Libercontrarian

Crushed between the wheels of capitalism and big government.

A followup to the Housing Crisis piece I did a couple of days ago

I guest-post on Resurrection Song, a wide-ranging blog put up by a co-hort Rocky Mountain Blogger called zombyboy. I put the Housing Crisis post on RS a couple of days ago and its has stirred up a little conversation there. One of the respondents, Bob, had an interesting "add-on" comment that extended my idea by discussing the Credit Default Swaps and how they helped artifically induce an inflationary effect on the housing prices in this country. I responded with my take on that comment - here's the exchange:

Bob:

This wouldn’t be nearly the problem is is if there weren’t hundreds of trillions [of dollars] of redundant credit default swaps held by counterparties with no interest in the underlying credit.  Bad enough that bottom tranches of mortgage-backed securities were scooped up, restacked, and re-rated as new offerings, but then when those offerings defaulted, which was practically a given considering the garbage they were constructed of, CDS counterparties (many of them hedge funds) reaped record rewards for their speculation.  This is what brought AIG down, for example, and it magnified the risky mortgage problem many times over. 

But you’re right, now that the easy finance game isn’t so easy, of course we’ll see fewer buyers, buyers with less purchasing power, and housing declining in value to meet the buyers’ reduced purchasing ability.

Bob, you’ve adroitly touched on a key point here that I didn’t have the space to expand upon in a shortish blog posting - an extension of the unanticipated consequences of government-induced (not-market-created) finance forces. If you force companies to loan money based not on the typical market drivers (read: CRA), but instead out of “outcome-based desires” (i.e. Socialistic needs to bring unqualified borrowers into the market) you will eventually create a market for several unwise activities.

What kind of activities? Behaviors like what were exhibited by the banks in the sale of the CDS, which motivated lenders to offer more high-risk loans to unqualified parties (further falsely pumping up the mortgage industry), which caused ever more home-buyers to enter the market, snapping up ever-more-expensive homes that frankly, barring government intervention, would have been markedly cheaper. Behaviors like mortgage companies coming up with ridiculous ARM or “no-income, no job” loans, loans to illegal aliens, et al, with the ultimate goal of “hey, we’re going to sell this package of crummy loans off to other banks and misrepresent their risk profiles anyway, who cares if they can pay? We’ll be sitting on OUR chair when the music stops. Get that hot potato away from me!”

The whole point of my post (the part that Nathan seemed not to understand, no matter how it was explained to him) was that salaries had risen SLOWER than inflation (about 2% annually v. about 4% annually), and MANY TIMES slower than home prices. I attribute Artificial Housing Inflation to the CRA. Banks would have never gone down this path in the ‘70s and ‘80s if Jimmah Carter hadn’t forced them to. Once they created an industry around this misfit idea, they naturally applied their creative commercial talents and discovered a way to make money conforming to the regulation - by passing the risk onto others.

See what happens when Big Government mandates outcomes based on foolish premises?

Outcomes-based thinking will be a future topic for this blog. I am fascinated by the concept in a modern era, there are people who think that they can just do anything they want to get to whatever goal they wish to accomplish, whether or not it violates law, good taste, common sense, or time-worn experience.

They call those people "liberals."

posted by: underwhelmed at February 19, 2009 12:05 | link | comments |

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