Jejudo, South Korea
First thought: Isn’t this a symptom rather than a cause?
Ironic thought: The Bush administration was pushing for more regulation while Barney Frank and company were pushing for less?
Aside: Frank, on O’Reilly, is arguing for more regulation, not less.
So, what’s the problem? To put it simply, Rightwingers are arguing that what went wrong was giving money to poor people and minorities. Lefties are saying that rich people were greedy and stupid.
Ah, all is right with the world again.
… many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multiyear plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least-subprime housing markets in the nation.
Third, lending money to poor people and minorities isn't inherently risky. There's plenty of evidence that in fact it's not that risky at all. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates. And as the New York Times recently reported, Nehemiah Homes, a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.
In other words, poor people aren’t necessarily a higher risk than rich people.
Threadbear’s opening statement assumes this to be the case. It’s not:
On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Bros. or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity. And here, again, it's difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients' money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms?
Perhaps the most important point is that regulators, the bonny chaps who are supposed to save us from all this madness, displayed the same pattern. So did the politicians behind them. Over the past few weeks, much has been made of the various regulatory actions that enabled this mess. Though some are wrong, two are not: the Democrats protected OFHEO's shockingly loose regulation of Fannie and Freddie against the White House's attempt to toughen it; and the Republican-appointed SEC loosened the capital requirements for the five largest banks.
But why did they do this? Democrats seem to believe that the Republicans and the SEC simply did this out of wanton greed and a blind faith in markets; Republicans seem to believe that OFHEO, the Democrats, and Fannie/Freddie did this because of political corruption and a blind belief in homeownership for poor people. But neither side was simply accepting the risk that the whole thing might come crashing down leaving the economy in tatters and the taxpayers on the hook. The regulators, too, were misled by recent history. In recent history, lending had been safer, and risk models did seem to be performing better. Both groups genuinely believed that improvements in both computer models, and in economic theory of regulation, would allow them to identify and halt any crisis before it occurred. And just like everyone else, when no disaster occurred, they became ever more confident in their own genius.
What we need, fundamentally, is not simply stricter regulation or less greedy bankers. What we need is better economic theory of how these things play out, so that the regulators have better tools to assess and prevent systemic risk. But that's not how we're thinking right now. What we're looking for is not better tools, but someone to blame.
And that makes sense to me. A few years ago, Robert Samuelson, I think, wrote an article in the NYT, I think – it was a long time ago – essentially saying that economically we really didn’t know where we were going. That the first decade of the 21st century was uncharted territory for economists.
Now we know.