As I wrote in my earlier piece, neither of those narratives gives you a good picture of the financial crisis and what it was about. That people on Wall Street are greedy is a given. That financial institutions were behaving in suboptimal ways was the fault of lawmakers and regulators. CRA, though wrongheaded, did not have much to do with the financial crisis. And, yes indeed, Fannie and Freddie were as much a part of the financial crisis as any of the other large financial institutions in the United States.
To remind you, Fannie and Freddie, formerly privately-owned (but "government-sponsored") enterprises, have been under government conservatorship since September 2008, and bailing them out will ultimately cost us in the neighborhood of $300 billion. Indeed, Fannie and Freddie appear to be the principal source of bailout losses to the federal government and the Fed. Fannie and Freddie are corrupt, they survive - indeed thrive and expand - because they are subsidized, and they perform no important economic role.
Now, where Thoma seems confused is in his characterization of this book by Gretchen Morgenson and Joshua Rosner:
That’s why I was so disappointed to see the new book by Gretchen Morgenson and Josh Rosner, Reckless Endangerment, blaming the financial crisis on Fannie, Freddie, and Democrats. The book has been highlighted recently by George Will and David Brooks, and it joins a chorus of conservative voices promoting the idea that government policies to encourage home ownership among middle and low income households is at the heart of the financial crisis.If you read the reviews of the Morgenson/Rosner book here, you will find glowing ones from those right-wing nuts Bill Moyers and Simon Johnson. Morgenson works for that right-wing rag, the New York Times, and Rosner writes in the Huffington Post. I have not read the book, but the review here makes it sound more like the left-wing bad-Wall-Street-guys narrative. Don't worry Mark, I don't think anyone is seizing your narrative.
I don't know of anyone who would counter your claim that F&F are corrupt, or that they "survive - indeed thrive and expand - because they are subsidized." The question is whether it's fair to single F&F for causing the crisis. Or, is it even fair to claim that they "were as much a part of the financial crisis as any of the other large financial institutions in the United States?"ReplyDelete
While I don't necessarily disagree with your conclusion, it doesn't suffice to circularly claim that it's just true. Can we claim that they're as responsible as, say, private banks, simply because they're crooked? Or because of the cancerous cronyism they will have cost taxpayers $300 billion? I don't think so.
The point is that you can't "single out" anyone or anything. The financial crisis was systemic. But it is also wrong to be letting F and F off the hook. Read my earlier piece. There's plenty of detail there. This is not some claim that it's "just true."ReplyDelete
F&F's leverage contributed to the crisis, not "loans to poor people". Alt-A loans were certainly not made to lower income individuals. Moreover, in California, the average subprime buyer had a median income. This is not surprising given that a low-end house still cost around $400k in 2006.ReplyDelete
What helped cause the crisis was F&F's out-sized leverage ratios. They were making big bets with little capital, just like Bear and Lehman. This leverage was the cause of the run on shadow bank liabilities collateralized by F&F AAA-rated MBS.
Who was blame? Most economists, for arguing (based on flawed econometric models) that nominal house prices could not decline. Congress, for allowing F&F's balance sheets to balloon based on what economists told them about house prices. And, of course, F&F's shareholders and creditors, for allowing management to pay themselves big bonuses while risking huge losses.
"Most economists, for arguing (based on flawed econometric models) that nominal house prices could not decline."ReplyDelete
Most? That would be 90%, 80%, or what? I certainly don't remember saying this, nor hearing it.
I think the Fed is a good stand-in for their profession. A string of Fed Governors and Presidents, including both Chairmen, testified before Congress or gave speeches to the effect that national nominal house price declines were improbable.
Beyond that, most Wall Street economists held the same view, and so did the legions of econometricians/quants these firms employed. Every mania has its analytical enablers, and this one was not different. I would say the number was in excess of 70%.
Academic economists? Point me to the papers dealing with this, one of the most important macroeconomic issues of our time, in a serious, proactive way. Perhaps I am wrong to interpret complacency as agreement, but then one could also easily conclude this is a distinction without a difference.
Even today, I'm not sure academic economists understand the dynamics caused by the drop in house prices. I would point to the endless debate over structural vs. cyclical unemployment. How many academic economists recognize the fact that declining home equity erodes the capital available for new firms? Net new firm creation is the most important potential source of employment growth. How many papers have you seen on this topic? I've seen many useless studies examining sectoral job losses, studies which overlook this important dynamic.
"How many academic economists recognize the fact that declining home equity erodes the capital available for new firms?"ReplyDelete
Kiyotaki and Moore (land plays a specific role)
Pretty much all the work by Iacoviello is on housing
A large part of Ben Bernanke's work. Bernanke and Gertler's work has an OLG structure for entrepreneurial firms, so I guess you could say firm creation margin plays a role.
A lot of Vicenzo Quadrini's work (some of it deals with firm creation)
Mendoza, when it comes to small open economies, however no specific emphasis on real estate, but could be easily adapted.
Anon1 (aka Ignorance is bliss) above illustrates the Krugman syndrome to a perverse degree. Completely and utterly ignorant of the vast macro literature but damn sure they know it has nothing to say. Go and read and then come back when you know what you are talking about. About 5 years should do it.ReplyDelete
What would you say prevented that research from being utilized then?ReplyDelete
You are entirely correct. I have not waded through the macro literature on the causes of financial crises. I am more concerned with what academics had to say in 2006 and 2007 about house prices, shadow bank liabilities, and the banking system's obvious fragility. Gorton's work certainly holds up well. Early on, he correctly identified the dynamics of the 2007 run on shadow bank deposits. I'm sure you will tell me who else was able, through their knowledge of the vast macro literature, to warn us about the dangerously high level of systemic risk.
The usefulness of a body of work is not in making point estimates about the future. It is in helping us, the broader public, understand the range of probable outcomes. In this regard, how do you think the academics profession fared?
@Anon1 --- the Boston Fed published a paper reviewing what economists said about housing during the boom. Perhaps you could read it before you post more misinformation in the comments section here.ReplyDelete
The paper you cite reiterates my point:
"The main question that motivates this paper is why market participants were so optimistic— in other words, why they largely ignored the pessimists. Our answer is somewhat surprising: the pessimistic case was a distinctly minority view, especially among professional economists."
None of the papers cited tried to quantify how much transitory housing demand the credit markets were creating with low-payment products. If they had looked at this question, they would have determined that once these products saturated the market (leveled out in penetration), house prices would decline. Armed with that knowledge, one could then look at the impact of house price declines on credit markets. The risk was evident.
you're missing the point, which is that you keep making unsubstantiated claims - about economists, about economic research, about the behavior of politicians, about the lending practices of the GSEs, etc.ReplyDelete
"None of the papers cited tried to quantify how much transitory housing demand the credit markets were creating with low-payment products. If they had looked at this question, they would have determined that once these products saturated the market (leveled out in penetration), house prices would decline. Armed with that knowledge, one could then look at the impact of house price declines on credit markets. The risk was evident."ReplyDelete
There are so many ill-defined concepts in this paragraph it is hard to know what to make fun of.
The Boston Fed paper you cited substantiates the original claim that I made and Stephen took issue with. I'll leave it at that.
"I'll leave it at that."ReplyDelete
Somehow, I don't think you will.
In another context, our friend anonymous 1 writes "it was obvious the die would come up 6. Most economists thought it would come up between 1 and 5 but with my special insight, I knew a 6 was inevitable. Economists are useless"ReplyDelete
"Who was [sic] blame? Most economists"ReplyDelete
what is "most"? which "economists"? academics? central bankers? wall street economists? there is no way to substantiate such a vague claim.
The question of whether academic economists were assigning the most accurate probability of a crisis given available information at the time is unanswerable, so why are we even discussing it?ReplyDelete
A more interesting question is whether there was any identifiable source of bias. Are there characteristics of macro-economists that would make them more likely to have called the crisis? Perhaps work with historical/emerging market data? Links (or lack of links) to financial industry? Employment at the Fed or in academia? Publications in major journals? Any other?
"what is "most"? which "economists"? academics? central bankers? wall street economists? there is no way to substantiate such a vague claim."ReplyDelete
Nonetheless the FRB paper cited above says things like, "The small number of economists who argued forecefully for a bubble..." Is that also a vague claim? And anyway what's the problem with making a claim, even if hard to substantiate, so long as it's true? Or are you saying there is a long list of economists - define the term as you will - who argued forcefully for a bubble? Or are you just playing the "burden of proof" game? You know the claim is true, don't like it, and thus try to confuse the issue by imposing a burden of proof on the poster, which you wouldn't accept yourself?
To above commenter -- prove to me there was a bubble. Actually, I'll make it easier for you -- define a bubble and give me an empirical method for detecting them. You don't even have to prove there was one this time, only that they can exist at all.ReplyDelete
Good luck. I'm guessing you'll fail.
"And anyway what's the problem with making a claim, even if hard to substantiate, so long as it's true?"ReplyDelete
How do you know a claim is true if it is hard to substantiate?
whether "most economists" failed to spot a bubble is irrelevant. congress did not allow the GSEs balance sheets to "balloon based on what economists told them about house prices". they did so because they were incentivized to do so by campaign contributions and by voters (who like government subsidized mortgages).ReplyDelete
"Actually, I'll make it easier for you -- define a bubble"ReplyDelete
Um, this goes under the fallacy of "unless you define your terms, you can't make true claims." I can know an object is red without being able to define "red".
Are you actually claiming there *wasn't* a housing bubble? Be a man (or a woman) then, and come out and say it. C'mon, make the claim, in the unambiguous form, "There was no housing bubble," and see how little people take you seriously, and rightly so. Instead, you hide behind a burden-of-proof argument.
"How do you know a claim is true if it is hard to substantiate?"
There are many, many claims which are hard to substantiate which can be known to be true, under the normal meaning of "know". You're just playing semantic claims.
I am not. Thhis is the core of what science is about. If you can't substantiate it, it is meaningless.ReplyDelete
By the way, I can define red. Red is the set of colors close to the color of a cherry. As it turns out you can associate it with some frequencies of light. If you and i disagree about whether something is red or green it is pretty easy to check who is right.
For neophyte epistemologists, this is a good starting point on the state of the art of the philosophy of the matterReplyDelete
"By the way, I can define red. Red is the set of colors close to the color of a cherry."ReplyDelete
"If you and i disagree about whether something is red or green it is pretty easy to check who is right."
Which is not the same thing as providing a definition. We check who is right by asking other people, "Do you think that is red?" Similarly, in the recent run-up to housing prices in the US, we two seem to disagree. So we can check who is right by asking other people, "Do you think it was a bubble?" Care to be how that will pan out?
So if 500 years ago I wanted to know whether the world is round or whether the earth sat in the center of the universe all I had to do is go around and ask people? (you may be surprised if you try doing this even now).ReplyDelete
"So we can check who is right by asking other people, "Do you think it was a bubble?" Care to be how that will pan out?"ReplyDelete
About as well and meaningful as asking Sarah Palin if dinosaurs played with people. Asking people who don't know the answers is not useful. Quit pretending to know economics, it won't do you any good here. If you want to seem smart, try Marginal Revolution -- nobody there knows any economics at all.
"Quit pretending to know economics, it won't do you any good here. If you want to seem smart, try Marginal Revolution -- nobody there knows any economics at all. "ReplyDelete
My you *are* bitter you never got accepted at Harvard, aren't you?
"My you *are* bitter you never got accepted at Harvard, aren't you?"ReplyDelete
Ah, but I did.
As you note, you have not read Morgensohn and Rosner's book, neither has Thoma I would guess. Going through the index, CRA does not show up prominently. I suppose every reviewer just reads his/her own prejudices into the book. My reading is that the main claim of the book is that the Fannie management was manipulating Congress and pushing regulators around to achieve its performance goals and get its bonuses. I am not sure if Fannie was that effective at it, but suppose it really was the bully M&R describe, and that it wasn't alone in that. Does that have any implications for the summary you offer in your previous post, that "It's all about the government"? I mean, the laws/regulations that constrain the environment Fannie and other financial institutions are operating in are not coming out of nowhere, and these institutions were and still are very much aware of that. Its not just about being greedy within the rules, its about changing/interpreting the rules and thereby defining what is acceptable greed and what crosses the line.ReplyDelete
A statement without content. Why are my preferences up for debate? Why should you get to decide whether my preferences are okay?