy, BTW, Krugman has zero credibility on this issue, as he has an agenda and his past assertions about F&F have been shown to be factually inaccurate. I have always favored abolishing F&F, “privatization” does no good when our Congress is this corrupt. Maybe it would work in Denmark, not here.

    The reason people like Krugman don’t understand what caused the crisis, is that they don’t know what the crisis is. The crisis is bailouts and recession, whereas Krugman thinks it’s the housing bubble. The housing bubble didn’t matter at all. What matters is taxpayer bailouts of the GSEs and FDIC.

    In 2009 a highly Democratic Congress refused to ban subprime mortgages, and now the Obama adminstration is actively promoting subprime lending. The left’s argument that deregulation caused the subprime crisis has become a sick joke. They are in power now and the regulators are encouraging more subprime lending, which will create more subprime crises in the future. So much for the “deregulation” meme. The regulators are just as evil as the banks, and have the power to do much more damage.

  13. Gravatar of Benjamin Cole Benjamin Cole
    27. December 2011 at 09:17

    Reactions?

    By DAVID WESSEL

    President Barack Obama will announce Tuesday that he plans to nominate a Harvard University finance professor and a former private-equity executive to fill the two vacancies on the seven-member Federal Reserve Board, a White House official said.

    The nominees are Jeremy Stein, 51 yeas old, an economist who did a five-month stint in the Treasury and White House in the early months of the Obama administration, and Jerome Powell, 58, who was undersecretary of the Treasury for domestic finance in the early 1990s during the George W. Bush administration.

  14. Gravatar of StatsGuy StatsGuy
    27. December 2011 at 09:43

    “Krugman has zero credibility on this issue, as he has an agenda”

    … everyone has an agenda. Everyone. The academic pretense of arguing “from a neutral point” is a fallacy that has done it no service. Even in the “pure” sciences.

    “The housing bubble didn’t matter at all. What matters is taxpayer bailouts of the GSEs and FDIC.”

    At all? Really? That’s a fairly strong statement. Also, are you saying that the problem was taxpayer bailouts, or the implied promise of bailouts in 2004 which led to the problematic behavior (and, hence, contributed to the bubble)?

    “In 2009 a highly Democratic Congress refused to ban subprime mortgages”

    Banning subprime mortgages in 2009 is sort of closing the barn door after the horses have run free, ain’t it? (Or are you saying that the democrats also wouldn’t have banned subprime mortgages even if they’d had the opportunity in 2004, which is certainly true).

    As to beating your wife…

    http://www.themoneyillusion.com/?p=10030

    I interpreted this as somewhat sympathetic to the GSE story…

    “Instead, it seems to me that both sides of the GSE debate tacitly accept that lax lending standards due to either:

    1. deregulation and moral hazard causing banks to take excessive risks, or

    2. the GSEs and other federal housing rules, regulations, tax breaks, etc.,

    caused a housing price bubble in the mid-2000s. When this bubble collapsed, it created a severe banking crisis, which then led to a severe recession.

    I believe this is mostly wrong. I’ll concede that part of the housing bubble was due to the factors mentioned above (both banks and the GSEs played a big role.)”

    I’m sorry if I misinterpreted this. I had thought your position was nuanced, but still somewhat sympathetic to the GSE-fault story. I was wondering if you were more willing to reject that element of the GSE story as we learn more about the GSE timeline from the SEC hearings?

  15. Gravatar of JimP JimP
    27. December 2011 at 10:30

    An interesting look at U.S. long bond rates.

    http://scottgrannis.blogspot.com/2011/12/bond-yields-are-ignoring-good-economic.html

  16. Gravatar of Morgan Warstler Morgan Warstler
    27. December 2011 at 11:16

    Stats, the argument is that IF there was no assumption of bailout, FDIC, and GSE there wouldn’t have been sub-prime lending to deal with.

    There is nothing wrong with requiring 20% down and forcing banks to sit on their loans rather than selling them off.

    There is nothing wrong with 55% home ownership instead of 64%… in the same vein, we WANT lax land use regs that push housing costs down, we want more renters, we want people to not view home ownership as a short or mid term investment.

  17. Gravatar of Morgan Warstler Morgan Warstler
    27. December 2011 at 11:18

    And can we PLEASE call them DeKrugman

  18. Gravatar of StatsGuy StatsGuy
    27. December 2011 at 14:33

    @Morgan

    “There is nothing wrong with requiring 20% down and forcing banks to sit on their loans rather than selling them off.”

    Isn’t that a pretty heavy handed intervention in the free market?

    One thing I never got about all of the allegations that “it was the government” was that Countrywide (the source of much of the innovation) was selling bonds that were NOT explicitly backed by FDIC. In fact, it was never the $100k and below DEPOSITS in Countrywide (or Lehman) that were the issue. It was the BIG money that bought mortgage secured assets. And no one forced them… no one.

    I think the point that Krugman makes – and which does seem legit – is that it was NOT competition from the GSEs that forced Countrywide to start offering innovative loans (ain’t it funny to see conservatives arguing that a government backed agency was more innovative than the private sector?). Instead, it was innovation from Countrywide that forced the GSEs to offer similar products (and buy securities) to hold onto market share, and it was the poor risk profile of sr. management incentives which caused them to take that decision – something shared across the financial sector.

  19. Gravatar of dwb dwb
    27. December 2011 at 15:06

    There is nothing wrong with requiring 20% down and forcing banks to sit on their loans rather than selling them off.

    i cannot emphasize strongly enough that most banks WERE requiring 20% down to offset the lower credit scores. There are a couple of good papers/studies out there by the Fed that show, for example, pricing sheets (borrower interst rate as a function of down payment and credit score). I’ve linked to some in the past. Some were requiring as much as 50% down for really low credit scores. Loan to value is only ONE metric for a loan and there are many other factors, including affordability (eg mortgage/income and mortage/liquid assets).

    A very sizeable fraction of the market was “no or low documentation.” a good loan-to-value does NOT save the loan if income is grossly overstated, the appraisal is overstated, the borrower becomes unemployed, and/or the home price goes down significantly (60+% in some markets). The case-schiller national index is now down 30%+, which means that even at an 80% LTV for an affordable prime loan with good credit in Jun of 2006, the borrower is very likely underwater now. And if that borrower is now also unemployed, too bad so sad….

    Lending standards were absolutely lax… but the primary issue was the willingness of banks to loan money without doing sufficient due diligence (check income, honest appraisal) – something like 30-40% of the market towards the end. And compounded by extremely high unemployment which pushed a lot of “prime” borrowers over the edge as well. Plus, since the bank had no idea what the TRUE risk of the borrower was, they were not holding enough capital in the end. As the saying goes, we are all subprime now. Fannie ane Freddie guarantee about 45% of the mortage market, which means that once the downturn affected “prime” borrowers, their failure was inevitable.

    would limiting loans to 80% or better LTV have helped? absolutely positively not – this is only one dimension of the credit decision.

    “subprime” has existed in some form or another since time began. “subprime lending” is not, per se, the issue. If a bank lends “subprime” and holds 100% capital against it, it is not going to cause the bank to fail if the borrower defaults. Commercial Real Estate has been boom-bust forever, with lots of “subprime” loan activity, but banks hold a lot more capital against these loans and do a lot more due diligence. LBOs are high risk too, I do not see anyone trying to ban them. The difference is how much capital banks are required to hold.

    If you make a loan with poor (no) documentation you really have NO idea what the appropriate leverage ratio (capital) should be! So dont be surprised when its not enough!

  20. Gravatar of Morgan Warstler Morgan Warstler
    27. December 2011 at 16:05

    Stats,

    No it is not intervention… as Scott is pointing out… FDIC is the turd in the punch bowl.

    Once you have the gvt. essentially giving free marketing cover to banks such that we don’t get smarter depositors who don’t feel TERRIFIED they might lose their money…

    After that, it is about turning banking into a low profit yawner of business with something like Glass-Steagall.

    In fact precisely because of FDIC we ought to be using the system to let thousands of local virtual mutual banks that:

    1. run out of a guys home office.
    2. have his entire book exposed online in real time.
    3. pay the majority of profits back to depositors.
    4. essentially drive the cost of borrowing down, while not increasing the risks taken. If you open a bank and make a couple bad bets, you are done. Ruined. So you get a bunch of terrified extra conservative guys loaning money with very little profit motive, living on $75K a year, and taking all the cost of money loan profit out of it for the big guys. Use FDIC to take down the big banks. Force investors who want real returns out into the risky streets where they belong.

  21. Gravatar of Steve Steve
    27. December 2011 at 18:09

    Time for some serious monetary discussions again:

    Obama to Choose Powell, Stein for Fed Board

    http://www.bloomberg.com/news/2011-12-27/obama-to-nominate-jerome-powell-jeremy-stein-to-fed-s-board-of-governors.html

  22. Gravatar of StatsGuy StatsGuy
    27. December 2011 at 18:21

    “Once you have the gvt. essentially giving free marketing cover to banks such that we don’t get smarter depositors who don’t feel TERRIFIED they might lose their money…”

    Morgan, it’s not about the depositors (it never was), and thus it’s not about FDIC. It’s about the bondholders.

    With Lehman, this was obvious, but even WaMu…

    http://allmandlaw.com/bankruptcy/epic-battle-between-senior-bondholders-and-bankrupt-wamu-continues

    And that means it wasn’t about “regulation”, but raw political influence. FDIC is a red herring, except as part of the resolution mechanism.

    Also, I don’t disagree with you in theory about “one man transparent banks”, although I think you underestimate the difficulty of providing simple account security for a one man organization (let alone the liability concerns).

    I think, however, this is happening anyway to a degree due to the collapsing margins inherent in the ZIRP + global savings glut. As spreads tighten, banks have been trimming staff aggressively as they are being forced to compete on services provided. The anti-competitive concentration arguments in banking don’t seem to hold much water.

    That’s _quite_ a different story when it comes to payment processing (visa, amex, mastercard), particularly when you look at merchant contracts.

  23. Gravatar of StatsGuy StatsGuy
    27. December 2011 at 18:25

    @dwb – I’d love to see those papers.

    Another interesting fact that caught me by surprise was that the official capital/asset ratio for Lehman was actually quite reasonable. The issue was risk-adjustments (bad mathematical models in CDO tranching which assumed that the correlation structure was stable, when the entire structure subsequently shifted to make all the underlying assets less independent) and off-balance sheet vehicles.

  24. Gravatar of dwb dwb
    28. December 2011 at 06:29

    http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1406594

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020396

    banks model and price credit similar to what is done in the third paper. Table 2 of the first paper shows a typical pricing sheet from Countrywide… interest rate as a function of LTV and FICO (in reality, debt/income and other factors play here too). Which is as it should be for risk-based pricing.

    LTV per se was NOT the primary driver of defaults for prime and subprime mortages. that is, the same loan in 2006 , with similar LTV and FICO and other stats as one in 2002, had a much higher propensity to default(and severity given default) and the key driver was home price declines. If you underwrite a 80% LTV loan (prime or not), and home prices decline 30%, 40%, 50%, you are screwed. no matter what. Another key point is that upwards of 40% of the subprime loans were no doc and the overwhelming evidence is that these have much higher default rates (duh). There is no substitute for due diligence!

    The flip side of the coin is that the same models used to price loans are also used for internal capital. So if a model underpredicts the sensitivity of defaults to home price declines and/or underpredicts actual home price declines (most people did not forecast a 30% decline even in a “stress test”) then the model also underpredicts the probability and severity of loss given default, so in general not enough capital is being held.

    Underwriting a bunch of 99% LTV loans and holding them on your balance sheet will NOT cause your bank to fail. What will matter is how much capital you are holding against that loan, and whether your model accurately predicted the severity of default.

    Yes, for most banks the capital ratios were reasonable given the assumptions in their models. Most models were based on “great moderation” data, where the relationships were reasonable, and failed to incorporate a scenario where gdp falls off a cliff. Even in mortage models, the severities were limited to the real estate crash of 90-91 – nothing compared to 2008.

  25. Gravatar of Mike Sax Mike Sax
    28. December 2011 at 08:07

    Morgan I have good news: your very insightful comments have given me a new post. Don’t worry-I plug your website and your guranteed income proposal

    http://diaryofarepublicanhater.blogspot.com/2011/12/sumner-krugman-and-credibility.html

  26. Gravatar of Bonnie Bonnie
    28. December 2011 at 10:47

    @Stats

    Isn’t the FDIC involved in regulation though? I’m pretty sure it had a hand in the adjustment of the recourse rule in 2001-2 that kept reducing the reserve requirements for securities purchased from F&F. It eventually landed at 2%, and so what would happen is financial institutions would write mortgages or buy them from the mom and pop outfits, sell them to F&F to be securitized, then buy some portion of them back, freeing up the reserves to do more of it.

    Here’s a link to one of the change announcements:
    http://www.securitization.net/pdf/mbphugi_102501.pdf

  27. Gravatar of StatsGuy StatsGuy
    28. December 2011 at 11:59

    @dwb – thanks

    @ Bonnie – FDIC does have a hand in regulation, and in resolution authority. I don’t think reserve requirements really are the issue, though. Sweeping programs, which had come into their own right around the turn of the millennium, have made them fairly non-restrictive in most cases. My guess is that a change to F&F reserve ratios was intended to compensate for sweeping practices due to the different natures of their retail practices.

  28. Gravatar of JimP JimP
    28. December 2011 at 12:13

    another Romer column

    http://www.nytimes.com/2011/12/18/business/financial-crises-impact-varies-widely-economic-view.html?partner=rss&emc=rss&wpisrc=nl_wonk

  29. Gravatar of Morgan Warstler Morgan Warstler
    28. December 2011 at 12:23

    The bigger issue is that FDIC and getting bank charters in general is virtually impossible.

    IF there is gong to be FDIC, there should be tens of thousands of start up entrepreneurs getting to exploit it.

  30. Gravatar of Brett Kirkland Brett Kirkland
    28. December 2011 at 12:30

    ahhh yes, TheMoneyIllusion – A slightly off-center perspective on monetary problems and occasionally a look a theoretical science.

  31. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. December 2011 at 14:36

    ‘I think the point that Krugman makes – and which does seem legit – is that it was NOT competition from the GSEs that forced Countrywide to start offering innovative loans ….’

    No, it was mandated by HUD. Their Best Practices Initative of 1993-4. We’ve quoted from banking journals of the day complaining about this.

    However, in a broader sense, it was competition from the GSEs that drove the Countrywides into lending to riskier people. The FMs had a competitive advantage that allowed them to meet their ‘affordable housing’ mandates with lending to the least bad of the new underwritings. That had the effect of driving the non-bank lenders into even more dangerous lending…if they wanted to stay in business.

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. December 2011 at 14:41

    Wallison and Pinto devastate Nocera (and David Min):

    http://american.com/author_search?Creator=Peter%20J.%20Wallison%20and%20Edward%20Pinto

    ———quote———
    To the extent that we have had any success in challenging the conventional narrative about the causes of the crisis, it is because fair-minded people are persuaded by facts, not invective. Our argument is and has been that the financial crisis would not have occurred but for government housing policy implemented principally through Fannie and Freddie and the Department of Housing and Urban Development (HUD). Although there were a number of such policies, the most important were the affordable housing requirements first imposed on Fannie and Freddie in 1992 and expanded and tightened by HUD through 2007.

    Summarized below are the original numbers we relied on, taken from Fannie and Freddie’s own data and from the views of bank regulators—and now supplemented with additional data from the Securities and Exchange Commission’s recent complaints against certain officers of Fannie and Freddie. Of particular interest are Fannie and Freddie’s non-prosecution agreements with the SEC, in which they agree with facts that confirm—and in many cases go beyond—our original research concerning the scope of the GSEs’ subprime and Alt-A exposure. These are facts, and Nocera and others who might wish it otherwise should become familiar with them.
    ————endquote———

  33. Gravatar of StatsGuy StatsGuy
    28. December 2011 at 15:43

    @ Patrick

    “it was competition from the GSEs that drove the Countrywides into lending to riskier people”

    That is a self-defeating argument for a libertarian to make. You are saying that competition _drove_ a private enterprise to engage in behavior that was self-destructive…

    To blame corporate malfeasance on competition is to blame crime on the free market. Enron, too, was “driven” to commit accounting fraud by the competition that resulted from deregulation.

    Why, then, did so many other private banks NOT engage in the same behavior – not just community banks, but the likes of Wells Fargo? Or, even, to some degree JPM?

    The answer lies in incentives – the same incentives that caused the senior mgmt of F&F to lower underwriting standards (in terms of documentation, etc.) in order to regain market share and thus capture bonuses.

  34. Gravatar of StatsGuy StatsGuy
    28. December 2011 at 15:55

    @ Patrick

    Read the AEI piece (no agenda there…).

    They do not address the core point at all – there’s no question F&F were complicit in the scandal. The question is this:

    Was F&F’s behavior forced by legal mandates enacted in 1992 (which, presumably, were suddenly enforced by the Bush administration in 2004-2006 when F&F started accumulating alt-a and subprime loans)?

    OR was F&F’s behavior a result of corporate malfeasance by corrupt and badly incented senior management, who were responding to market share losses due to private sector “innovation”?

    Nocera says the latter. The big “new” claim of the AEI piece is:

    “in its non-prosecution agreement Freddie agreed that as of June 30, 2008, it had $244 billion in subprime loans, comprising 14 percent of its credit guaranty portfolio, rather than the $6 billion it had previously disclosed. Freddie also agreed that it had $541 billion in reduced documentation loans alone, vastly more than the $190 billion in previously disclosed Alt-A loans which Freddie had said included loans with reduced documentation.”

    In essence, they are saying that the senior management of F&F had LIED TO INVESTORS. This is consistent with the F&F management were criminals argument. In fact, the AEI paper supports Nocera’s allegations.

    For the AEI argument to be sound, they need to support their claim that the HUD requirements from 1992 were _suddenly_ tightened in 2004 by the Bush Administration, when F&F started making the bad loans. They do _claim_ the reqs were “tightened through 2007″, but present absolutely no evidence of it in this paper. I skimmed their other stuff, and didn’t see it – perhaps you could be so kind as to show me where they present their evidence?

  35. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. December 2011 at 16:29

    It’s hard to know where to begin Stats Guy. You claim, ‘Was F&F’s behavior forced by legal mandates enacted in 1992 (which, presumably, were suddenly enforced by the Bush administration in 2004-2006 when F&F started accumulating alt-a and subprime loans)?’

    They started accumulating those in 1992 after the GSE Act of that year mandated that they do so. In following years those mandates went from 30% of the FM’s portfolios to over 50%. Prior to 1992 the FMs refused to touch these unconventional mortgages, which is why they were known as sub-prime. (Krugman was only off by 16 years when he claimed in the summer of 2008 that it couldn’t have the FMs, because it was illegal for them to participate in sub-prime mortgages).

    You also say, ‘You are saying that competition _drove_ a private enterprise to engage in behavior that was self-destructive…’

    Again, crazy. What I have pointed out many times is that government mandated certain behavior (thus created incentives) that drove all the lenders to relax underwriting standards. How self-destructive is it to sit idly while no one comes to you seeking a loan?

  36. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. December 2011 at 16:40

    Just to show that I’m a ‘go the extra mile kinda guy’, here’s Ed Pinto’s lengthy analysis;

    http://www.aei.org/papers/economics/financial-services/housing-finance/government-housing-policies-in-the-lead-up-to-the-financial-crisis-a-forensic-study/

    Which is nicely summarized as;

    ‘The major cause of the financial crisis in the U.S. was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky Non-Traditional Mortgages (NTMs). These NTMs began to default en mass beginning in 2006, triggering the collapse of the worldwide market for mortgage backed securities (MBS) and in turn triggering the instability and insolvency of financial institutions that we call the financial crisis. Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of over-leveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.’

    This is the paper to which David Min claimed Pinto was engaging in a radical redefinition of subprime (but, which we now know the SEC agrees with). It’ll take you awhile to read it (and unfortunately it is repetitive) so I’ll probably not being hearing from you soon.

  37. Gravatar of StatsGuy StatsGuy
    28. December 2011 at 17:15

    @ Patrick

    Thanks!

    So they walk through year by year, and from 1992 through 1999 there’s some dense regulatory activitiy (one would expect this – Clinton years and all). We do see a spike in home ownership, but we don’t see the spike in no-doc loans, or the big spike in prices, till 2004. For 2001-2006, they don’t observe serious regulatory action.

    “2001-A:
    National median home price to median income ratio breaks out of narrow range of 2.9 to 3.1 (1988 to 2000) as it increases to 3.4, eventually increasing to 4.6 by 2006. (See Chart 9)
    2001-2003:
    The increases in the GSEs‘ affordable housing goals announced by HUD in late 2000 take effect in 2001. While the moderate-income component had a modest increase from 28% in 2000 to 30% in 2001, the low- and very low-income component increased dramatically from 14% to 20%. This change is magnified by the start of a refinance boom in 2001 due to lower interest rates. As a result of this boom:
    1. Annual first mortgage origination volumes increase dramatically from $995 billion in 2000 to $2,100 billion in 2001, $2,720 billion in 2002, and $3,725 billion in 2003.286
    2. At the same time the GSEs‘ share of this origination volume also increases dramatically from 28% in 2000 to 37% in 2001, 41% in 2002, and 44% in 2003.287″

    They do observe: that the end-Clinton 2000 goals take effect, and they do start observing impacts on _outcome metrics_. However, they also observe these outcome metrics are conflated by monetary policy dynamics in 2001-2004 (aggressive easing in response to 9/11). Big increases in GSE share do happen, but they noted the share increases were commensurate (slightly smaller) than the share increases experienced by private MBS – in other words, the trend was commoditization of loan portfolios, of which GSEs were a big part.

    So, the question remained, what happened around 2004? But they don’t cover that. They do correctly identify the massive spike in CDO activity from 2004-2006, much of which was driven by AAA tranche demand from GSEs. OK, so I DO buy the argument that GSEs were effectively lowering lending rates. (a few trillion will do that)

    But, again, why?

    Hypothesis 1: they were compelled by the Bush Administration’s sudden enforcement of the 1992 HUD rules

    Hypothesis 2: they lied to investors about the riskiness of loans and the extent of their due diligence to capture market share, using their GSE govt.-backed status to gain artificially low funding

    I don’t doubt the GSEs shared some of the blame, the question is whether it was the poorly conceived idealistic 1992 HUD rules to help minorities, or a more classic care of government (quasi-)agency corruption. The AEI paper tells a great story about a govt-backed agency pushing leverage levels to truly ridiculous nose-bleed levels, and lying about the risk profile of their assets, to squeeze more margin out of their capital base.

  38. Gravatar of StatsGuy StatsGuy
    28. December 2011 at 17:23

    @ Patrick

    “How self-destructive is it to sit idly while no one comes to you seeking a loan?”

    Judging by the relative position of Wells Fargo, my own community bank, and many others… (vs., say, Citibank) apparently it’s not self-destructive at all.

    And once again, I’m not questioning whether the GSEs contributed to the bubble – I’m questioning whether the GSE overreaching was due to the HUD rules, or more standard agency corruption?

    The F&F fiasco points a bloody finger at quasi-public institutions that are given govt. support but operate (still!) under private rules (including compensation).

    “The total compensation for the top six executives at Fannie and Freddie for 2009 and 2010 was $35.4 million, with Williams and Haldeman receiving about half of that. Each of them could take home as much as $6 million apiece in salary and bonuses in 2011.”

    I work with a staff of 40 salespeople, and I can tell you that variable compensation (bonuses) are immensely motivating.

  39. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. December 2011 at 21:02

    Wow, you’re a really, really, really fast reader.

  40. Gravatar of Bonnie Bonnie
    28. December 2011 at 21:04

    @Stats

    What’s the point in having reserve ratios if they are not restrictive? I think they really are, considering the uproar when reserve ratios are raised. I find it odd that it would be so granular as to call out F&F securities and AAA AA+ munis, while everything else gets lumped into general categories. Nothing like trying to funnel the maximum amount of potentially productive capital into bad mortgages by lowering the cost of those investments by a considerable margin vs. everything else.

    I don’t think any sane regulator would ever suggest such a thing. Someone had to be lobbying for this stuff.

  41. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. December 2011 at 21:04

    ‘Judging by the relative position of Wells Fargo, my own community bank, and many others… (vs., say, Citibank) apparently it’s not self-destructive at all.’

    Maybe in your speed reading you missed the role merger incentives played?

  42. Gravatar of StatsGuy StatsGuy
    29. December 2011 at 06:38

    @ Bonnie

    Reserve ratios were restrictive prior to sweeping. They are still somewhat restrictive, and would become highly restrictive in the event of a run on the bank, or if they were increased substantially, or if a bank really let its deposit base decline over time (to take advantage of sweeping).

    The point of sweeping is to anticipate likely demand on a daily basis for withdrawals, and have enough on reserve to meet those withdrawals. You could view it as a form of accelerated clearing/settlement that reduces the demand to hold cash. Doesn’t eliminate it, but reduces it, freeing funds to reinvest in overnight lending.

    There is a controversy about whether reserve ratios are still an effective tool to control money supply – with one faction arguing that the bank should target interest rates, making targeting the monetary aggregates obsolete. Wonder what ssumner thinks…

  43. Gravatar of dwb dwb
    29. December 2011 at 07:17

    @Stats, @Bonnie
    trying to funnel the maximum amount of potentially productive capital into bad mortgages.

    Thats not a new or even recent policy. U.S. housing policy since the 1930s has been to “boost homeownership” through the FHA/VA, FNMA (which prior to the 70s was a govt agency) Ginnie Mae…. That policy basically has two prongs: the mortgage interest deduction, and the explicit govt backing of mortgage backed securities (which also date to the 30s, by the way).

    The GSE’s historically have held a “special” place mainly because it was carved out in the late 60s by law. Fannie used to be a govt agency. When FNMA was split off in the late 60s it retained an “implicit” govt guarantee (the law actually says that) that allowed it to borrow just a smidge above treasuries for years (Ginnie Mae, also a GSE but with an explicit govt guarantee, has better borrowing costs).

    FDIC is only one is several govt agencies (including the OCC, Fed, and others) that regulate banks. FDIC, OCC, Fed set capital requirements (which is i think what you mean by “reserve ratios” judging by the link Bonnie posted -reserve requirements are different than capital requirements. reserve requirements only apply to deposits while capital applies to the whole firm). Capital rules are more complex than one agency (and there is also intl Basel requirements) – often the rules are set by multiple agencies at once. Of course, there are lots of securities with a special place in bank capital, like soverign debt (incl treasuries), munis, GSE MBS….

    Lots of “private” banks were in subprime incidentally, including Wells Fargo.

    but why pick on housing subsidies? pick and industry and you the taxpayer are subsidizing it right now, from renewable energy to tax breaks for gas and oil development. how about property tax breaks for community redevelopment? there really is no business right now unblemished by corporate welfare because the govt is trying to promote some “policy”

  44. Gravatar of Peter N Peter N
    29. December 2011 at 08:13

    dwb -

    “LTV per se was NOT the primary driver of defaults for prime and subprime mortages. that is, the same loan in 2006 , with similar LTV and FICO and other stats as one in 2002, had a much higher propensity to default(and severity given default) and the key driver was home price declines.”

    Exactly. If you look at Fannie’s loans, the real stinkers were in the last 2 years of the boom. The default rate on earlier loans is quite reasonable given a 50% fall in home values.

    The real problem wasn’t whether loans were prime or sub-prime. It was whether there was fraud and lack of due diligence. And, most importantly, it was the way the securitization model subverted useful risk assessment.

    Even if Fannie had made only prime loans, fully documented, they would have lost money at current housing prices.

    Given prior statistics, Fannie’s pre-2005 nonstandard loan book would have been profitable. There was enough diligence and Fannie had put back guarantees. HOWEVER it turned out that the prior statistics were useless as a true measure of risk.

    It was inevitable that housing prices would eventually revert to trend. It was thus also inevitable that some writers of mortgages were going to lose money. The GSE and securitization model multiplied the damage rather than containing it.

    If you want to place blame, reserve some for the people who supplied the cheap money to inflate the bubble. When the Fed belatedly tried to tighten in 2004-2005, the banks were making too much money packaging CMOs, to want to stop. They turned to the REPO market, where AAA rated tranches could serve as collateral on which to built a pyramid of leverage.

    Greenspan was adamantly opposed to any attempt to regulate the REPO market. Regulators failed at all levels. Nobody caught Countrywide and WaMu at their fraud (and exactly how many have gone to jail for it since? damned few). Nobody gave any thought to systemic risk even after the LTCM debacle, the SEC was utterly impotent, etc…

    Human institutions fail all the time. The trick is to minmize and contain the damage.

    Concerning which, have you noticed that the Fed has taken on the job of bailing out the European banks through the back door of Euro swaps. The ECB balance sheet is exploding – much faster than the Fed’s QE. Can the Fed guarantee $3.5 trillion at the ECB and its own $3 trillion and still have plausible ammunition to be Chuck Norris for NGDP targetting as opposed to say, Steve Norris?

  45. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. December 2011 at 09:11

    ‘Even if Fannie had made only prime loans, fully documented, they would have lost money at current housing prices.’

    If they’d only made prime loans there would have been no housing bubble.

  46. Gravatar of StatsGuy StatsGuy
    29. December 2011 at 09:54

    Bonnie – “I don’t think any sane regulator would ever suggest such a thing. Someone had to be lobbying for this stuff.”

    Patrick – “If they’d only made prime loans there would have been no housing bubble.”

    Peter – “When the Fed belatedly tried to tighten in 2004-2005, the banks were making too much money packaging CMOs, to want to stop.”

    So, does anyone still think it was overly aggressive regulators FORCING F&F (against the will of sr. management) to make loans to minorities that drove the mess? And that F&F lobbied against authorization to participate in subprime, but those liberal Bush Admin regulators in 2002-2006 held their feet to the fire?

    Or was this a story of deregulation-gone-bad, with public backing for privatized actors who received privatized rewards for making bets with public money, lied to investors and regulators, and used mathematical models that understated risks to bloat leverage and implied returns?

    Here’s my theory:

    http://finance.yahoo.com/q/ta?s=FMCC.OB+Basic+Tech.+Analysis&t=my

    If the free market HATED being forced into subprime by the 1992 HUD rules, and thought this was destroying the F&F business, why did freddie mac soar until the end of 2007?

  47. Gravatar of dwb dwb
    29. December 2011 at 10:51

    @Patrick

    yes, if things were different they would not be the same. In the 90-91 real estate crash 000s of S&L’s went belly up at huge cost to the taxpayer). Was the risk due to large banks and GSEs or just concentrated? When a massive sector of the economy tanks who bears the systemic risk? When NGDP falls it drags down the the good with the bad. One cannot tell in retrospect if a delinquency is due to bad risk management or bad fed policy that swept everyone under the bridge of declining ngdp. I would like Fed a policy that better enables me to differentiate bad risk management. I do not think that banks should be holding capital against bad fed policy.

  48. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. December 2011 at 13:28

    ‘So, does anyone still think it was overly aggressive regulators FORCING F&F (against the will of sr. management) to make loans to minorities that drove the mess?’

    No one ever believed anything like that. Maybe you should actually read Pinto rather than comment on what you assume he said.

  49. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. December 2011 at 13:32

    dwb, had the FMs stuck to their plain vanilla business how would the housing price bubble have occurred in the first place?

  50. Gravatar of StatsGuy StatsGuy
    29. December 2011 at 14:43

    @ Patrick

    You write: “No one ever believed anything like that.”

    From Pinto’s abstract:

    “Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing….”

    “…HUD‘s policy of continually and disproportionately increasing the GSEs‘ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs.”

    Later in the paper, he observes that the 1992 HUD rules were specifically created to support minority lessons and address alleged minority discrimination.

    So… Pinto says EXACTLY that.

  51. Gravatar of ssumner ssumner
    29. December 2011 at 17:15

    Statsguy, There are still plenty of horses in the barn, new subprime loans are made every day via FHA.

    I don’t recall ever blaming the crisis on government rules aimed at lending to minorities (as you claimed)–I agree that the CRA was only a small part of the problem. GSEs were a big deal however, as evidenced by the big bailout of the GSEs. Their losses are estimated as exceeding $100 billion. That’s a lot. The bailouts matter, the bubble itself is no more important than the tech bubble.

    Ben and Steve, I don’t know their views on M-policy, and hence have no comment.

    JimP, I think the low bond yields reflect low levels of NGDP going forward.

    dwb, You said;

    “would limiting loans to 80% or better LTV have helped? absolutely positively not – this is only one dimension of the credit decision.”

    That seems like a complete non-sequitor. Are speed limits useless because speeding is only one cause of fatal accidents? And if appraisals were meaningless, why did banks require them? When I got my mortgage in 1991 it was difficult to get a mortgage. Lots of things changed after 1991, but the 20% rule was certainly one of them.

  52. Gravatar of ssumner ssumner
    29. December 2011 at 17:16

    Brett, At one point or another I’ve covered almost any given topic.

  53. Gravatar of dwb dwb
    30. December 2011 at 07:23

    That seems like a complete non-sequitor. Are speed limits useless because speeding is only one cause of fatal accidents? And if appraisals were meaningless, why did banks require them?

    Thats not what I am saying. you are arguing for credit rationing, I am arguing for smarter capital requirements and due diligence. risky loans do not cause bank failures. Inadequate capital against those loans causes bank failures. Capital requirements and risk based credit pricing are bank speed limits, not loan restrictions and credit rationing.

    regardless of LTV, the bank itself should not be borrowing more than what it expects to recover in default. A subprime loan funded with 100% equity (or less, even 50% equity) will not cause the bank to fail. Why should I care if someone is willing to pay the interest rate associated with that loan? Banks make all kinds of riskier loans (small/medium sized business loans, bridge loans for leveraged buyouts, credit lines to BBB- corporations…) so what? the difference is the capital requirements are higher.

    If you go back and look at the aggregate credit statistics for prime and subprime loans, even at the height, the average subprime loan had a 85% LTV and the average prime loan (=Fannie, freddie, ginnie loan) had a 75% LTV. even 75% is not enough when home prices decline 30%- both ended up with high delinquencies. credit rationing would not have made a difference.

    And I am not saying appraisals dont matter. quite the opposite. I am saying that there was a lot of fraud and corner-cutting which made the appraisals unreliable. banks and originators – like the whole robosigning mess – were cutting a lot of corners and not doing due diligence so the apprasals were meaningless (how hard is it to get an independent apprasial and check documents, really?).

  54. Gravatar of Morgan Warstler Morgan Warstler
    30. December 2011 at 09:26

    dwb, it seems like you are splitting hairs.

    If you require 20% down and provable income NO MATTER WHAT. it becomes almost impossible to repeat the housing boom.

    Personally, I think we should also force FDIC banks to hold loans the write on their books for good measure. FDIC should push us towards a local mutual small banks model, or we shouldn’t even have it.

    But ultimately all of this does restrict access to credit, it reduces prices, increases savings and reduces debt.

  55. Gravatar of StatsGuy StatsGuy
    30. December 2011 at 11:36

    dwb, Morgan – consider that you are both right. That weak bank capitalization requirements (and insufficient due diligence) AND low down payments (and lack of income proof) were both necessary but insufficient for the bubble.

    In a sense, you are both arguing for greater capitalization/collateralization of loan assets, but you are _disagreeing_ on who should shoulder the burden of providing the additional capitalization (borrower, or lender).

  56. Gravatar of StatsGuy StatsGuy
    30. December 2011 at 11:48

    @ssumner

    I observed that your views were nuanced, but I couldn’t find you anywhere rejecting the HUD-source argument, and wondered if you were now willing to do that.

    You write:

    “Their losses are estimated as exceeding $100 billion. That’s a lot.”

    Actually, if that is the limit of the losses, it’s not that bad at all. Consider that the GSEs were providing roughly half of loans during the critical years, and that the housing market crashed… Also consider that F&F were used as vehicles to absorb lossess from private banks, as F&F continue to purchase (possibly impaired) assets on the open market. Finally, ask yourself what might have happened if NGDP targeting had kept the economy on trajectory – what if unemployment had been limited to 7.5%? Defaults may have been cut in half, and price declines (largely driven by defaults) potentially limited to 15-20% nationally… F&F may not have even needed a bailout.

    The bailout price tag hardly seems strong evidence that F&F were the problem…

  57. Gravatar of dwb dwb
    30. December 2011 at 13:02

    @Statsguy: yes, more capital; no to credit rationing. I cannot mentally distinguish between prime, subprime, corporate loans (a BBB rated firm has a >50% default rate after 10 years and <50% recovery rate), commmercial real estate, bridge loans, small business loans… LTV is only one element of residential real estate credit profile (theres debt/income, debt/assets, recourse to other funds…). Banks are busy lending money to build solar and wind farms and accepting the solar renewable energy credits (which is a very illiquid market) or the project itself as collateral – or they will accept a power sale to as BBB energy company as collateral for the loan. whoa talk about subprime! Those deals have more hair than Yeti. banks do all kinds of crazy horsecrap (did you know Bank of America owns power plants via Merril Lynch? YES they do and a pizza chain too I recall. can you name the banks that owned a fleet of oil tankers?)… stuff that makes subprime look like baby stuff. If someone wants a high LTV loan and is willing to pay for it, why should I substitute my judgement? banks should be allowed to maximize return on capital provided that they are accurately calculating the actual capital they need (and its not subsidized capital either). yes, i know i am a capitalist pig…

  58. Gravatar of Morgan Warstler Morgan Warstler
    30. December 2011 at 13:53

    Stats, dwb,

    IF there will be bailouts, THEN anything that makes banking a low risk, low profit space is great.

    The same goes for FDIC.

    AFTER you remove any chance for bailouts and provide no FDIC protections than the banks can be as risky as their depositors will allow.

    What you can’t do is claim lots of economic benefits for easy access to credit for the bottom half that has a tax-payer backstop attached.

    The REAL tax payers are the folks with real assets and upwardly mobile jobs – it is THEIR MONEY backstopping this stuff, not “everybody’s.”

  59. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. December 2011 at 14:16

    ‘So… Pinto says EXACTLY that.’

    Which was your, ‘So, does anyone still think it was overly aggressive regulators FORCING F&F (against the will of sr. management) to make loans to minorities that drove the mess?’

    You haven’t provided Pinto saying that at all. For instance, in his lengthy paper (which you claim to have read in half an hour; I linked to it at 16:40 and you were responding at 17:15!) he documents ‘sr. management’ (CFO v CEO) in clear disagreement about the relaxed underwriting standards.

    Or, is Barney Frank an ‘overly aggressive regulator’?

    But, let’s take a gander at your examples from Pinto:

    (1) “Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing….”

    That’s clearly true.

    (2) “…HUD‘s policy of continually and disproportionately increasing the GSEs‘ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs.”

    True again.

    (3) ‘Later in the paper, he observes that the 1992 HUD rules were specifically created to support minority lessons and address alleged minority discrimination.’

    I don’t know what ‘minority lessons’ are, but there’s a veritable mountain of documentation to support your, ‘alleged minority discrimination’.

    Putting aside that none of the above supports your dismissive characterization, it’s all factual.

  60. Gravatar of StatsGuy StatsGuy
    30. December 2011 at 15:38

    @ Patrick

    ['Minority lessons' should have been 'minority loans'.]

    Um, you appear to be directly contradicting yourself…

    I ask: “So, does anyone still think it was overly aggressive regulators FORCING F&F (against the will of sr. management) to make loans to minorities that drove the mess?”

    You say: “No one ever believed anything like that.”

    But Pinto’s paper says EXACTLY that (see above).

    Then you agree his paper says EXACTLY that (“Government policies forced”), and you write “That’s clearly true”.

    So… what is your position again?

    To be clear, my position is that F&F contributed to the crisis, but the cause wasn’t HUD policies forcing them, it was corrupt sr. mgmt taking taking advantage of market-based incentives to gain market share and reap the rewards of government-subsidized risk by maximizing the risk profile of assets (and lying to investors and regulators about the true risk profile in order to do this).

    I maintain that Pinto & Co. present no evidence that the 1992 HUD rules were suddenly and aggressively enforced by the Bush HUD around the time that F&F started to aggressively make bad loans and ramp subprime and “liar” loans. Nocera, however, does show proof that F&F sr. mgmt were lying to regulators to maximize their bonuses.

    Pinto’s story is largely “Bad unintended consequences of do-gooder policy”. The truth is “corruption of corporatized federal agencies”. It is CLASSIC Stigler (regulation to benefit the regulated) and old-style capture.

    Also, the EMH is on my side. If HUD policy was suddenly “forcing” F&F in 2002-2006 to do things against their interest this would be harming profits, so why was their stock booming even as much of the stock market was suffering?

  61. Gravatar of StatsGuy StatsGuy
    30. December 2011 at 15:46

    dwb – consider the Morgan is _also_ right. Whether or not credit rationing _should_ be policy (you are right, banks buy lots of risky assets, so the argument for rationing THIS portion of their business seems weak), if it HAD been policy, the 2004-2006 bubble probably would not have happened?

    Morgan – you are basically saying that IF the public is footing the bill, then economic profits (rents) should not be allowed? I, of course, agree – I’d only add that while the key to your distributed bank operation is transparency, some amount of oversight will still be needed, but it will be easier. Good luck with it – I don’t see how banks would give up the golden goose without a big fight.

  62. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. December 2011 at 20:43

    Repeating yourself isn’t going to rescue your claims, Stats Guy. Nor is providing examples from Pinto that are clearly true going to make 2004 the crucial date:

    ‘I maintain that Pinto & Co. present no evidence that the 1992 HUD rules were suddenly and aggressively enforced by the Bush HUD…’

    No doubt because Pinto never claimed that. That’s the straw man that Housing Cause Denialists need for their argument though.

  63. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. December 2011 at 20:47

    ‘Pinto’s story is largely “Bad unintended consequences of do-gooder policy”. The truth is “corruption of corporatized federal agencies”.’

    Pinto makes both arguments. You don’t really believe they are mutually exclusive do you?

  64. Gravatar of Morgan Warstler Morgan Warstler
    31. December 2011 at 06:12

    Stats, there is no question that senior management will be corrupt.

    There is also no question that INTENTIONALLY giving loans to bad credit risks happened BECAUSE the Democrats bastardized housing policy with backstops for minorities.

    We have to assume senior management will always be corrupt, we don’t get to do stupid shit and then after the fact blame that corruption.

    Good intentions are the road to hell. Deal with it.

  65. Gravatar of ssumner ssumner
    31. December 2011 at 09:00

    dwb, You said;

    “Capital requirements and risk based credit pricing are bank speed limits, not loan restrictions and credit rationing.”

    You keep saying this, but you are not giving me any reason to believe it. Why don’t loan restrictions and credit rationing work? Because they can be evaded? So can capital requirements.

    you said;

    “If you go back and look at the aggregate credit statistics for prime and subprime loans, even at the height, the average subprime loan had a 85% LTV and the average prime loan (=Fannie, freddie, ginnie loan) had a 75% LTV. even 75% is not enough when home prices decline 30%- both ended up with high delinquencies. credit rationing would not have made a difference.”

    This is a complete non-sequitor. The final sentence (the conclusion) seems completely unrelated to the rest of the paragraph. It would be like saying lower speed limits make no difference if the average speed is already below the limit.

    Statsguy, I don’t know what the “HUD-source argument” is so I can’t comment. You said;

    “Finally, ask yourself what might have happened if NGDP targeting had kept the economy on trajectory – what if unemployment had been limited to 7.5%? Defaults may have been cut in half, and price declines (largely driven by defaults) potentially limited to 15-20% nationally… F&F may not have even needed a bailout.”

    That’s been a big theme of this blog, that most of the debt crisis is a symptom of falling NGDP. But that’s precisely why I have been a fierce critic of the GSEs for 20 years–they were a time bomb waiting to explode. Ditto for FDIC.

    I agree that the $100 billion (or more) loss is not that big compared to other things going on, but it is much bigger than the losses from TARP. So they were a much bigger problem than the big banks. I certainly agree, however, that the fall in NGDP is the big problem, not the financial crisis.

    Still, the GSEs are useless and should be abolished. They perform no useful service to the economy, and I’d rather not waste even $100 billion.

  66. Gravatar of StatsGuy StatsGuy
    31. December 2011 at 18:57

    HUD source argument –

    … That the HUD regulations on the GSEs were the core source of the housing bubble. I don’t think you actually agree with the HUD source argument, I just wanted to see you actually say so on record. But you seem to have been very diplomatic…

    I’m curious what your alternatives to the FDIC and GSEs look like exactly. That would be worth a post, detailing precisely why those alternatives would address the problems that the FDIC was meant to solve but without the drawbacks.

  67. Gravatar of Scott Sumner Scott Sumner
    1. January 2012 at 20:10

    Statsguy, I plan to do a post on banking when I have time. But the substitute for FDIC is NGDP targeting.

    I’m told many other countries lack the GSEs, I don’t see why we need them.

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