Matt Yglesias points us to the following:
Federal Reserve Chairman Alan Greenspan said Monday [February 2004] that Americans’ preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.
By the way, Greenspan’s recent Op-Ed claims he is not to blame, plus he disavows blame in his NPR segment the other morning.
The other day I wrote of widespread fraud; I was referring to the fact that many lower income borrowers lied on their mortgage applications or failed to provide documentation of income. Do any of you have figures here?
The New York Times today blames many factors, including lax and fragmented regulators, but most of all the irresponsible practices of mortgage-lending affiliates of nationally chartered banks. Here are the now well-known warnings of Ed Gramlich.
If you are curious to evaluate my record as a prognosticator, my earlier posts on whether we are in a housing bubble are here [TC: it turns out I didn't buy close to the peak] and here. Am I to blame? Here is Alex’s insightful post. Most to the point, here is my post "If I Believed in Austrian Business Cycle Theory."
Some of the Austrians blame Greenspan for lowering short-run interest rates to one percent. From another direction, here are tales of a real estate bubble on the moon.
I browsed through a New York Fed conference summary the other day; it was about "systematic risk" and it was held about a year ago. I did not see a word about housing bubbles. The surprise was not the bubble, but rather than its collapse could be such a source of systemic risk and that it could freeze broader credit markets so much.
Paul Krugman claimed that the fundamental problem is lack of solvency, but he doesn’t make a clear enough distinction between insolvent homeowners (for sure) and insolvent banks (has he bought puts?). I haven’t seen an estimate of the losses that is large enough to imply anything close to widespread bank insolvency.
Matters would be easier to understand if they were either much better or much worse than they are; it is the current state of hovering which is so puzzling.
Here is Bob Dylan on what went wrong. It’s the best account I’ve heard so far.
You need to read Calculated Risk. As an exercise in self enlightenment, try reading CR (and tanta) during the period Alex was moaning about credit snobs and you took to the pages of the NYT to moan about how complicated it all is and why all the little people should just let the experts figure it all out.
Nope, your economics prognostication record is not good.
I do read all the books and buy a lot of the music though. Keep up the good work.
The majority of investors I’ve talked to most certainly knew they were in a bubble. Naturally, such knowledge doesn’t help anything when they are hoping to make money before the bubble bursts. I’d be interested to see any studies taken during bubbles that ask investors whether or not they feel they are currently in a bubble. Although prediction market prices would be the preferred way of gathering this data, we don’t have any that are used by all that many people.
A good portion blame the problem on low interest rates as well, although they have no understanding of ABCT.
Tyler, if you don’t believe monetary expansion and contraction are the causes, what do you think the effects of price-setting the interest rate are? We all know prices coordinate economic action within an economy, so altering the rate of interest has to do something. I’m curious to know what most economists think that does, even if they don’t accept that the rate of interest coordinates intertemporal action (which I think in itself is a pretty silly stance to take, given the millions of business undergrads throughout the US who are taught to use the rate of interest to make choices for the future).
Tyler,
The present situation seems even odder than you think. Have you
looked at past occasions when over-priced property started to loose value?
i remember being a lonely predictor of the break in the British property markets in the late 1980s. The banks lending criteria then had become hair-raisingly loose. I was scared of a major credit crunch when prices stared to fall. In a perverse policy stance, the British Government kept interest rates really high. Prices fell twice as far as I had expected, but the fierce credit crunch never came. Something is very different now.
Heh. Credit snobs. I remember those days. I was disturbed to be told:
“The fact that people do not anticipate their inability to pay is a problem to be addressed only by the borrower and the lender. And nobody else.”
On the statistics front, you can go to http://www.mari-inc.com/ which is the Mortgage Asset Research Institute and they cover this sort of thing.
I have posted a link to the Hayman Capital Partners letter of July 30 2007 before. His informal due diligence contains some figures.
http://disciplinedinvesting.blogspot.com/2007/08/subprime-update-from-hayman-capital.html
In Socal at least, a lot of the no-doc loans were to undocumented immigrants, who got taken by unscrupulous mortgage brokers and loan originators who sold the loans to “sophisticated” suckers.
An alleged example of this
The problem is straightforward moral hazard. I saw this coming several years ago when studying the law of mortgages. Securitization means that originators get to fob off most of their risks onto investors who don’t regulate the loan process and often don’t even get reliable information about loan quality. Instead, as Foobarista observes, investors trusted computerized “risk models” that did not (and perhaps could not) properly account for moral hazard. Investors in mortgage securities act financially like insurers but without the rules and processes to reduce moral hazard that real insurers use.
Solving moral hazard problems requires more than fobbing off the risks with statistical risk premiums. It requires rules and regulations to reduce that hazard, preferably from the investors/insurers themselves but if not them from regulators.
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