- Bubba and Shrub concluded (with all politicians, ever) that
- home ownership was a good thing, essential to the Americal Dream, and
- therefore, it should be encouraged
- Further, Bubba and Shrub noticed that the poorer sections of the population could not buy houses, which (obviously) made their lives worse. Massively represented among the poorer sections who could not buy houses were NAMs.
- Therefore, Bubba and Shrub directed that it be made easier for poor folks, and especially NAMs to buy houses.
- The GSE's (Fannie Mae and Freddie Mac) and the justice department took the lead, and (a) changed the reserve rules on who could buy a house (what % down), and (b) sued anyone who didn't go along, and (c) hired syncophants to sing their praises (i.e. Gingrich)
- The banks, spurred by direct government action on 2 fronts, and encouraged by uncertain, apparently always-rising house values, lent a metric butt-ton of money to folks who were poor credit risks (AFIAK, the #1 predictor of mortgage repayment world-wide is size of downpayment as a percentage of home-value)
- The housing bubble bubbled.
- All the rest of the economy responded to the presence of the additional phantom money in houses.
- The banks, having now lent an insane amount of money to uncertain risk, created financial instruments (MBS) that seemed to (under standard operating assumptions about the amount of risk from the real conditions of the bubble) turn the risk into a saleable commodity. Then they sold a lot of these.
- The bubble popped.
- The MBS turned out to have assumed far too little risk.
- The US financial system exploded.
- The rest of the US economy exploded.
- Obama/Pelosi/Reid have spent the last 4 years trying to avoid observing that step 3 was a huge mistake.
Corrections?
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6 comments:
Some of this is slightly backwards. MBS were created long before Bubba/Shrub (though it's true that's when they really started to blossom). Or you could amend #8 to speak of "CDO of MBS" and it would work ok.
The only significant addition I'd make are the Basel capital rules that set up arbitrary, artificial "risk weights" based on a security's (supposed - i.e. a priori) risk, for the purpose of calculating capital. This is what incentivized a lot of the super-leverage, regulatory arbitrage, and just general gaming of the rules that "CDOs" signified. Read Per Kurowski....
Without me knowing the complete line of thought that you've already run through, I do think that your summary looks extremely parochial.
That is to say: What about Europe? Was the European crisis, which seems far deeper and more serious than the US one, a purely unrelated issue that just happened to occur at the same time? Were European finances also controlled by American politics?
Or, to look at things from a completely different perspective, the entire problem really European, the Euro and the EC were the basis of the entire unbalanced forces that lead to a debt bubble, and the problem only came to light in the USA first because (to take an annoying possibility) the USA has a more open and less deceptive financial system?
I'd give these possibilities the following weights:
1. Unrelated issue in parallel 50%
2. Europe controlled by US politics 20%
3. USA controlled by European politics 20%
4. Europe the actual source of the problem, USA a symptom, 33%
5. USA and Europe both unbalanced by the same, third cause as yet unidentified 33%.
You will note the percentages add up to more than 100, because most possibilities are not mutually exclusive. Indeed there there probably most of them operating in concert.
I think you've got it about right. A few quibbles:
(1) there was somewhat of a feedback loop from (8) to (5). That is, by slicing and dicing risk (and then selling the resulting steaming heap of CDO to suckers worldwide), the big banks kept their own risk low enough to keep pushing out the zero-down no-questions-asked mortgages.
(2) Another thing worth mentioning is the overall financial picture. After the tech bubble popped in ~2000, and certainly after 9/11, the Fed was creating money like crazy. When the winds of fiat blow, some kite will soar; predicting which is always the trick. But anyway, that is part of the background too. If the Fed had not created so much money, causing very low interest rates, the housing bubble (which fed on low interest) couldn't have happened.
Expanding on what Sonic said, I've come to see the "housing bubble" as an extension of a larger credit bubble (CDOs, MBSes, capture of ratings agencies, and so on). If housing hadn't been a convenient place to invest a pathological expansion of credit, the investment banks would've found something else -- student loans, perhaps. (Some say this is already happening.)
Where did the credit come from? My guess is two things: A monetary response to the dot-com bust in the US, and an expansion of cheap public credit as countries joined the Euro and could suddenly borrow as if they were Germany. The degree to which European banks are tied to state fiscal policy rather horrifies me.
tl;dr: The housing bubble was a downstream effect of the credit bubble.
To bluntobject's 2 massive sources of credit, we should add the Asian (China, Japan, Taiwan, Korea, India, Arabia) currency surpluses being recycled back into western bond markets.
(Check out the sentence structure used above!)
The financial sector should not be able to destroy the economy by itself. It is just one industry, like any other. The economy has to be fundamentally broken.
Re: the credit bubble.
Itself caused by political manoeuvring, and was possibly only because of fractional reserve/maturity transformation. In addition to various measures whereby the banks offload responsibility for their risks onto others. Externalizing internalities.
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