I want to make a couple of remarks about Holman Jenkins’s latest column in the Wall Street Journal but I’ll quote a substantial chunk of the column here first because I think you might find it interesting:
en years after Lehman, revisionists are overturning the potted story of the 2008 crisis, and not too soon.
Claims of a national housing bubble as the precipitating event always seemed dubious when referring to an asset class whose prime differentiator is location, location, location.
What bubble there was seemed confined to a few subprime hot zones mainly in the West and Southwest. Now comes the Mercatus Center’s Kevin Erdmann to complicate the story. The hottest markets in the country never stopped being hot because restrictive zoning and building regulations turn them into what he calls “closed-access cities,†such as New York and San Francisco, where it is legally impossible to supply the housing demanded by the nonrich.
The subprime hot zones of the early 2000s, in his recounting, were those that experienced a demand shock from working families being priced out of the closed-access cities. Using Phoenix as an example, he shows that prices shot up to unsustainable levels because even a home-building boom couldn’t keep pace with new arrivals. He also shows, based on rents, construction and housing’s share of personal consumption, there never was a national oversupply of housing but the opposite: a shortage that continues today, centered on the closed-access cities that generate so much of U.S. economic activity.
Every day the sun rises in the world capital markets on countless scenes of failed risk-taking without causing a general panic. This is where the housing story interacts with another strand of revisionism, led by Bentley University’s Scott Sumner, which faults the Ben Bernanke Fed for tightening all through the Great Recession, oblivious to plunging inflation and a rising public demand to hold cash. A related story that you’re hearing—that anger over the bailouts is what led to the rise of Trumpian populism—is, of course, ridiculous. People are angry because their own job and wage opportunities were depressed for a decade.
Which brings us to Lehman. Say what you want about “too big to fail†and moral hazard. These are real problems. But once the safety net is unfurled, sending mixed signals was the height of foolishness, with the result that an even bigger, more controversial bailout was needed to corral the ensuing panic. Keep in mind that a general loss of confidence by wholesale lenders is what suddenly endangered the survival of a whole array of banks, money-market funds and industrial firms like GE and the auto makers, only some of which held the opaque, hard-to-value mortgage derivatives that were at the heart of a bank solvency conundrum.
The first remark is that I think that while it’s completely appropriate to have “safety nets” for individuals we should never, ever, under any circumstances have them for companies. Not for Lehman Brothers. Not for General Motors. Not for Goldman-Sachs. Help the people, particularly the working poor, who will be injured by a company’s collapse but for goodness sake do not help companies. Companies need to be able to fail to make prudent decisions about their courses of action.
The second remark is that although we have global movement of goods and capital we do not have the institutions or resources to control those flows. This is a subject that has been lost in the retrospectives of the financial crisis of a decade ago. Some of the actions taken were to preserve foreign companies, banks, and even foreign governments.
A last word: we are not insulated from the choices of Chinese or Indian companies and banks.
Heh. Well….
For a decade now I have advocated the “standard model” of financial restructuring: start wiping out the most junior capital layers until such point as the cap structure and the financial realities of the firm are congruent. No bailouts for junior capital. It happens every single day in this country and is the only real way of controlling corporate decision making. This process and principle applies to an insolvent banks capital base, a lender bank’s loans or GM.
I have also pointed out, with significant derision from some commenters, that two policy goals collided. The goal of home ownership and the restrictions to development. (Both primarily left wing creatures BTW) The cheap and flimsy derision has come in the form of a sarcastic “oh sure, blame the poor.” But this shows no understanding. The players: home purchasers, brokers and lenders were simply reacting to the rules set up beginning in late 1996. It became fashionable to scorch lenders and brokers as greedy, as most assuredly they were. But homebuyers, every bit as greedy, were given a pass. Lost in the debate, as always, were the Barney Franks, Dodds or Maxine Watters who excoriated regulators for daring to question the offloading of risky assets to Freddie and Fannie thereby facilitating the madness………….just as any fool knew they would. (As a point of completeness, Jenkins really should have cited S Florida as another locus of price bubble. That was really pure subprime, and relatively little zoning.)
Lastly, the seize up in commercial paper lines really did initiate a violent if temporary liquidity/financial crisis. And to revisit a topic from a few days ago. Money is fungible. To what degree homeowner cash flow available to service mortgage debt was impaired by each of rate resets, gasoline and diesel fuel prices, taxes or lagging wages……….or all of the above…….. is really unknowable.
Did this guy not hear about Florida?
Based on comps, the value of the house I had there at the bubble peak in 2006 was $525k. I sold it two years later for $200k. I originally purchased it in 2002 for $150k and put about $50k of improvements in. Zillow current lists the home value as $240k.
In other words, the bubble was not limited to a few areas in the west and southwest.
Andy,
I noticed that too. It’s exactly the same thinking that concluded a major market crisis could not occur because geographical regions were somehkw isolated from each other. If the subprime crisis had actually been limited to the west/southwest, mortgage-backed securities would have performed as promised and the crash wouldn’t have occurred.
And housing market collapse was very noticeable here in Lincoln, Ne. Although at lower values, $100,000 dollar homes sold at (tax) auction for less than $20,000. I’d like to add another spice to the brew, many of the people I know who lost their homes did so because of balloon payments on home equity loans they thought they would be able to re-finance, (Moral Hazard), and, generally these loan proceeds went back into home repair or improvement. Although one neighbor bought two new cars. Mistake.
In Chicago housing prices barely rose at all from 2002 through 2007 and then declined sharply in the aftermath of the collapse of the housing bubble and onset of the Great Recession until they were back where they were in 1997. They have risen little since then.
Meanwhile my property taxes have risen about 50% from where they were in 1997.
” But homebuyers, every bit as greedy, were given a pass.”
When you offer people free money, they take it. The banks were the ones making money, billions and billions of dollars, to assess risk and they were not doing it.
” Barney Franks, Dodds or Maxine Watters”
I have asked you to do this before but don’t recall you ever doing it. How did these minority party Congresspeople control everything? So when the ACA was passed and the GOP party was a minority, why didn’t they just run things like the Dems did when they were a minority? (I guess in short, are you capable of acknowledging that the GOP controlled both houses and the presidency when most of this was going on? Didn’t conservatives used to preach responsibility?)
Steve
Steve
You need to clean out your ears, or eyes. It all started in the late 90’s during Clinton’s term. That’s just a fact. It is well known that the subprime standard was pushed by Clinton as a social policy of “affordable housing for all.”
The Bush administration’s culpability (or anyone else) is really about standing by while the whole thing built to a crescendo. As I have pointed out multiple, multiple times the regulators were excoriated, primarily as racists, by the likes of Frank for daring to question loan portfolios. It was just politics. And we know how powerful racial politics is. Maxine Waters was busy singing the praises of Franklin Reines while he got rich letting his institutions buy loans from banks. What the hell, let the taxpayers take care of it. I have no idea whether the CSPAN archives are still available, but an interested person could have watched it with their own eyes.
“When you offer people free money, they take it.”
That’s your rationale? That’s absurd. If I said to you here’s a free $100MM house, but you have to post a million dollar bond and take over all the carrying costs in 3 years or lose your bond…………..would you do it? Would that be responsible?
As far as the lenders, of course they were culpable. But they had Fannie and Freddie to dump the loans on and clear their balance sheets. That shouldn’t have been allowed. This isn’t rocket science, steve.
By the way. From my comment last night. Right on cue new FBI emails signaling Obama’s culpability in the Russia hoax. Obama wanted dirt. It will ultimately be shown this thing rotted from the head.
“That’s your rationale? That’s absurd. If I said to you here’s a free $100MM house, but you have to post a million dollar bond and take over all the carrying costs in 3 years or lose your bond…………..would you do it? Would that be responsible?”
I run a medium sized medical group of over 150 people. In theory, I might be better than the average person at assessing risk, however, I would bet than when it comes to financial risks (what we are talking about here) you are probably a lot better at it. Is it so hard to see that finance professionals (bankers) should be better at assessing risk than most of us? They get paid millions for assessing risk and distributing capital, and you are making the case they are no better at it than the average person. Then they really shouldn’t be making all of that money. Maybe we should require that at the top of the loan it says “this finance professional is just as clueless as you are on finance issues”.
“But they had Fannie and Freddie to dump the loans on and clear their balance sheets.”
The money went to F&F late in the cycle. Early in the cycle it went to the shadow banks and the big banks.
” It all started in the late 90’s during Clinton’s term. ”
When the GOP controlled both houses in Congress.
“The Bush administration’s culpability (or anyone else) is really about standing by while the whole thing built to a crescendo. ”
The ignorance. It burns! It was pretty clear to a number of the state AGs that 125% mortgages and liars loans would not end well. They tried to sue to stop them. Bush’s people stopped the suits. The GOP also did a lot of other stuff to make sure if things went south, the banks would not get hurt, like eliminating clack for a number of financial instruments. Also, the subprimes that were prevalent during the Clinton admin were much different than we saw in the Bush years. They were generally just loans with lower down payments. They actually performed well. It was during the Bush years that we saw liars loans, 125% loans, and the big ARMs become prevalent. It is one thing to stand aside and watch or actively promote loans that are working. Totally another to watch while loans that you really have to consider fraudulent (liars loans) take up half the market.
Steve
Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
It has been proven empirically time and time again that brokers are no better at picking stocks than random chance. And yet somehow they continue to make money.