Protection-racket capitalism

Arnold Kling makes some good points:

One way to view the period 2005-2009 is as a massive destruction of property rights by the government. First, they destroy the right of Freddie, Fannie, and commercial banks to maintain lending standards. Then they confiscate the property of holders of securities in GM and Chrysler to pay off the labor unions. Then they sell off AIG’s assets in order to bail out Goldman Sachs and several large foreign banks. And of course, the government has made every effort to keep banks from enforcing mortgage contracts, while extracting large fines from banks.

Here is Charles Rowley making a similar point:

The financial crisis was generated not by any rating agency, but by a cross-party political conspiracy to bludgeon mortgage companies to extend mortgages to minority households that had no resources to enter into home ownership. A crude vote-seeking frenzy ensued, fed by Fannie Mae and Freddie Mac, two government-enterprises that were shell agencies for a Ponzi scheme in the housing market.

All this is in the context of the US government suing S&P.

The problem is that S&P is not guiltless, after all as Charles Rowley tells us:

S & P’s error was ever to take credit guarantees emanating from the government with anything except supreme contempt.

But there is a lot of guilt to go around. In the first instance the Boston Fed has questions to answer. The authors of a paper published in the American Economic Review, the publishers of the American Economic Review, and many, many regulators should join S&P in the dock.

Substantial media and political attention was showered upon a 1992 Boston Federal Reserve Bank study of discrimination in home mortgage lending. This study concluded that, while there was no overt discrimination in banks’ allocation of mortgage funds, loan officers gave whites preferential treatment. The methodology of the study has since been questioned, but at the time it was highly influential with regulators and members of the incoming Clinton administration; in 1993, bank regulators initiated a major effort to reform the CRA regulations.

By singling out just S&P it looks a lot like pay-back for down grading US debt rather than a proper effort to bring the originators of the GFC to account.

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13 Responses to Protection-racket capitalism

  1. blogstrop

    The MSM has never told the true story of the CRA and activism promoting way too many dud mortgages. It is absolutely “inconvenient”, as a shining example of what the liberal/left/Alinskyist players can do to a country when the “programmatic synchronicity” between activists, media and lefty pollies combine to form (as Blair’s Law has it) one giant idiocy.
    That’s if you are forgiving. One giant fifth column might be closer to the truth.
    The story is not over yet, but the last two elections hold out no hope that the USA can recover from the white-anting from within.

  2. Token

    The fact people could abandon their property by sending back the keys was part of the problem too.

    Compare that to the education debt which you can’t escape by going bankrupt.

    To paraphrase Obelix, these Seppos are crazy….

  3. “The fact people could abandon their property by sending back the keys was part of the problem too.”

    I do not accept this being due to the law of unintended consequences. There’s too much indifference for this to be the explanation. The village idiot could see the very predictable result.

    It’s a simple case of ideology first and bugger the consequences.

  4. Eyrie

    Blogstrop, same as the synchronicity in the global warming scam.

  5. Gondwana

    I had an Australian friend who was offered a loan to $750,000, unsolicited, to buy a home in the United States with no collateral or evidence of income. They refused! I totally support what you say.

  6. Rafe

    As opposed to ATM capitalism under ALP administration in NSW. And WA a while ago when Bondie was playing the ALP machine.

  7. Token

    I do not accept this being due to the law of unintended consequences.

    Neither do I. It obviously was part of the same scheme which had this crazy plan:

    The financial crisis was generated not by any rating agency, but by a cross-party political conspiracy to bludgeon mortgage companies to extend mortgages to minority households that had no resources to enter into home ownership.

    I presented the student loans as a contrast to show that it is not the norm in the US for debtors to have such an easy option to leave a contract.

  8. Luke

    The impact the policies had was to create reckless spending by Freddie, Frannie and the other one.

    The ratings agencies were a far bigger contributor! These were the same agencies that went around giving AAA ratings to crap, and then when the gig was up they turned around and said, “well, we can’t be expected to understand things”. The problem was that they weren’t just taken for a ride by the big investment banks. They were working hand in hand with them! When creating all the junk, the agencies were right there giving advice about what they’d give AAA to. i.e. “include these, and these but not these, and we’ll be okay with that”.

    Had the ratings agencies not been handing out AAA ratings (for massive fees) then crap loans would never have spread as widely as they did, and junk buying by Freddie & Frannie on some nonsense notion of ‘equality’ would have crippled those institutions early in the piece.

    The biggest contributor to the financial crisis (those before it and the next one coming) is that those who have the most to gain from risk (in the collection of fees, salaries and bonuses) have become removed from the potential losses from those risks. i.e. the ‘financial manager/board etc’ rake in the big fees and bonuses when big risks pay off, but loose nothing when those big risks wipeout the investment. That, toegther with government bailouts, have made it a game of betting big with other people’s money.

  9. .

    Personally I think it was the FHA PMI which was the underlying toxic asset which drove everything else – including the forced CRA loans.

  10. Luke

    Token – I fully agree. It explains why the US suddnely had such massive default rates. Other countries (particularly Australia) had larger house price increases but didn’t have the massive influx of defaults.

    Not sure about the government making efforts to prevent banks from enforcing loans. The US governments and Courts have been woeful in ignoring and excusing procedural failures by lenders. see for example, roboloans. At the same time individual borrowers, who did what everyone was doing on liar loans, have been sent to jail.

  11. brc

    Wait on a minute – pinning the blame on no-recourse loans isn’t right here.

    There is nothing inherently wrong with a no-recourse loan, or, effectively a loan tied to the property rather than the title-holder.

    A no-recourse loan means that the creditor bears an equal amount of risk on the property to the debtor. It’s wrong to think people can just send in the keys and walk away – having such a large default will seriously affect their ability to get credit in the near future, and is not a costless option for buyers.

    In Australia we blindly accept that the debtor bears the majority the risk with the property – given that many people have to pay to insure the bank against default. We are so trained by our former-nationalised banks to roll over and take it up the tailpipe that we don’t even think that a freer, more creative credit market is possible.

    The problem in the US is not non-recourse loans, it’s the fact that the creditors have been taught that, if they make a bad credit decision, the taxpayer will pick up the tab. So the borrowers and the lenders freely entered into high risk contracts, with the implicit understanding that both would be bailed out by the taxpayer if things go bad, which they did, and the taxpayer has fronted up the difference.

    We shouldn’t be prescribing one style of credit over the other – the banks should be free to lend how they see fit, if they can make the numbers work. What should be made clear, however, is that ‘too big to fail’ does not exist, and if you lend a pile of money to bad credit risks, and you go down, tough.

    The full-recourse loans in Australia, coupled with stamp duties, have created a zombie-market in many areas. While prices ostensibly have not dropped much, what you see is wafer-thin volume at the current price level. It’s not much of a stretch to imagine a very large downward-gap of prices to a much lower level, given the market is so illiquid. You have a situation where existing people must stay in underwater homes because they can’t afford to get out, and can’t afford to move because of the obscene tax payments on moving house.

    A proper functioning market would see those people cut their losses, the banks would take their hit on bad lending decisions, the property market would clear and the houses could be purchased by new families.

    Pretending that the Australian home market and mortgage market is somehow better because of full-recourse loans is foolish back-patting and navel-gazing.

  12. Token

    There is nothing inherently wrong with a no-recourse loan, or, effectively a loan tied to the property rather than the title-holder.

    Nothing wrong?

    The clearing out of people from suburbs and the resulting stripping of the houses by criminals destroyed the values of many potentially saleable assets.

    I see a problem with this in terms of property rights.

    As I understand it, though it removed stock from the market, there was an avoidable loss of value due to the speed of the process.

  13. brc

    The type of loan is different from the foreclosure process. The emptying of entire suburbs is a factor of the size of the boom and subsequent bust, not a feature of the loan type.

    You could say that maybe the property market wouldn’t have crashed so hard if full-recourse loans were around. However, the loss would still be there, but they’d have more of a zombie market like we do, and much less recovery.

    When mistakes get made, it’s vital that the old is brushed away to allow renewal. For every person that suffers a loss, someone else is gaining, and crucially people can move on with their lives. We will have people still servicing loans in 15 years, still unable to sell their property for enough to pay down the loan. That’s not healthy for growth, labour mobility or even the banks.

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