Tue
Sep 23 2008
09:55 am

The Freakonomics clowns have been mostly merely annoying. But being a mainstream conduit for fatuous wingnut talking points is just beyond the pale, man.

[T]here is no doubt at all about how we got into this mess...[A]t the heart of the problem is Congress and its deeply corrupt relationship with Fannie Mae and Freddie Mac. Congress was equally at the heart of the savings and loan disaster 20 years ago and, obviously, learned nothing from it.

Bullshit.

The author, like all the other purveyors of this and other similar dumbass notions, fails to explain the mechanism by which the GSEs ruined America. He harps on poor and corrupt management, accounting scandals and skeezy congressional ties - all of which existed. But zero evidence is provided for the core implication that Fannie Mae and Freddie Mac stampeded Wall Street into making bad loans to the shiftless underclass.

That's because no such evidence exists. The GSEs followed Wall Street into subprime late in the game, and held only a tiny fraction of the junk. This is proof that the management was exceptionally stupid - the object of a pyramid scheme is to be the first to join, not the last - but it is not confirmation that the GSEs were the "heart of the problem." Just the opposite, in fact.

These facts also put lie to the corollary wingnut talking point that McCain was prescient in predicting the financial crisis. The accounting scandals he rightly railed about had nothing to do with either the need for GSE privatization (poorly worded) for why the GSEs failed and certainly not the broader housing fiasco. And McCain said absolutely nothing about the subprime recklessness that the rest of Wall Street was engaging in, and that the GSEs would not dabble in for another year.

The bottom line is that Wall Street did not embrace risky credit because of any government housing mandate or competition from government-sponsored enterprises. It embraced risky credit 1) because there was no regulation standing it its way and 2) because it thought it could make mo' money off po' people by charging usurious interest rates.

...one other point. If the conservative argument is that, more broadly, the GSEs distorted the housing market by creating artificial demand, then I expect they will also come out against the mortgage interest tax deduction. Riiiiight.

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metulj's picture

If the conservative argument

If the conservative argument is that, more broadly, the GSEs distorted the housing market by creating artificial demand, then I expect they will also come out against the mortgage interest tax deduction. Riiiiight.

Ding. Ding. Ding.

On a related note to that very wise crackback point, hands up, how many people here knew that one can deduct an RV as a second home? I didn't until my mom got rid of her Prevost (she dog shows, but cut back because of health) and lamented the loss of the tax write off because the family home is paid off. You have got to be kidding me. I asked her if she was crazy and that if the CPA approved of that stunt and she said he was the one suggested it. I ran it by our accountant and he said, "Yup. You sure can." So it's like the perfect combination of petroleum hogging excessive spending mayhem that typifies the American dream these days.

True happiness is knowing you are a hypocrite. -- Ivor Cutler

R. Neal's picture

I expect they will also come

I expect they will also come out against the mortgage interest tax deduction.

That's what the "Fair Tax" liberpublicans want. The craziest ones were weeded out of the primaries early on, though.

Sven's picture

Ach mein Gott! At a

Ach mein Gott!

At a political rally in Linz, Merkel indirectly attacked US President George W. Bush. She suggested that American obstinacy had dragged other industrial nations into the credit crisis. Many European countries, she said, had already imposed stringent conditions on their banking sectors. "We dutifully adopted a nice EU directive into national law, and we had to deal with numerous complaints from small- and medium-sized companies in doing so. When the day came, the Americans said, 'We won't'," Merkel said

Sven's picture

the craziest ones were

the craziest ones were weeded out

I'd say McCain's just as crazy on this stuff; it's just not his top priority - his specialty is foreign policy lunacy.

It'd sure be nice if actual conservatives hadn't gone extinct and been replaced by free market fairytale true believers. Actual conservatives recognized that the market is inevitably shaped by the state; what really matters is how it is shaped, not if.

Liberals do come up with many cockamamie ideas, and desperately need a rational debating partner.

Sven's picture

Jebus: If [the GSEs] were

Jebus:

If [the GSEs] were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing? The answer was their affordable-housing mission. So it was that, beginning in 2004 [evidence?], their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006.

Yet another attempt to prove the GSEs kicked off the frenzy. Note the shift. "Their portfolios" becomes "originations [sic] in the U.S."

Shameless wankers.

rikki's picture

trillionaires

There seems to be an assumption that bad mortgages were issued to "poor people," but is that really the case? It seems more likely that the people defaulting on mortgages were middle/upper class folks living above their means -- those who could have been fine in an ordinary subdivision, but reached for the McMansion instead; those who could have been fine in a modest, older home, but reached for the shiny new one instead; those who could afford their home based on their income, but had major credit-card debt that careless lenders ignored or failed to notice.

I find it inconceivable, pretty much by definition, that "poor people" could be sitting at the heart of a trillion-dollar failure.

Justin's picture

You are correct. I work in

You are correct. I work in the insurance industry and have noticed that a majority of the foreclosed homes that I deal with are in the 150k-400k range (I get sent foreclosure paperwork from the lenders). In fact, I cant recall seeing any homes under 150k come across my desk in quite some time.

Rachel's picture

It seems more likely that

It seems more likely that the people defaulting on mortgages were middle/upper class folks living above their means -- those who could have been fine in an ordinary subdivision, but reached for the McMansion instead; those who could have been fine in a modest, older home, but reached for the shiny new one instead; those who could afford their home based on their income, but had major credit-card debt that careless lenders ignored or failed to notice.

Plus those who were trying to make a lot of $$ by "flipping."

metulj's picture

In which case it was the

In which case it was the corporation that owned the house and not the persons themselves, so "Hey, no biggie. Just dissolve and reincorporate!"

True happiness is knowing you are a hypocrite. -- Ivor Cutler

R. Neal's picture

Interesting question about

Interesting question about the demographics of people in default on their loans.

Here's some info from one study:

Link...

When comparing the 2007 foreclosure filing rates in each of the income quartiles to those in 2006, we find increases in the filing rates in all but the lowest-income quartile, where there was a slight decrease in the filing rate. The largest increases occurred in the third and highest-income quartiles, where foreclosure filings grew by 406 and 116, respectively, reflecting rate increases of 11 percent and 6 percent. These numbers tell us that although the greatest numbers of foreclosed homes are still concentrated in the county’s lower-income tracts, the growth rate of foreclosure filings in the upper-income quartile, primarily suburban census tracts, appears to be increasing.

There's lots of other interesting stuff at the link.

Here's another study of people seeking credit counseling:

(link...)

Table 1 shows the demographic and mortgage profiles of clients who sought default counseling. The median age of the mortgage default clientele was 36.0 years old, which resembled the national median age of 36.2 years old (U.S. Bureau of the Census, 2004). Two thirds of the sample (66.1%) were married, and 19% were divorced. The average number of dependents was 2.3, which was lower than the reported U.S. household size (3.07) (U.S. Bureau of the Census, 2004). The majority of the clientele (88.4%) were Caucasian, 8.4% were Hispanic, and the remaining 3.2% belonged to other minority groups.

Almost two thirds (62.4%) of the mortgage default clientele had no savings at all. Less than 3% of clients reported $50 in savings, a slightly higher percent (3.8%) reported $100 in savings, and 6% reported having between $700 and $2,500 in savings. Almost half (48.4%) were employed full-time, 3.3% were employed part-time, 4.7% were seasonally employed, and 3.3% were self-employed.

The most common reason for the mortgage default was a reduction in income followed by job loss, marital instability, or divorce. On average, clientele had a housing ratio of 40%. More than half of the clientele (65.5%) sought counseling in the first 3 months of default. Of the clientele who sought counseling in the first 3 months of default, 54.5% were able to keep their home. Over half of the clientele (57.3%) were behind on other debt in addition to their mortgage obligation.

Sven's picture

Good point. But I would say

I find it inconceivable, pretty much by definition, that "poor people" could be sitting at the heart of a trillion-dollar failure.

Good point. But I would say the tip of the spear was subprime, where the financial wizards thought they could make 4-5 times the usual mortgage profit and thus opened the floodgates of credit into the market.

It was also subprime that touched off the collapse of the whole shell game. Last fall, it accounted for around 20% of the mortgage market and 7% of defaulting mortgages, but 43% of foreclosures. That led to the first wave of corporate failures, fewer home buyers and was a big factor in driving home prices down sharply, which in turn sent a lot more of the "safe" loans into default that wouldn't have otherwise. That's my vastly oversimplified theory, anyway.

But yes, the larger point is that "poor people" did not create this crisis. Subprime borrowers weren't trying to game the system and make a profit off cheap credit (just the opposite - Wall Street was sucking the equity out of their homes). Many if not most could have afforded a non-usurious mortgage, and would have arguably been more diligent about meeting their obligations.

Sven's picture

Bullshit bullshit bullshit

Mr. Keating 5:

These quasi-public corporations lead our housing system down a path where quick profit was placed before sound finance. They institutionalized a system that rewarded forcing mortgages on people who couldn't afford them, while turning around and selling those bad mortgages to the banks that are now going bankrupt. Using money and influence, they prevented reforms that would have curbed their power and limited their ability to damage our economy. And now, as ever, the American taxpayers are left to pay the price for Washington's failure.

Whatever happened to the Randian supermen who were supposed to be in charge of the economy's commanding heights? They were outwitted by Fannie Mae? Jesus Christ.

...Ahhhhhhh! blacks or Hispanics in particular. Ok, time to step away from the computer.

bizgrrl's picture

selling those bad mortgages

selling those bad mortgages to the banks that are now going bankrupt

Selling to "banks"? I think banks do the selling to these "financiers".

Sven's picture

In case John McCain can't

In case John McCain can't read, a pretty picture:

Amazing how the GSEs goosed the market by selling fewer mortgages during the problem time span. Let's make this man president. He's a friggin' financial mastermind.

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