NYT: Blaming the Fed for the Sub-Prime Mortgage Crisis
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“Hindsight is always 20-20, but it’s clear the Fed should have acted earlier. Financial innovation is great, but you have to have some basic rules. One of the most basic rules is that a borrower should have the ability to repay.”
--Sheila C. Bair,chairman of the Federal Deposit Insurance Corporation
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Back in August, I wrote a piece titled The Ongoing Impact of the Housing Sector. In that, I discussed all the many people responsible for the sub-prime housing crisis (which has subsequently led to the present credit crunch).
I singled out the Fed for two reasons: 1) taking rates down to ridiculous levels and leaving them there for too long, and 2) their failure to adequately perform their banking regulatory responsibilities when it came to the origination of mortgages.
Today's page one NYT article covers the latter in grisly detail Fed and Regulators Shrugged as Subprime Crisis Spread. They single out Greenspan for his part in allowing unregulated problems to fester.
You can read the full article there, but here I wanted to emphasize the graphic:
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click for larger version
courtesy of NYT
Download ginormous version: 2007subprime.jpg
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As we have seen in oh so many different contexts, the blind adherence to dogma and ideology, from religious zealots to acolytes of Ayn Rand, seems to only lead to a broad range of problems, ranging from errors in judgment to unnecessary pain. Ultimately, most political and economic extremists collapse under the weight of their own slavish devotion to a universal idea that is inapplicable to a specific situation. Some people call this consistency, but the word "stupidity" means the same thing, and can be typed with less letters.
I'll take a pragmatic technocrats over the syncophants, idiots and idealogues any day of the week . . .
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Sources:
Fed and Regulators Shrugged as Subprime Crisis Spread
EDMUND L. ANDREWS
NYT,December 18, 2007
http://www.nytimes.com/2007/12/18/business/18subprime.html
The Ongoing Impact of the Housing Sector
Barry Ritholtz
Investors Insight, August 24, 2007
http://www.investorsinsight.com/otb_va.aspx?EditionID=576
Tuesday, December 18, 2007 | 06:37 AM | Permalink
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Comments
Ah, but they forgot this:
Greenspan says ARMs might be better deal
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said.
2/22/04 (or thereabouts)
Posted by: fatbear | Dec 18, 2007 6:48:45 AM
And let's not forget that this one time the Times headline writer had a sense of humor - I'm sure it started as Alan Shrugged but got shot down
How many Big Picturers out there think that big Al knew what he was doing, and thought that in the mortgage jungle the plebs were there for the rightful fleecing?
Posted by: fatbear | Dec 18, 2007 6:56:24 AM
Hey, Barry - it's fun this early - sorta my own blog - promise, this is my last comment for now - gotta get to the Apple store in Soho for my class
Posted by: fatbear | Dec 18, 2007 6:59:03 AM
Hey Fatbear,
I never mind multiple comments -- as long as they contribute something to the dialogue.
Your fine . . .
Posted by: Barry Ritholtz | Dec 18, 2007 7:03:51 AM
Barry-you neglect the main reason Alan Shrugged. Pleasing lobbyists and political masters has corrupted the Fed absolutely. Volcker was truly independent and thus feared and disliked and EFFECTIVE. Easy Al was loved and revered (owned by the elite)and we will be paying the price for years.
Posted by: lurker | Dec 18, 2007 7:39:57 AM
top blogger spelling errors:
your/you're
you're = you are!
there/their/they're
there - as in "over there"
their - as in "their fault" or "their ipod", ie. belonging to someone.
they're = they are!
lose/loose
"you will lose the game if you play too loose"
IN SUMMARY:
"there is a theory if your subprime lending is too loose, you're likely to lose money as their credit deteriorates and they're not going to pay you back!"
Class over!
Posted by: stickler for spelling | Dec 18, 2007 8:05:19 AM
ECB just dropped a half-trillion into the system; I'm not sure what to think of that.
Posted by: Paul Jones | Dec 18, 2007 8:06:24 AM
Time for Alan to walk quietly into the sunset, the guy is like an ingrown toenail that just won't go away.
Posted by: rob | Dec 18, 2007 8:08:46 AM
stickler for spelling said ...
IN SUMMARY:
"there is a theory if your subprime lending is too loose, you're likely to lose money as their credit deteriorates and they're not going to pay you back!"
reply: Your grammar may be correct, but it is boring.
"Deadbeats and very poor people won't pay you back if you're dumb enough to loan them money" makes the point more clearly and is more fact than theory.
"Stupid is as stupid does" is also on point, but lacks context.
"Unpaid money is get what you will. Unwise is credit easy" is how Yoda might say it.
Got it?
Posted by: cinefoz | Dec 18, 2007 8:19:26 AM
I think you guys are just to hard on Alan. Remember the "real" problem of deflation at the time, and the horrible memory of what happen to Japan. Also remember; "hindsight is 20-20." The rest goes down as: "I don't know, so I'll do nothing, and oh shit!"
Posted by: justino | Dec 18, 2007 8:24:18 AM
Barry, interesting that you mention Ayn Rand. I wrote this the other day which includes a piece from one of her books:
Comrade Citizen, for the greater good
With the barrage of headlines over the past several days concerning freezing mortgage rates, bailing out homeowners, foreclosure moratoriums... and having written on Wednesday of Hillary Clinton's demands, yesterday's proposals by Treasury Secretary Paulson and President Bush to offer homeowners assistance, today's Bloomberg headline comes as no surprise as Senator Dodd has sent a letter to Fed chairman Ben Bernanke indicating he must "forcefully protect homeowners".
And with all of this, I cannot help but think of "We the Living" by Ayn Rand. In this novel she speaks of the Upravdom, a citizen who is elected to represent the other citizens... my idea is that it would be kind of like a union boss. So there is this scene where the Upravdom calls the tenants to attend this urgent meeting. He says: "No exceptions, citizens. Social duty comes above all. Every tenant gotta attend the meeting."
So the tenants bring their own chairs and chew on their sunflower seeds in this one large room which was offered for use by another citizen due to "social duty".
"Seeing as how I'm the Upravdom, " said the Upravdom, "I declare this meeting of the tenants of the house Number --- on Sergievskaia Street open. On the order of the day is the question as regards the chimneys. Now, comrade citizens, seeing as how we are all responsible citizens and conscious of the proper class consciousness, we gotta understand that this ain't the old days when we had landlords and didn't care what happened to the house we live in. Now this is different comrades. Owing to the new regime and the dictatorship of the proletariat, and seeing as how the chimneys are clogged, we gotta do something about it, seeing as how we're the owners of the house we lived in. Now if the chimneys are clogged, we'll have the house full of smoke. . .
"... and the special assessment will be divided in proportions to the. . . Is that you Comrade Kira Argounova, trying to sneak out? Well, you better don't. You know what we think of people that sabotage their social duties. . . And the special assessment will be divided in proportion to the social standing of the tenants...".
Makes me wonder when I read those words. And yesterday Greenspan said to 'just give the money to the homeowners'. Another door opened!
Posted by: strasser | Dec 18, 2007 8:30:43 AM
One big part of the problem is the idiotic part of supply side theory that claims you can borrow your way to prosperity. The qualifier is that you don't need to pay it back and that you can borrow for Consumption, rather than for Investment. The justification is that lower taxes and cheap illegal Mexican labor will pay for it all.
Makes perfect sense, right? The Mafia should have it this good.
Posted by: cinefoz | Dec 18, 2007 8:34:33 AM
Word for the day (from an arty NPR show over the weekend):
Poor people who hit the lottery don't become rich people; they become poor people with money.
It works the other way too....
Posted by: fatbear | Dec 18, 2007 8:56:26 AM
There used to be a radiologist at Yale named Greenspan, and I believe I've heard that Alan is his brother. The radiologist was highly respected -- hard-working, interested in the total clinical story of his patients, a superb teacher. I've wondered over the years if their mother ever stopped saying "my son the academic doctor" and switched to "my son the banker chairman". The cycle won't be complete until these values return to their proper scale and perspective. (Returning the money to its rightful owners is a little too much to hope for.)
This has been your geezer curmudgeon message of the day.
Posted by: Roger Bigod | Dec 18, 2007 8:56:49 AM
For the last 5 years, I have been ridiculed for talking about a bubble in real estate.
I believe the Fed is at the top of the list but I find it disgusting that the media that denied this bubble for so long now has the nerve to single out a culprit.
Maybe they should write an article about the role they played in building up Greenspan's public image, as in turning him into the Maestro.
They could have nipped this bubble in the bud by simply doing some real homework. They did not even need a huge budget to get it. Heck, the data is everywhere for everyone to see!
MANY ARE TO BLAME BECAUSE MANY WANTED TO CASH IN, HOPING FOR A BIGGER SUCKER.
Posted by: D. | Dec 18, 2007 9:20:41 AM
Alisa Rosenbaum aka Ayn Rand never understood Slavic people. She also did not understand Western mathmatics and our Germanic social system. Like her counterpart, Lev Davidovich Bronstein, she was only grist in the mill of history. That Greenspan was her syncophant is no mystery.
Posted by: Ross | Dec 18, 2007 9:31:16 AM
Thanks for the wonderful post against ideology. I have been blogging on the topic of ideological decision making in another more political blog. This mess is what you get when your world view is black and white. Subtlety is lost, nuance is ignored all for a strict adherence to dogma. Bush was highly praised for being a guy who sticks to his guns, he is the one whose ideology was followed to this ugly end we are seeing now. Remember this when you vote in November.
Posted by: mreynolds | Dec 18, 2007 9:34:46 AM
What D said.
I read (pronounced red) many articles on the web about the looming crisis during its multi-year ramp-up. A significant subset expressed concern about the growing tonnage of the derivative bomb that accompanied the bubble. I don't remember whether any were written by 'establishment' reporters.
I wonder... did Mr. Kudlow warn us about what might happen?
Posted by: J.S. | Dec 18, 2007 9:35:35 AM
right on stickler!
Posted by: BigMary | Dec 18, 2007 9:35:50 AM
D. is right. Greenspan, the rest of the Fed and regulatory agencies are responsible, along with the financiers of this bubble that are guilty of avarice and forethought.
There is no escape now because whatever remedies that politicians work out, it will not stop deleveraging.
Posted by: zell | Dec 18, 2007 9:39:21 AM
I get this.
As to the solution. All kinds of folks keep saying that the Fed needs to lower rates. That is the only thing that can save us. Yet, that would not jive with the above? Or does it?
Posted by: Advsy | Dec 18, 2007 9:45:27 AM
JS Said ...
I wonder... did Mr. Kudlow warn us about what might happen?
reply: Yes, but he calls it Goldilocks and denies the existence or possibility of a market that might go down ... unless Democrats are involved.
He recently shut down comments to his blog. I guess he was tired of being wrong so often and having others, such as me, point it out so frequently. Oh, well. At least I can write here. But, since, this is a much higher class joint, I can't be nearly as big a smartass here as I was there.
Posted by: cinefoz | Dec 18, 2007 9:45:52 AM
I wonder how this will go down on the Easy Al Revisionist History Book Tour?
Posted by: Peter Davis | Dec 18, 2007 9:54:34 AM
Barry -
the only problem with your theory is that Greenspan was the ultimate pragmatic technocrat. They make mistakes too.
God save us from more Fed 'accountability' a/k/a political intervention.
And a gold or commodity standard or monetary rule... remember Goodhart's law. Even Volcker couldn't stick with it when it meant double digit interest rates and unemployment as far as the eye could see.
~~~
BR: Pragmatic technocrat? He's more of a drunken sailor on shore leave . . .
Posted by: curmudgeonly troll | Dec 18, 2007 9:56:02 AM
Alan Shrugged. that's a good one.
Posted by: scorpio | Dec 18, 2007 10:03:01 AM
