Nouriel Roubini is exactly right.
The current housing bubble, now in the process of popping, is the biggest con in the history of finance. The Wall Street Journal, politicized economists like Arthur Laffer and Larry Kudlow, and (in general) the Republican Party have created an enormous asset bubble, but they are even now in the process of deflecting blame, claiming it was regulation (rather than de-regulation) which caused the crash.
The Bush Disaster is a three-legged stool. The so-called neo-conservatives who got us into Iraq and who represent military contractors and oil field services outfits such as Halliburton are one leg of the stool. The Religious Right, which seeks to remake the U.S. into a Christian Iran, is the second (the weakest, most public) leg. But it is the third leg, the Wall Street Kleptocrats, who are the stiffest, most important, largest, and most criminal leg.
The Great Depression inaugurated a host of financial regulations,
which worked to limit and moderate economic disasters for two
generations. This has all been undone in our time. It will not be
enough to re-create the old forms of financial regulation after the
house of cards falls.
We need more. We need those who lie on behalf of money to take
responsibility for the results of those lies. Not just in civil law,
but in criminal law.
This is not an attack on the First Amendment. It is, instead, a
demand for fiduciary responsibility on the part of those who claim to
practice it. Here’s what I propose:
- Punitive financial damages must become uninsurable.
- Torts against both individuals and institutions for backing financial frauds must be allowed to go forward.
If some small-timer cons you out of your life savings, if they claim
to be something they are not, they go to jail. Somehow, this principle is being ignored regarding the housing bubble. We have seen houses sold
to people who put no money down, who the banks knew lacked the income
to pay back the loan. We have seen teaser rates used that let people
move into homes and, two years later, triple their payments. And we
have seen these same loans bundled for sale through our largest
financial institutions, backed by quasi-government agencies like FNMA.
The reason the Internet Bust did not become a general recession was
that this housing bubble was built on top of it. For years I’ve been
watching McMansions going up in poor neighborhoods, immense apartment
blocks built, when everyone knew that the eventual buyers lacked the
money to afford them.
Even Alan Greenspan was in on the act, saying in 2004 that this phony baloney was better, better, than traditional mortgage instruments.
Our past economic crises have had various causes. Some were social
in nature. Others were economic in nature. Others had to do with
foreign policy. What we have, thanks to con artists like Kudlow, is a
crisis which combines all three. All three legs of the Republican Iron
Triangle — the military, the church, and the moneymen — have been in
on the scam. It’s as though, in 2000, we really did select a Latin
Caudillo, another Peron or Samosa.
And all three legs of this triangble must be reined-in, permanently, if we’re to prevent a recurrence. Iraq, the unitary executive, and the housing bubble are all of a piece. Together they are the generational crisis of our time.
Alex Tabarrok disagrees. In fact, he pretty much calls you people who are so up in arms about subprime lenders “credit snobs”. I’d like to think Alex is being harsh, that this is really just this weeks episode in Bush hating. But then I see an honest comment like yours about houses going up that poor people can’t possibly afford. Pretty much hits the mark of what Alex is saying.
Alex Tabarrok disagrees. In fact, he pretty much calls you people who are so up in arms about subprime lenders “credit snobs”. I’d like to think Alex is being harsh, that this is really just this weeks episode in Bush hating. But then I see an honest comment like yours about houses going up that poor people can’t possibly afford. Pretty much hits the mark of what Alex is saying.
Regarding Brad’s comment, Alex Tabarrok seems to also compare the US subprime loan industry–which helped those who were less well-off buy homes outside what they would be able to pay when the market went south–to a Nobel Prize winning lender that offered micro-loans to people who wanted to improve their lives in a third-world country.
Offering favorable terms for amounts averaging less than US$1 is not even in the same ballpark as offering loans on the order of US$100,000 that could increase in cost as the home they were secured against dropped in value, possibly leaving the now-former homeowners out in the cold.
One is acting as an angel investor, the other seems to be fiduciary irresponsibility.
Regarding Brad’s comment, Alex Tabarrok seems to also compare the US subprime loan industry–which helped those who were less well-off buy homes outside what they would be able to pay when the market went south–to a Nobel Prize winning lender that offered micro-loans to people who wanted to improve their lives in a third-world country.
Offering favorable terms for amounts averaging less than US$1 is not even in the same ballpark as offering loans on the order of US$100,000 that could increase in cost as the home they were secured against dropped in value, possibly leaving the now-former homeowners out in the cold.
One is acting as an angel investor, the other seems to be fiduciary irresponsibility.
Thuktun, you’re only off by a factor of 1000. According to Wikipedia, “The Grameen Bank has issued more than US$6 billion to 7 million borrowers.” I know math is hard, but this would be an average of almost $860 per borrower.
Now, if you’re talking about $100K at an indexed rate that is sitting at 12% now, you’re talking about $1000/month in interest, which after the tax deduction, is more like $750/month. I think when you weigh it, yes, these loans squeeze people who don’t have a history of being good with money, but on balance are a reasonable deal compared to renting. Also, I don’t know if you’re old enough to have bought (or had parents who bought) a home in the 1970s, but these sub prime rates of today were the typical good credit rates of 30 years ago. Back then, we all suffered uniformly. Now, it’s just people who overextend themselves that suffer. And guess what? Nothing says that they can’t (or shouldn’t) rent if they find the terms of a loan too ominous. But they still have the opportunity to buy and finance and improve their credit because we have very loose credit. I do not know why this isn’t a good thing.
Like I said above, I would like to think that this uproar is all about an opportunity to bash business and demand regulation because that’s what you people enjoy doing. But you just can’t help slipping something in about someone not belonging in the market for credit, which is unabashedly elitist.
Thuktun, you’re only off by a factor of 1000. According to Wikipedia, “The Grameen Bank has issued more than US$6 billion to 7 million borrowers.” I know math is hard, but this would be an average of almost $860 per borrower.
Now, if you’re talking about $100K at an indexed rate that is sitting at 12% now, you’re talking about $1000/month in interest, which after the tax deduction, is more like $750/month. I think when you weigh it, yes, these loans squeeze people who don’t have a history of being good with money, but on balance are a reasonable deal compared to renting. Also, I don’t know if you’re old enough to have bought (or had parents who bought) a home in the 1970s, but these sub prime rates of today were the typical good credit rates of 30 years ago. Back then, we all suffered uniformly. Now, it’s just people who overextend themselves that suffer. And guess what? Nothing says that they can’t (or shouldn’t) rent if they find the terms of a loan too ominous. But they still have the opportunity to buy and finance and improve their credit because we have very loose credit. I do not know why this isn’t a good thing.
Like I said above, I would like to think that this uproar is all about an opportunity to bash business and demand regulation because that’s what you people enjoy doing. But you just can’t help slipping something in about someone not belonging in the market for credit, which is unabashedly elitist.
One more thing… If you think defaults are going to tank this market, then you’re arguing one of two things… (1) that rates aren’t (in aggregate) high enough to cover the defaults as a cost of doing business or (2) that lower rates would result in lower default rates which would result in smaller losses (or higher profits). The second is basically the same as the supply side tax argument. The irony of this uproar is thick.
More evidence of Alex’s point that in reality, this is just credit elitism, as a good liberal could not possibly support either of the above arguments ;-).
One more thing… If you think defaults are going to tank this market, then you’re arguing one of two things… (1) that rates aren’t (in aggregate) high enough to cover the defaults as a cost of doing business or (2) that lower rates would result in lower default rates which would result in smaller losses (or higher profits). The second is basically the same as the supply side tax argument. The irony of this uproar is thick.
More evidence of Alex’s point that in reality, this is just credit elitism, as a good liberal could not possibly support either of the above arguments ;-).