What Could Have Averted the Housing Bubble?

Greg Ip has a strongly-worded yet sensible rejoinder to Alan Greenspan's latest attempt at self-absolution, and it's well worth reading:

In the earlier part of this decade Mr Greenspan asserted on a number of occasions that while America might have local housing bubbles, there was no national housing bubble. Yet he now asserts there was a global housing bubble. It has always puzzled me how he could go from seeing local bubbles to a global bubble without at some point diagnosing a national bubble.

Ip reckons that if Greenspan had hiked interest rates into a recession-inducing 8%-to-10% range, that might have sufficed to stop the housing bubble -- but of course that would have violated the Fed's mandate. Alternatively, says Ip, Greenspan could have taken the regulatory approach: requiring 20% downpayments or mortgage insurance for all mortgages, for instance, or requiring stricter underwriting at the originator level. But of course, these moves, as Ip says, would never have been implemented by Greenspan, the great deregulator.

Ip says that there would have been a reduction in homeownership if the Fed had followed this course:

It is hard to believe that society would have been significantly worse off if we'd limited the growth in home ownership to, say, 66% instead of 69%, by excluding people unable to make a substantial financial commitment.

I'm not even sure that is true: the 69% figure was hit between the second quarter of 2004 and the first quarter of 2005 -- before the worst excesses of no-money-down mortgage lending. I suspect that the rise in homeownership was more a cause than an effect of the housing bubble -- that homeownership rates served as a leading indicator of house prices.

But I certainly agree that if the US had followed the lead of pretty much every other country in the world and simply regulated its lenders, a lot of the worst excesses of the bubble could have been avoided. I don't know where major regulatory overhaul stands on the Obama administration's list of priorities, but I do hope that by the end of this administration, we will no longer be in a position where lenders can lend out billions of dollars to homeowners with essentially no regulatory oversight whatsoever.

Comments

[john s. gordon:]

yes regulate the lenders, and if debt instruments are securitized, regulate the rating agencies with stiff penalties for putting out fictitious high ratings.
> jack

Mar 16 08:15 AM

[Insiderman:]

I think it would be instructive to know what particular policy tool the Fed had at its disposal that allows it to regulate down payment percentages.

The Community Reinvestment Act of 1977 (Rev. 1995) bears primary responsibility for opening the mortgage spigot to low income and minority borrowers in low- to moderate-income neighborhoods. If banks fail to respond to mandates in the CRA, community organizations can exert pressure to prevent banks from expanding, merging, or even keeping their charter.

FNMA issues special CRA-Targeted MBS to help both originators and institutions seeking to purchase a qualified investment. Up to 100 percent of the loans backing this geographically-customi... MBS will be to borrowers with incomes below 80 percent of the area median income.

The four federal bank regulatory agencies responsible for enforcing the CRA include the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS).

The FDIC supervises insured state-chartered banks that are not members of the Federal Reserve System. OTS regulates federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations. The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises national banks.

One member of the Fed's Board of Governors serves as the Federal Reserve System’s representative to the Federal Financial Institutions Examination Council (FFIEC), which is responsible for coordinating, at the federal level, examinations of depository institutions and related policies. The FFIEC has representatives from the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.

I'd say blame Congress and the CRA rather than the Fed.

Mar 16 08:26 AM

[Leftfield:]

I don't think the suits in DC and Washington get this: Their huge pay scales were ignored mostly by the public because they successfully took credit for a long stretch of relative prosperity and stability.

We see how pathetic they are. The most eggregious imaginable lapses and statements of, "who could have known?" Now they frantically prescribe much more of the same in hopes of reflating the bubble. So happy days can come again, or at least jail time averted.

The bubble only hid the rot underneath. Much of the general public sank from middle class status, hidden only by home ATM's. The banks and corporations they ran were utterly leveraged and in debt. Largely to pay off the geniuses of leverage who got their mega "performance" pay upfront and who continue to pay themselves bonuses while they socialize their mega losses.

Politicians are proposing more government with earmarks galore that will not only further cripple our balance sheet but load us with perpetual overhead. That's their modus operendi, which continues shamelessly.

No surprise Greenspan is lying. It's cultural for our leaders. Voters need to keep voting incumbents out until we finally get real-world leadership.

Mar 16 08:28 AM

[Leftfield:]

First sentence should read, suits in DC and Wall St.

Mar 16 08:34 AM

[Bruce Vande...:]

In 2006, somewhat after the peak of Florida's housing bubble, I had a somewhat beat up house for sale. The house needed more money and work than I wanted to put into it. I listed it at the lower end of the (then high) market for a quick sale.

I was surprised at all the offers that came in, mostly 100% loans from people who worked at low paying jobs. I had the impression agents were pushing it because they knew these people could get the financing. It did sell on a 95% "FHA loan" in "as is" condition. They didn't make me fix anything to qualify the buyer.

One of these days I will get the courage to drive by and see what house looks like now.

Mar 16 09:19 AM

[Jan Baker:]

There is so much pressure to re-ignite the 'bubble.' If US consumers do not consume, Europe and Asia, both lacking its own internal markets due to public policies that depress population growth, are lost. It's not just housing. Our current ratio of credit card debt to income is 123% (I believe that's up about fifty percent in only twelve years). If over-fed and over-housed Americans do not consume ever more, the game is over.

Either that, or Europe and Asia can abandon their public policies, admit they are in a population crisis, and do what is necessary to induce men and women to procreate. That would take a larger cultural effort than we can even imagine. And we, too, must struggle against our own deeply-ingrained Malthusian tendencies. A Self magazine survey found that US girls still are ambivalent about the consequences of engaging in sexual activities without birth control and the consequence of pregnancy ("So what?" seems to be the most commn 'error' made by S teens.) But the new funding for Planned Parenthood (making up for its Madoff losses just in time) will ensure that teens will be newly bombarded with messages about the 'stupidity' of motherhood.

We must buy. If we continue the developed world's trend toward much longer life-spans and much decreased new births, then we must over-consume. We must bubble. We must suffer the consequences of these decisions. It isn't the 'suits,' it's the demographics driving this downturn.

Mar 16 09:31 AM

[Alex Filonov:]

Short answer: nothing. Longer answer: maybe other countries regulate lenders better, but housing bubble in UK was worse than in US, as well as housing bubble in Spain.

Mar 16 10:21 AM

[nym:]

Perhaps Filonov will share with us his evidence that the bubble is worse in UK and Spain.

Mar 16 10:42 AM

[mister d:]

insiderman You are right for blaming congress and the CRA, but you need to understand that people who got loans, in the CRA areas, were not the ones who created this mess. It is the fraudulent bad flips and other type of speculative bulls*** that gives these neighborhoods a bad reputation statistically. The worse part about it is the stripping of wealth these communities absorb. These are neighborhoods that need it most. Any housing package must contain intense oversight as these vulters are gearing up for another round.

Mar 16 11:50 AM

[Danny Newton:]

I don't see why people can not see that the government is manufacturing the next bubble in energy. Nobody wanted to fix the last bubble in housing for the same reasons they don't want to take evasive action on the next one.

Mar 16 12:09 PM

[1uncle:]

Would an amendment to the constitution stopping the gifts
(campaign contributions) to people in congress prevented these financial institutions from merging until they became too large to fail have prevented these housing mortgage problems?

Mar 16 01:04 PM

[Doug Poretz:]

I do not buy the argument that the housing bubble was simply a consequence of financial creations that allowed irresponsible mortgages. The housing bubble was a cultural phenomenon, part of the same culture that gave rise to the growth of large flat screen TVs, new car sales, cruises, name it. The idea that financial instruments allowed the market to grow is correct, BUT those instruments responded to a MARKET DEMAND -- are we going to continue focusing on just the suppliers of nthe tool or the abusers who created the tool? If and when we place blame where it belongs -- to our entire culture versus a few financial instruments -- maybe then we will realize that the "change" we are going to end up with is going to be largely cultural/social/politi... in nature? Isn't that what is actually happening? Well, watch what's happening around the world -- the headlines are about to change: tinyurl.com/daaua9

Mar 16 01:21 PM

[jarcom:]

Please. Must we look at Alan Greenspan for the courage to buck the then prevalent political tide and absolve Congress (Frank, Dodds et al) and W with his excess compassion and limited intelligence. It's us. We elected these turkeys and it's beginning to look like we did it again.

Mar 16 02:35 PM

[mediapro:]

I wish I could find an excellent posting by a Canadian comparing the housing market up north to the U.S. It went something like this:

They sit in amazement at the US, enjoying a rather stable housing market. Canada has(I believe) about a 63% home ownership rate. They stringently regulate the mortgage conditions (20% down), and offer no mortgage interest deduction.

Perhaps a neighbor to the north can weigh in on this and educate all of us.


On Mar 16 10:21 AM Alex Filonov wrote:

> Short answer: nothing. Longer answer: maybe other countries regulate
> lenders better, but housing bubble in UK was worse than in US, as
> well as housing bubble in Spain.

Mar 16 05:36 PM

[samwise:]

Totally agree with Mr. Poretz--cultural phenom. Fannie/Freddie--the government was in on it. And since when are bubbles in housing bad? "Bubbles" are just excess capacity that have to be worked off. Had 'em in the railroads in the 19th century (who has the best and ONLY commercially viable railroad industry on earth? USA) the telecom industry at the turn of the century (where did so many of these internet tycoons come from? telecom) electric utilities and autos during the roaring 20's (biggest car market on earth and no problem getting air conditioning let alone blogging on this goofy site.) and of course the mother of all bubbles--the NASDAQ and "the 90's." Be interesting to write the history on THAT one. so repeating as you seem to be doing here that "all bubbles are evil" may in fact not be true PROVIDED the hangover doesn't obliterate everything. Got the right guy in charge in Bernanke--whether or not he's "doing" the right thing is another thing altogether--at least we have an expert on it though and where the real screw-ups begin is when you have a total moron in charge. And so what if there are too many single family residences? A total social bad? LET THE PRICES OF HOMES FALL. YOU'RE FRIGGIN' DEMOCRATS FOR PETE'S SAKE.

Mar 16 08:58 PM

[mediapro:]

What Mr. Poretz fails to take into account when making his observations is the function of regulation within a captialist environment. The Great Depressions followed by earlier great downturns in the late 1800's finally taught us the lesson that unfettered captilaism and truly free market economics is a fool's game except for those who own the casino.

It is a convenient side step to point the ultimate blame as a "cultural phenomenon" and obfuscates the underlying fallacy of unfettered free market capitalism.

The introduction, ascendency and idolatry of Milton Friedman's brand of shock economics has done more to destroy the world's economy than any economic hypothesis in our lifetime. This is not just Reaganomics /Bushanomics, but the pitting of haves/have nots in a global play orchestrated through Milton's disciples within the IMF, World Bank, and governing neo-conservative world view since at least 1975.

Cutting taxes on the wealthy and re-distributing middle class income up to those captains of industry combined with wholesale deregulation and record deficits under Reagan, Bush I and Bush II, and conveniently leaving the $1 Trillion dollars of Iraq war spending off the books while the national debt ballooned from around $5 Trillion to $10.6 Trillion at last peek is an ingenious spin on what constitutes supply side stimulus, if not outright delusion.

Count the change left in your pockets, unless of course you are one of the few who benefitted from this latest episode of Shock Economics so popular with necons. I'll just ask you the same question Reagan used to ask: "Are you better off now than you were four years ago?"

If you're in the same boat as the rest of us, our "staying the course" has undeniably run the lot of us aground. If you have benefitted, then you're one of the lucky 2% that control 80% of America's wealth, completely comfortable that you'll ride out the storm until the next lunatic can covince most of the people all of the time into something completely counter to their own self interest.


On Mar 16 01:21 PM Doug Poretz wrote:

> I do not buy the argument that the housing bubble was simply a consequence
> of financial creations that allowed irresponsible mortgages. The
> housing bubble was a cultural phenomenon, part of the same culture
> that gave rise to the growth of large flat screen TVs, new car sales,
> cruises, name it. The idea that financial instruments allowed the
> market to grow is correct, BUT those instruments responded to a MARKET
> DEMAND -- are we going to continue focusing on just the suppliers
> of nthe tool or the abusers who created the tool? If and when we
> place blame where it belongs -- to our entire culture versus a few
> financial instruments -- maybe then we will realize that the "change"
> we are going to end up with is going to be largely cultural/social/politi...
> in nature? Isn't that what is actually happening? Well, watch what's
> happening around the world -- the headlines are about to change:
> tinyurl.com/daaua9

Mar 17 04:15 PM