Paul Krugman on Countrywide Financial and the CRA

Here’s what Paul Krugman had to say about the role the Community Reinvestment Act played in encouraging reckless lending by Countrywide Financial:

As others have pointed out, Fannie and Freddie actually accounted for a sharply reduced share of the home lending market as a whole during the peak years of the bubble. To the extent that they did purchase dubious home loans, they were in pursuit of profit, not social objectives—in effect, they were trying to catch up with private lenders. Meanwhile, few of the institutions engaged in subprime lending—such as Countrywide Financial—were commercial banks subject to the Community Reinvestment Act.

I’m in no position to judge the accuracy of that statement, as mortgage banking is far from my area of expertise.  However a commenter named Patrick Sullivan sent me the following link from 1994, which casts a very different light on the relationship between Countrywide and the CRA.  It is from a ABA Banking Journal article written by Steve Cocheo:

A group of lenders not subject to CRA–and more directly under HUD’s purview–are the nation’s mortgage banks. In mid-September, the Mortgage Bankers Association of America-whose membership includes many bank-owned mortgage companies, signed a three-year master best-practices agreement with HUD. The agreement consisted of two parts: MBA’s agreement to work on fair-lending issues in consultation with HUD and a model best-practices agreement that individual mortgage banks could use to devise their own agreements with HUD. The first such agreement, signed by Countrywide Funding Corp., the nation’s largest mortgage bank, is summarized on this page. Many have seen the MBA agreement as a preemptive strike against congressional murmurings that mortgage banks should be pulled under the umbrella of the CRA.

Read the entire link, it is quite interesting.  I still think the GSEs were a far bigger problem than the CRA.  But as we saw in the previous post, Krugman also seems to have underestimated the role of the GSEs.


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52 Responses to “Paul Krugman on Countrywide Financial and the CRA”

  1. Gravatar of spencer spencer
    20. September 2010 at 07:53

    Cann’t we get away from this stupid argument.

    Yes, both the government and the private sector contributed to the bubble.

    But attempts to make either one innocent are strictly ideological driven and reflects people ideological orientation — both right and left — much more than economic analysis.

  2. Gravatar of David Pearson David Pearson
    20. September 2010 at 07:56

    The paragraph cited discusses a three year “best practices” agreement signed in the mid 90′s. Subprime lending did not explode in volume until 2002/3. Does the author of the cited work supply a link between the two?

    Suprime originators needed no urging from HUD to make loans.
    To put it simple terms: they underwrote at margins that reflected historical delinquency experience; because delinquencies were far below that norm, this was a license to print money. Of course, margins declined due to competition, which occurred as large banks AND non-banks bought their way into the business. WAMU bought Long Beach Mortgage, HSBC bought Household Finance, H&R Block bought Option One, Morgan Stanley bought Saxon Mortgage, Bear Stearns bought EEC Capital, Merril bought First Franklin. Does this sound like financial institutions were being forced to make subprime loans? Or like these institutions were attracted by the industry’s profitability?

    A concrete example. In 2q04, Countrywide’s mortgage banking segment reported the following:

    Prime

    Loans sold $75b
    Gain on sale $790m
    Margin 1.06%

    Subprime

    Loans sold $8b
    Gain on sale $409m
    Margin 4.66%

    http://www.safehaven.com/article/3769/competition-is-killing-subprime-margins-as-risk-skyrockets

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 09:00

    First, in Paul Krugman’s defense, F&F went from holding 48% of subprime loans sold in the secondary market in 2004 to 24% in 2006. It doesn’t sound to me like they were driving the demand for such securities.

    Secondly, are we to believe that a voluntary best-practices agreement signed in the mid-1990s, what is essentially a toothless document, caused Countrywide and similar institutions to dramatically increase their share of subprime loan originations to low income households or neighborhoods to 54% of the market in 2004-2006 (several years later) when banks and thrifts who actually faced a legal repercussions under the CRA saw their share of such loans shrink to 9% of that market (remember their share of the total origination market was about 25%) during the same period? It just doesn’t pass the smell test.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 09:14

    ‘First, in Paul Krugman’s defense, F&F went from holding 48% of subprime loans sold in the secondary market in 2004 to 24% in 2006.’

    Again, Krugman is wrong, and I’ve already (in the earlier post of Scott’s) provided links to Raghu Rajan’s rebuttal AND Ed Pinto’s lengthy demolition of these arguments. As the old joke goes, statistics are like lampposts; they can be used as they were intended to be used; for light, or they can be used as the drunk uses the lamppost; for support.

    The Krugmans can’t possibly be ignorant of these facts, they’re either in deep denial, or deeply disingenuous–and it’s pretty clear which Rajan believes.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 09:24

    ‘Cann’t we get away from this stupid argument.’

    Not when the Krugmans keep bringing it up, no.

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 09:31

    ‘Does this sound like financial institutions were being forced to make subprime loans?’

    At the time, yes, that’s what they thought. From the 1994 ABA article to which Scott links:

    ——————quote——————
    Last January, on Martin Luther King Day, President Clinton signed an executive order creating a presidential Fair Housing CounCil under the direction of Housing and Urban Development Secretary Henry Cisneros. In response, Cisneros made a commitment to obtain voluntary agreements from 75 private lenders to better comply with federal fair-lending laws.

    An early effort to strike such agreements with Washington, D.C., area lenders–many of whom had been tarred by a Washington Post series on alleged racial discrimination in lending– fell apart. Bank lenders involved in the negotiations complained that HUD representatives were trying to ram the “voluntary” agreements down their throats.
    ————endquote—————-

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 09:49

    David, do you really think that one quarter’s statistics prove anything (coming from near the bitter end, and ten years after the ABA article was published)?

    Your own source says: ‘With consumers being increasingly stressed as evidenced by rising defaults and delinquencies on Primary Mortgage Insurance,….’

  8. Gravatar of David Pearson David Pearson
    20. September 2010 at 10:26

    Imagine today’s set of CRA blamers working as mortgage originator CEO’s. Its 2004, and prime origination margins and volumes are collapsing after the industry built out overcapacity during the unprecedented 2003 refi boom. The quarter ends, and EPS is down from the previous year’s quarter. All the competitors with subprime operations have growing EPS and rocketing share prices. Its the conference call. An irate investor wants to know, “why aren’t you originating subprime like Countrywide?” The CRA-blaming CEO’s answer: “no government is going to force us to make money.”

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 10:39

    I see you’re committed (Krugman-like) to HousingCause Denial, David. Since Scott’s link is to a footnote in Ed Pinto’s paper on the history of the transformation of the home loan industry,

    http://www.aei.org/docLib/Pinto-Government-Housing-Policies-Crisis.pdf

    would you like to tell me what Pinto gets wrong here:

    ‘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 [non-traditional mortgages].

    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.’

  10. Gravatar of spencer spencer
    20. September 2010 at 10:44

    Can’t you do in better than this.

    The government eased regulations that prevented private lenders from making stupid loans.

    So the private lenders made stupid loans.

    Consequently it is the governments fault.

    And freedom is slavery.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 11:03

    Patrick R. Sullivan,
    I’ve read Raghu Rajan’s (non)rebuttal. He completely elides past the key point I just repeated. Krugman wasn’t making an argument concerning the total mortgage market as Rajan implies, and it simply doesn’t matter what F&F’s share of the subprime mortgage securities market was in 2004 but rather its direction afterwards (which was clearly down). F&F could not have been driving the demand for such securities during the peak of the bubble if their market share was declining. Many other economists have made this point besides Krugman (e.g. Thoma, Chinn etc.)

    As for Edward Pinto I’m quite familiar with him having had the pleasure of arguing with him in comment threads elsewhere. My impression is that he’s boxed himself into a corner after providing fodder for the Republican propaganda machine back in 2008. As a result he’s got a new career defending easily refutable and contextless claims for the rest of his life. If it weren’t for the fact he’s probably well compensated I’d feel sorry for him.

  12. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2010 at 11:24

    It isn’t helpful to discuss it this way….

    Krugman is to be JUDGED on all his other positions by whether or not he accedes to the indisputable proof we now have in front of us, that the Government cannot “help” people who afford a house to they cannot afford int he private market.

    It artificially increases demand and raises the prices of homes. This is exactly the same in education. The “market” in each is virtually destroyed.

    That he so desperately denies the reality of what happened shines a bright light on what passes for “economics,” in his non-scientific view.

    Krugman would fail Micro.

  13. Gravatar of ssumner ssumner
    20. September 2010 at 11:27

    Spencer, I completely agree.

    David, I agree.

    Mark, Rajan says Krugman’s numbers are wrong. He has a lot of sources. You might want to look at his evidence to see what you think.

    I also am skeptical about whether the CRA was a major factor, but that’s not the issue I am addressing in the post. The issue was whether the CRA influenced Countryside, not how much. Krugman implied not at all.

    Patrick, Both of your responses were the same as mine. We think alike. BTW, I’ve always argued the private sector also made some mistakes.

    Mark, You need to reread Rajan, as you have not correctly characterized his view. His says F&F got more involved in subprimes after 2004, not less as Krugman asserts. So he isn’t eliding past anything, he’s accusing Krugman of once again making false claims about the GSEs. Krugman’s already admitted his first claims were false. Perhaps Rajan is wrong this time, I don’t know. But he is definitely attacking Krugman head on.

    Everyone, I have never claimed the CRA was a big factor in the crisis. The post was not addressing that issue. The issue is whether or not Krugman is making accurate or misleading claims in his articles.

    The reason we need a better understanding of what caused the crisis is so that we can prevent a repeat. As far as I can tell the Obama adminstration is currently encouraging the sort of subprime lending that got us here in the first place.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 11:45

    Spencer, the reality is that prior to the early 90s the home loan industry refused to make stupid loans *all by itself*. There was no need for government regulation to stop them (only about 1 in several hundred were low low down payment then).

    The government didn’t merely *allow* reduced underwriting standards, they mandated them, even threatening lenders who didn’t with criminal prosecution (Janet Reno’s contribution)

    Can’t you do in better than this.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 11:59

    Following up on Scott’s comment to Mark, from the Pinto paper (p. 140):

    ————-quote—————-
    While the GSEs’ share numbers shown on Chart 48 [what Krugman is relying on] are correct as far as they go, they do not give the entire picture. By limiting the GSEs’ business to just their own securitizations, their share is substantially understated, particularly for the Professor Krugman’s key years of 2004-2005. Instead of dropping below 30% as Chart 48 shows, it averaged about 42% for these two years.

    This is because:

    1. Fannie, and to a lesser extent Freddie, purchased whole loans that were not ultimately securitized by them. These loans are included in the “non-securitized” category, but should be added to the GSEs’ total share.

    2. The GSEs were substantial purchasers of “non-agency securitized” subprime … and Alt-A MBS. Over 2003-2007 their purchases totaled $641 billion for subprime and $154 billion for Alt-A, representing 33% and 12% of all such subprime and Alt-A issuances. ***These securities need to be added to the GSEs’ total
    share and deducted from the “non-agency securitized” share***. The FHLBs were also major purchasers of such securities ….
    —————endquote—————

    (My *** in the above)

  16. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2010 at 12:01

    Scott, OF COURSE Krugman is making mis-leading claims!

    The question to us is: Since Krugman is making these claims, and doing it for political reasons…. and since we want SSUMNER to be a big honking economist deal…. and since ALL ECONOMISTS remembered approached it with a political agenda…

    Then we can say: Scott Sumner’s policies are GOOD when they are deployed PRE-CRISIS to keep things from growing out of whack, and his policies are good AFTER the effects of the crisis have squeezed EVERY LITTLE DROP of liberals gains out of the fiscal system.

    Let’s get ourselves a conservative congress and see whats what, then right after we have some serious cuts in government, some new tax cuts for small businesses – we’ll slam down some monetary QE and take all the credit when things go well.

    Famous Economists don’t live in the middle – so glad to have you tune your policies to the right!

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 12:10

    ‘Everyone, I have never claimed the CRA was a big factor in the crisis.’

    Semantics. The assault by the Feds on the home lending industry–of which the CRA is only part–is the sine qua non of the crisis. Without which the snowball never gets started rolling down the hill.

    As I’ve asked the HousingCause Deniers before, what would be wrong with mortgage backed securities that were backed by SOUND home loans with 20% down payments? Or, what would have been wrong with the derivatives of those MSBs?

    The answer is, nothing. And Scott wouldn’t have had to start this blog, because there would have been no financial crisis in the first place.

  18. Gravatar of David Pearson David Pearson
    20. September 2010 at 12:13

    Scott,

    I think the CRA was a very bad idea. However, the mistake being committed by FHA now is orders of magnitude greater. FHA loans outstanding have climbed from $250b to $850b since the the bubble ended. These loans are effectively no-money-down, and the taxpayer is fully on the hook for losses. All that time wasted focusing on the CRA, when the real issue is how we can stop the FHA/government from becoming the “new subprime”.

  19. Gravatar of Benjamin Cole Benjamin Cole
    20. September 2010 at 14:25

    A recent report (9/16) from the BoJ that mentions unconventional monetary policy.

    John Taylor reviewed this paper on his blog, and I think somewhat cherry-picked a quote to highlight. At times, I wonder what is on Taylor’s agenda, he seems so dead set against QE. In fat, towards the end of the paper, the author suggest we need to learn more about QE.

    http://www.boj.or.jp/en/type/press/koen07/data/ko1009c.pdf

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 14:25

    David, has it occurred to you that the effort and energy put into denying the government’s role in precipitating the housing bubble, just might explain why that effort is continuing through the FHA?

  21. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. September 2010 at 14:51

    It is hard to get past local governments controlling land use in a way that created supply-constrained housing markets, so demand went into (in such markets) higher prices rather than being fully reflected in increased supply. After all, there was not a housing bubble everywhere.

    But it does not seem to matter much which particular instrument was being used to ramp up demand by lowering the cost of entering the market as a buyer: CRA, GSE’s, FHA or whatever. It was clearly federal government policy to make entry as a buyer into housing markets easier: housing markets many of which were supply-constrained by other regulations. Coupled with the IMF and other public bodies injecting implicit or explicit moral hazard into financial markets.

    I am reminded of a combination of policies in the 1970s in New York. The city government had rent control. The state government gave preference in public housing to people who lost their home through disaster, such as fire. The federal government was running a high inflation policy. The combination of (1) and (3) destroyed the incentive for landlords to look after their properties. The combination of (1), (2) and (3) meant city blocks burned down. There was a lot of destructive private action going on, but the picture only made sense when you looked at the interactive effects of public policy at various levels of government.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 15:33

    Scott,
    You wrote:
    “Mark, Rajan says Krugman’s numbers are wrong. He has a lot of sources. You might want to look at his evidence to see what you think.”

    Rajan’s source is the same as Krugman’s and everyone else’s (including mine): “Inside Mortgage Finance”. In my reading of his rebuttal nothing he says disputes the numbers (because they are what they are).

    And you wrote:
    “Mark, You need to reread Rajan, as you have not correctly characterized his view. His says F&F got more involved in subprimes after 2004, not less as Krugman asserts. So he isn’t eliding past anything, he’s accusing Krugman of once again making false claims about the GSEs. Krugman’s already admitted his first claims were false. Perhaps Rajan is wrong this time, I don’t know. But he is definitely attacking Krugman head on.”

    Rajan states that the GSEs made a commitment to increased involvement in subprimes after 2004. But he doesn’t state that they actually succeeded in increasing their share of the subprime securities market after 2004, for the simple reason that they didn’t.

    Krugman is sometimes sloppy in his editorializations but he is very rarely wrong. Although he has shifted his argument I think it’s a huge stretch to say Krugman has admitted anything.

    Patrick R. Sullivan,
    Chart 48 refers to market shares of all MBSs. It misses the point of everything I have said with respect to F&F so far (and which Krugman alludes to) which is in reference to the subprime securities market, the primary source of the MBS problem.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 15:43

    By the way, just to be clear, I believe that the CRA has outlived its purpose and that the GSEs propbably should be privatised. I just hate it when people play fast and loose with the facts.

  24. Gravatar of Benjamin Cole Benjamin Cole
    20. September 2010 at 15:46

    Morgan-

    “Let’s get ourselves a conservative congress and see whats what, then right after we have some serious cuts in government, some new tax cuts for small businesses – we’ll slam down some monetary QE and take all the credit when things go well.”

    I fear the motives you exrpress so bluntly are reflected in the gentlemanly writings of Richard Fisher, Dallas Fed Chief, and John Taylor, academic.

    Unfortunately, federally induced inefficiencies in the US economy are not limited to one party or the other–as witnessed by runaway federal military spending or vast rural welfare programs (everything in urural America is subsidized, from roads, to water systems, power systems, telephone service, railroad stops, airports, crop subsidies–you name it.

    Rural America would blow away without federal subsidies or cross-subsidies).

    That is why no R-Party President has proposed a balanced budget since Eisenhower (a great president, btw). The R-Party, and Red States, love lard. The Red State Socialist Empire.

    If QE makes sense a year from now, it makes sense now–unless you have a craven political agenda.

    Is this really the level to which Republicans have sunk? “We won’t give you a expansionary monetary policy because we are not in power.” ?

  25. Gravatar of Benjamin Cole Benjamin Cole
    20. September 2010 at 17:00

    BTW-

    I have come up with a new catchphrase to describe QE’ers: “Monetary Bulls.”

    I have been using “Growth Hawks,” but it was pointed out that “Inflation Hawks” want to fight inflation, so a “Growth Hawk” would want to fight growth.

    On the other hand, a military hawk wants more military outlays, so the picture is mixed on the word “hawk.”

    Be that as it may, “Monetary Bulls” sounds strong, and has the added bonus of connoting a bull market and confidence.

    My fellow Monetary Bulls: Keep Up the Fight against the sniveling Japan Wing of the Federal Reserve Board, and its quisling allies in blog-land!

  26. Gravatar of David Tomlin David Tomlin
    20. September 2010 at 17:01

    Benjamin Cole:

    That is why no R-Party President has proposed a balanced budget since Eisenhower (a great president, btw).

    The last time we had a balanced federal budget was under a Democratic president and a Republican Congress.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 17:51

    How on earth did the Republicans ever get a reputation for fiscal discipline?

    In my opinion, fiscal responsibility mainly involves reducing the public debt as a percentage of GDP. (Anything less is unsustainable.) Since the end of WW II we’ve had 63 Federal budgets (FY 1947-FY 2009). If you consider the FY 2002 budget the product of a united Republican government (a Republican congress passed the tax cut) and FY 2003 the product of a divided government you have the following breakdown. Thirtynine budgets were the product of a divided government with 31 having Republican presidents and 8 having Democratic presidents. Twentyfour budgets were the product of united government with 19 having Democratic presidents and 5 having Republican presidents.

    The Federal public debt increased as a percentage of GDP in 24 of those fiscal years.(It did not increase during the transitional quarter in 1977.) Eighteen of these budgets were the product of divided government and the remaining six were the product of united government. So although 38.1% of all of the budgets were a product of united governments only 25% of the budgets which resulted in an increase in the public debt were the product of a united government. It seems if reducing the public debt is your goal, then a united government is at least slightly preferable to a divided government.

    The worst possible combination is a united Republican government. Three out of the five budgets passed by a united Republican government (60%), an admittedly small sample, resulted in an increase in the Federal public debt as a percent of GDP. The next worst combination is divided government with a Republican president. Eighteen out of 31 budgets passed (58.1%) increased the public debt. Only 3 out of the 19 budgets that were the product of united Democratic government (15.8%) increased the public debt. And none of the 8 budgets passed by a divided government with a Democratic president increased the public debt.

    Scientific analysis, eh?

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 17:58

    ‘Chart 48 refers to market shares of all MBSs. It misses the point of everything I have said with respect to F&F so far (and which Krugman alludes to) which is in reference to the subprime securities market, the primary source of the MBS problem.’

    I have no idea what you think you are claiming. Chart 48 is what Krugman published on his blog to argue that the GSEs were getting away from subprime. As I said, it’s the drunk using the lamppost for support.

    Btw, the fact that the GSEs couldn’t continue to increase their market share after 2004 isn’t from lack of trying. There are plenty of quotes from GSE executives bragging about their intention to do just that in Pinto indispensable paper, for instance (p. 137):

    “Fannie Mae Launches Major Initiative to Tackle America’s Toughest Housing Problems; Pledges to Help Raise Minority Homeownership Rate to 55 Percent over Next Ten Years.”

    “Fannie Mae, the nation’s largest source of financing for home mortgages, today joined its partners to announce its pledge to help 6 million families — including 1.8 million minority families — become first-time homeowners over the next decade. The pledge
    boosts the company’s commitment to President George W. Bush’s Minority Homeownership Initiative and will help raise the minority homeownership rate from 49 percent currently to 55 percent, with the ultimate goal of closing the gaps between minority homeownership rates and non-minority homeownership rates entirely.”

    Nor was HUD easing off on its pressure on the GSEs in 2004 (p. 128):

    ‘A 300-plus page rulemaking by HUD is a veritable how-to-manual designed to force the GSEs onto a market leadership position with respect to the use of even greater levels of loosened lending.345 The rule is issued by HUD Secretary Alphonso Jackson mandates increased goals for the GSEs. The Low- and Moderate- income Goal is raised from 50% in 2004 to 52% for 2005, 53% for 2006, 55% for 2007 and 56% in 2008.’

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 18:02

    ‘I just hate it when people play fast and loose with the facts.’

    Like Krugman claiming Countrywide wasn’t subject to the CRA?

  30. Gravatar of MikeSandifer MikeSandifer
    20. September 2010 at 18:04

    Scott,

    Krugman’s also pointed out elsewhere that similar problems over seas couldn’t have been caused by the GSEs or the CRA.

    Also, even if Countrywide chose to let CRA shape lending practices, what about the major investment banks?

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 18:17

    Patrick R. Sullivan,
    Yeah I saw the chart too. It means nothing new or relevant to me.

    Grasping to anecdotal heresay instead of data eh? The fact remains that the market share of securities in the subprime market delivered to F&F declined. That means unequivocally that the driving force that was demanding them was not from the GSEs but from some other force. RIGHT?

    Sorry sir, you have no ammunition remaining in your pocket.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 18:28

    Patrick R. Sullivan,
    You wrote:
    “Like Krugman claiming Countrywide wasn’t subject to the CRA?”

    So are we to believe that a voluntary best-practices agreement, what is essentially a toothless document, made them legally subject to the CRA? And we are also to believe that this impacted their behavior when there is no statistically significant different behavior on their part?

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. September 2010 at 18:54

    Mike Sandifer’s arguments are the nail in the coffin.

  34. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2010 at 19:44

    ‘So are we to believe that a voluntary best-practices agreement, what is essentially a toothless document…’

    Which has already been demonstrated to be a flat falsehood by a 1994 journal reference to HUD cramming a ‘voluntary’ agreement down lenders’ throats. I can only conclude that you are simply dishonest, Mark.

  35. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2010 at 21:07

    “Unfortunately, federally induced inefficiencies in the US economy are not limited to one party or the other–as witnessed by runaway federal military spending or vast rural welfare programs (everything in urural America is subsidized, from roads, to water systems, power systems, telephone service, railroad stops, airports, crop subsidies–you name it.”

    @Benji, this really is a non-answer, and I assume that it’s all you got…

    Yes, yes… even though there are plenty of R programs, I’d willingly cut: farm subsidies, military, etc.

    The truth of the matter is… D programs are much easier to trim politically: specifically cutting Public Employees enough to crush their unions (really have it out and end them), and gutting Obamacare as such that what we provide as “mandated care” for the uninsured is limited to off-patent drugs and x-rays instead of MRIs.

    We can GET THOSE DONE, but we can only get those done in a massive crisis like this. Then maybe hopefully, when Dems have some power, they’ll worry more about making cuts (on military and corporations) instead of increasing spending.

    But, it isn’t often we get out the long knives… and none of us are Paul Krugman, so let’s lean back, get some pop-corn and see how this end game really plays out.

    This was all set into motion long ago, whether you use 1980, 1929, or 1913 as your starting point, we’re FINALLY going to get down to some brass tacks.

  36. Gravatar of MikeSandifer MikeSandifer
    21. September 2010 at 04:58

    Morgan,

    It’s probably safe to say Krugman passed micro. There’s something about the PhD he holds that gives me that feeling. Oh, and he’s also made significant contributions to theory in the economics.

    I am an economic layperson and the times here and there where I’ve disagreed with Scott or Krugman, I’ve almost invariably been wrong. When they disagree, I usually realize that I have no basis to decide who is closer to right and about what. I have neither the time nor expertise to research most of the issues they discuss.

    So, for you to speak with such certainty when you disagree with even macro fundamentals, if your ideas make you a successful investor, I’d like to read your blog. Otherwise, I’ll stick guys who understand the limits of their abilities, while nonetheless vastly exceeding my own.

  37. Gravatar of scott sumner scott sumner
    21. September 2010 at 06:44

    David Pearson, You said;

    I think the CRA was a very bad idea. However, the mistake being committed by FHA now is orders of magnitude greater. FHA loans outstanding have climbed from $250b to $850b since the the bubble ended. These loans are effectively no-money-down, and the taxpayer is fully on the hook for losses. All that time wasted focusing on the CRA, when the real issue is how we can stop the FHA/government from becoming the “new subprime”.

    I agree, and notice my list of bad policies never includes the CRA, but does include the FHA. This post wasn’t about the CRA, it was about Krugman’s claim.

    Benjamin, Yes, I read the paper, and I agree that in total it doesn’t really support Taylor.

    Mark, You said;

    “Krugman is sometimes sloppy in his editorializations but he is very rarely wrong. Although he has shifted his argument I think it’s a huge stretch to say Krugman has admitted anything.”

    He once said F&F had zero involvement in the sub-prime fiasco. Is he standing by that statement?

    BTW, The problem was originally thought to be sub-primes, but later other mortgages like Alt As that F&F were heavily involved in turned out to also be a big problem.

    You said;

    “So are we to believe that a voluntary best-practices agreement, what is essentially a toothless document, made them legally subject to the CRA? And we are also to believe that this impacted their behavior when there is no statistically significant different behavior on their part?”

    The article I quoted from was from 1994, before this became a huge partisan issue. It certainly seems like the author thought the pressure on Countrywide was pretty significant.

    Mike Sandifer, You said:

    “Krugman’s also pointed out elsewhere that similar problems over seas couldn’t have been caused by the GSEs or the CRA.”

    I’m not expert on those crises, but were they caused by the policies that Krugman claimed caused our crisis—evil deregulation by the Republicans? Last time I looked the Socialists were in charge of Spain, and the Labour party ruled Britain during the bubble.

    Mark, You said;

    “Mike Sandifer’s arguments are the nail in the coffin.”

    A premature burial?

    Morgan; You said;

    “The truth of the matter is… D programs are much easier to trim politically:”

    You think it will be easy to trim R programs like drugs for old people, and no child left behind?

  38. Gravatar of Wonks Anonymous Wonks Anonymous
    21. September 2010 at 06:50

    spencer, I’m not that familiar with regulatory history. Gramm-Leach-Bliley has gotten most of the attention, but that was about the structure of commercial/investment banks rather than stupid loans. I think there were also changes on interest paid on deposits, but again that’s not loans. Could you elaborate on what changed in the 90s/2000s?

  39. Gravatar of David Pearson David Pearson
    21. September 2010 at 09:48

    http://modeledbehavior.com/2010/08/27/fannie-freddie-acquitted/

    Another debunking of the CRA thesis. The point that most losses came out of Alt-A is often ignored. Somehow Alt-A is lumped in with “lending to poor people”, when the two have very little in common. In fact, even subprime does not equate with “lending to poor people”. If it did, subprime loans would have been geographically dispersed in inner-city zip codes across the country. Instead, they were concentrated in bubble states with high home prices that “low-income” people could not afford — even if they lied on their apps, they would not have enough cashflow to make payments on 90% of homes (I once calculated, based on Realtor.com listings, that only 10% of homes in Riverside County in 2005 were listed below $330k). And while it is true that CA lower-income zip codes were mostly subprime, it is not true that CA subprime loans were mostly lower-income (defined as substantially below the median household income of $55k).

  40. Gravatar of D. Watson D. Watson
    21. September 2010 at 09:50

    Unrelated question for you: I need a book recommendation on monetary economics.

    My cousin is a high schooler who has read some Hayek, some Friedman, and some other, shall we say, approved texts; who bought and studied an intro econ textbook when he had questions; and who has been asking me intelligent, insightful questions about economics for some time now. This is all to say that he is not afraid of hard work but doesn’t know higher level math. He’s asking me to recommend a good book on monetary economics. The first question is when yours is coming out? The second is who you’d recommend? Friedman and Schwartz?

  41. Gravatar of David Pearson David Pearson
    21. September 2010 at 09:51

    The above second sentence should have read, “…most GSE losses came out of Alt-A”.

  42. Gravatar of MikeSandifer MikeSandifer
    21. September 2010 at 10:25

    Scott,

    Just to finish on Krugman’s arguments, you replied:

    “I’m not expert on those crises, but were they caused by the policies that Krugman claimed caused our crisis—evil deregulation by the Republicans? Last time I looked the Socialists were in charge of Spain, and the Labour party ruled Britain during the bubble.”

    As you’ll probably see anyway, Krugman seems to be deemphasizing deregulation as a cause of the housing bubble.

    http://krugman.blogs.nytimes.com/2010/09/21/the-anti-dog-whistler/

    So, I guess your skepticism was right and Krugman’s been wrong on at least a couple of points, explicitly admitting he was wrong about the degree to which Freddie and Fannie were involved during the bubble in this other new post:

    http://krugman.blogs.nytimes.com/2010/09/21/fannie-freddie-further/

    One thing I can say for him is at least he admits he was wrong about something, which I personally haven’t seen other economists doing, other than yourself. After all, in a complex field like macroeconomics, everyone’s going to be wrong at least a fair percentage of the time.

    I wonder how many of the inflation hawks have admitted, or ever will admit they were wrong.

  43. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. September 2010 at 10:50

    David Pearson, the article you link to is an exceptionally good example of the drunk clinging to the lamppost. No one acquainted with the facts–i.e. who has read Stan Liebowitz or Ed Pinto–is going to fall for its sophistries.

  44. Gravatar of David Pearson David Pearson
    21. September 2010 at 10:58

    Scott,

    Looks like the Fed gave you two things today:

    -it acknowledged that it has a mandate to keep inflation at a certain level.

    -it acknowledged that inflation is likely to be below that level for some time.

    IMO, this is more than dipping a toe in the pool of inflation targeting.

  45. Gravatar of Benjamin Cole Benjamin Cole
    21. September 2010 at 11:18

    OT but timely…here is how the FT played today’s FOMC meeting…

    Fed ready to aid US economy
    By Robin Harding in Washington

    Published: September 21 2010 19:34 | Last updated: September 21 2010 19:34

    The Federal Reserve took no action at its September meeting but sent a signal that it may soon restart large purchases of Treasury bonds by changing its policy statement.

    After its meeting on Tuesday, the rate-setting Federal Open Market Committee said that it “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

    My fellow monetary bulls–keep e-mailing, writing letters to the Fed, crafting op-eds and blogging….

  46. Gravatar of spencer spencer
    21. September 2010 at 12:08

    Apparently Sullivan wants to forget about regulation “Q”
    that prevented the mortgage industry from borrowing short and lending long when the yield curve was negatively slopped.

    As soon as regulation Q was eliminated — giving the mortgage industry the freedom to act — they destroyed themselves by doing exactly what the regulation prevented.

    Another example of Sullivan saying that freedom equals slavery.

  47. Gravatar of Wonks Anonymous Wonks Anonymous
    21. September 2010 at 14:48

    Regulation Q governed interest paid on demand deposits, and was repealed in 1980. I suppose all deposits represent borrowing by banks, but I still don’t completely understand the implications. Is the point that deposits shifted from savings to checking accounts?

  48. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2010 at 07:57

    Regulation Q was done in by the inflation of the 70s, as all price controls are usually undermined by market responses. However, its repeal didn’t cause the home lending industry to abandon its traditional underwriting standards. Which is the (as I’ve pointed out already) the sine qua non of the crisis.

    Spencer is getting even sillier.

  49. Gravatar of Robert Hurley Robert Hurley
    22. September 2010 at 13:11

    Patrick Sullivan – You seem to be making a big deal of what F&F, HUD and other Government player said. Shouldn’t the case rest on statitics. I have found working for over 40 years in the private sector that there is often a discrepancy between what we say and what we do. I do not think Krugman or any other economist is saying that F&F had no role, it is more that they are saying look at the statistics and see which players had the major share of sub prime in teh run up to the crisis. For some of the other commentators, I wonder if calling into question Krugman’s intelligence doesn’t reflect more on your own lack of ability to respond with data.

  50. Gravatar of scott sumner scott sumner
    22. September 2010 at 14:44

    David Pearson, You link to a post entitled Fannie and Freddie acquitted. May I point out that the commercial banks are repaying all the Tarp money, and meanwhile F&F are estimated to cost the taxpayers $165 billion, and the number keeps rising. It doesn’t sound to me like they should be acquitted. One of the things I find interesting is that Krugman can show a graph showing that more that half the increase on mortgages was financed by F&F, then cherry pick a few years where their participation dropped off, and say the graph exonerates them. It really doesn’t matter when F&F participated in the bad loans, what matters is the amount. The problem wasn’t the “housing bubble” the problem was a mountain of bad debt that’s dragging F&F into bankruptcy at huge cost to the taxpayers. It is beyond my comprehension how people could exonerate them.

    D Watson, I don’t know of any good money textbooks, and I don’t plan to write one. Mishkin’s may be the best. I’d have him read stuff by Milton Friedman, like the monetary history of the US.

    Still haven’t gotten word on my Depression book.

    Mike Sandifer, You said;

    “One thing I can say for him is at least he admits he was wrong about something, which I personally haven’t seen other economists doing, other than yourself.”

    How can I put this politely: No. Most economists admit mistakes much less grudgingly than Krugman. Of course he had to admit he was wrong when he claimed F&F had zero involvement in sub-prime loans, but when it’s a gray area, I don’t see him admitting errors. Having said that, he’s a very smart blogger, and well worth reading. So I don’t agree with those conservatives who just ridicule him or dismiss him. He makes strong arguments.

    David Pearson, On the Fed we agree. I can’t help pointing out that this was my interpretation of the Jackson Hole speech, a line in the sand at 1% core inflation. This time it was more explicit. Arrgh, now I’m getting like Krugman!

    Spencer, Regulation Q was eliminated because when the yield curve inverted they were going bankrupt. There’s a reason even the most interventionist progressive doesn’t advocate re-instating Reg Q.

    Wonks Anonymous, Eliminating Reg Q had nothing to do with the crisis.

  51. Gravatar of Morgan Warstler Morgan Warstler
    22. September 2010 at 22:13

    Morgan; You said;

    “The truth of the matter is… D programs are much easier to trim politically:”

    You think it will be easy to trim R programs like drugs for old people, and no child left behind?

    Scott, you mis-read….

    I said certain programs NOW are easy to cut – they are Dem programs…. MF would applaud.

    I also said, hopefully next time Dems have some power, they wont waste it spending MORE, they will instead get off on cutting R programs – and I think cutting military and corporate subs, will be easier for them to cut than medicine for old people, or NCLB.

  52. Gravatar of scott sumner scott sumner
    23. September 2010 at 16:20

    Morgan, OK, let’s see what happens after November.

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