4th and Inches said:
FLBear5630 said:
Osodecentx said:
4th and Inches said:
2008 was 100% because of govt regulation, not lack of it..
Derivatives were regulated?
Regulation was the cause? Everything I read on it was deregulation which allowed the derivatives which ended up with interest only loans and ARMs.
https://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/
I know its an alt right publication but press through and read
Atlantic is traditional, thoughtful classical liberalism of the center left.
The article is a very good one and explains PART of the problem.....the supply part. Government policy effectively required banks to make "sub-prime" loans, and facilitated it by opening the "window" at Frannie Mae & Freddie Mac (FMFM) to dispose of the riskier/lower-yielding loans. Banks know they can meet their obligations for fair lending by originating loans they would never otherwise make, because they always have a "window" to dump them (FMFM). They make money on the origination fees, and small change on the sale. But FMFM and others have capital limits, too. They have to bundle up bunches of loans to sell to investment firms. Thus the rise of "mortgage backed securities."
The demand part of the problem is here: Those mortgage-backed securities, which by virtue of having FMFM instruments in them with implicit full faith & credit of the USG, are considered comparable to Treasury bonds....and are then bought by investors (which include investment divisions of banks), And those mortgage backed securities, because of the small number of sub-prime mortgages in them, had a slightly higher return. And, thanks to the 1999 repeal of key portions of the Glass-Stegall Act, (Gramm-Leach-Bliley), THOSE SAME BANKS WHICH HAD ORIGINATED THOSE SUB-PRIME LOANS WERE BUYING THEM BACK AS SECURED INSTRUMENTS to hold in their reserves.
We don't want Bank of America lending division to hold onto A sub-prime mortgage, but we'll let Bank of America investment division hold gazillions of them because they are attached to a bunch of better paper.
Good idea!
and then, the predictable happened: many of the sub-prime mortgages failed. and when they failed, they caused the yields on the mortgage backed securities to sag. When those yields sagged, the values declined and they became unmarketable. And thanks to "mark to market" rules by the Fed (who audits the creditworthiness of banks), if bank cannot sell an instrument in their reserves, it has no value and must be written off. When banks/investment firms (the line between the two was erased, remember) write off substantial parts of their reserve capital, they become insolvent from a regulatory standpoint. Investment divisions of profitable banks then fail, and the whole house of cards collapses. The Fed, you see, doesn't care about home ownership rates. Just the creditworthiness of the lending institutions in their system.
Arguing over whether It was driven by too much regulation or too little is a false dichotomy - it was both. More to the point, IT WAS ALL POLICY DRIVEN.
".....On closer scrutiny, it turns out that many of today's problems are a result of yesterday's solutions.
-Thomas Sowell