While the parent company of the Wall Street Journal, News Corporation, is getting a proper punching across the pond, let’s see how Rupert Murdoch’s business-as-usual cheerleader reports on the causes of The Second Great Depression.
By Nick Timiraos, The Wall Street Journal, May 4, 2012
That’s the implication of a new paper from economists at the Federal Reserve Banks of Atlanta and Boston that’s bound to spark debate because, if their premises are correct, it sharply undercuts the justification for much of the new regulation that’s been erected over the past two years.
Three economists, Christopher Foote,Kristopher Gerardi, and Paul Willen, present two narratives of the financial crisis in trying to answer why so many people made so many dumb decisions.
The first view is that the financial crisis was an “inside job” where various industry players, from the mortgage lenders to mortgage traders, took advantage of unsophisticated rubes, from homeowners to mortgage investors.
They largely discard that view for a second one—the “bubble theory” where delusional attitudes about home prices, not distorted incentives, fueled poor decision making.
This is the Wall Street Journal. Does anyone think for a New York minute that they’d get behind the Inside Job view of the housing debacle? Of course not. It was obviously the fault of strawberry pickers, the Community Redevelopment Act of 1977, Barney Frank, and undeserving minorities who never should have been allowed to own property ever ever ever. (Uppity rabble might then expect the vote, too.)
And as for the origin of this paper? The Boston Federal Reserve? Everyone working there is hoping to get hired by one of those market manipulators, so don’t look for their facts to bear much relation to what really happened.
Here’s the authors’ abstract of the
excuse for wrecking the whole economy report:
This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Translation: if we blame the meltdown on irrational exuberance, then none of our friends will have to give up their bonuses. Or their freedom.
The above diagram is from the research paper, and it neatly blames the victims for believing housing prices only go up. Notice who’s missing from the picture? Realtards. You know, the people who tell you that housing prices only go up.
Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis.
Hey, what do you expect when you loan to a bunch of deadbeats?
We’ve got 11 more of these delightful “facts” waiting for you after the break.
Fact 2: No mortgage was “designed to fail.”
Of course they weren’t designed to fail. They were designed so it didn’t matter if they were paid back or not. If they couldn’t “sustain a drastic decline in prices” then whoever designed and approved the mortgages were drinking their own Kool-aid.
Fact 3: There was little innovation in mortgage markets in the 2000s.
Just because bankers and loan brokers discouraged the usual loan type (20% down, fixed interest rates, no balloons) doesn’t mean they were actually innovating anything. Banks always had a way to loan money to deadbeats.
It’s just in the 2000s, banks were just aggressively marketing their products for
subprime markets Special sectors so that everyone could enjoy the benefits! Remember miss-a-month loans? These were even better!
Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.
Yes, yes, yes, it’s ALL Big Government’s fault! Why blame the bankers for writing loans that never would have been permitted before Glass-Steagall got repealed? And deregulating markets means more innovation! Which, um, according to Fact 3, there wasn’t any of! Really!
Also VA loans are low down payment and therefore evil. So there.
Fact 5: The originate-to-distribute model was not new.
Of course, if it isn’t new, therefore it isn’t a bad idea. And if selling 5% of your loans to secondary mortgage markets or insurance companies is a good idea, then selling 100% of them to investment banks is sheer awesomeness.
Again, it’s not a matter of new products, just new marketing, new volumes, new collateral, and new customers. By a factor of several million. And also the commodities market was deregulated. But we won’t mention that.
Fact 7: Mortgage investors had lots of information.
Of course they did. Lots and lots of information in 9,000 page prospectuses printed in 4 point type. A small percentage of it might have even been true.
There was also fraud, but let’s not spend too much time on that point. And nobody would have expected the investment banks to game the ratings agencies into giving AAA to crap.
It wasn’t the banks’ fault! It was those stupid investors buying the toxic products they were advised to buy! It’s morally wrong to allow suckers to keep their money!
Fact 9: Investors were optimistic about house prices.
No doubt because Suzanne researched this.
Fact 10: Mortgage market insiders were the biggest losers.
Yeah, those 4 million people who lost their homes to foreclosure? Who cares about them? But all those out-of-work bankers? What a shame!
Fact 11: Mortgage market outsiders were the biggest winners.
Goldman Sachs is a mortgage outsider? One would think creating, packaging, marketing and selling bets on mortgage market motion implies otherwise.
Wait, what about the synthetic CDOs where they sliced up the same package of mortgages, backed by various credit default swaps, a million different ways? That should have diluted the poison to a safe level.
And what do these geniuses conclude after announcing that the dog ate all the bankers’ homework?
For policymakers, the important question is whether the economic events of 2002 to 2008
were more like malaria or more like an earthquake. Was the crisis a “preventable disaster,”
resembling a disease whose pathology is well-understood and for which we can administer an
effective treatment?52 Or, to draw on the Nocera quotation from the introduction, was the
crisis instead caused by a poorly understood “mass delusion” that we can neither predict nor
prevent? Proponents of the conventional wisdom on the crisis clearly view it like malaria.
A great deal of policy since the crisis has focused on improving disclosure and changing
incentives for financial intermediaries. But we are skeptical that this approach will work.
Malaria’s spread is understood and can be eradicated. Earthquakes are also understood but cannot be predicted. But the authors compare the 1989 Loma Prieta earthquake to the 2010 quake in Haiti, and note that fewer people died in the former one because of better building codes. Based on that they suggest more mortgage industry regulation and disclosure is unnecessary.
Yes. They really said that. Because mortgages aren’t buildings. They’re just securitization of buildings. So if people are going to keep securitizing houses, all these economists think is necessary to prevent another financial Armageddon is remind banks and borrowers that house prices can indeed go down.
Yeah, like NAR’s going to stand for that.