Click on WORD or PDF below for full content
Lots of items today on the credit crisis and the probable origins of it in affirmative action mortgages. It is important to understand if these are problems of the market, or of government interference in the market.
David Warren comments on the efforts of our political class.
Talk about lipstick on a pig: the bailout measure, which began as a modest, $700-billion, three-page oink, reached the U.S. House of Representatives yesterday wearing about 450 pages of lipstick. Its maximum final cost was no longer calculable — after bipartisan negotiations to add “sweeteners” to the thing, to buy it support from various congressional factions.
Americans, and anyone else who happened to be watching (most of the world), got a good taste of what “Congressional oversight” means; to say nothing of the explanation of why, in opinion polls, the U.S. Congress enjoys even less popular esteem than President Bush.
It is not for a Canadian to lecture Americans on U.S. constitutional niceties, but I’m going to do it anyway. Money bills in that country are supposed to originate in the Lower House, as they do in all civilized national jurisdictions. This one effectively originated in the Upper House. In order to disguise this irregularity, the senators had to dress the thing up as a non-money bill. That is how the “Emergency Economic Stabilization Act” became the more aptly-named “Paul Wellstone Mental Health and Addiction Equity Act” — by taking a bill already on the floor of the Senate, stripping out its text, and substituting the text of the bailout bill.
“The letter killeth, but the spirit giveth life.” This decadent habit of cautiously observing the letter of the law, while purposely ignoring the spirit, is at the root of so many enormities in contemporary politics and society. …
Gerard Baker says Armageddon is not here.
There’s something curious about the human imagination. Confronted with unprecedented events of unfathomable scale, it seems to find the shocking reality insufficiently interesting and reaches instead for even grander, more cosmic explanations of what’s going on.
The financial crisis is precisely that sort of moment. It’s a vast drama, with consequences that will ripple steadily from immediate economic hardship to changes in short-term political fortune to a broad recasting of the way our economies and societies work.
But that’s not enough, apparently, for the drama queens and kings of our political and media establishments. Hastily, they’ve constructed a grand historical narrative in the last couple of weeks, composed largely of overarching myths that are in danger of hardening into conventional wisdom.
So at the risk of being accused of missing the historical boat, let me try to take a few of them on. …
We interrupt coverage of the plan with Mark Steyn’s VP debate review.
… When Regular Joe Six-Pack Bluecollar Biden tried to match her on the Main Street cred, it rang slightly wacky. “Look,” he said, “All you have to do is go down Union Street with me in Wilmington or go to Katie’s Restaurant or walk into Home Depot with me, where I spend a lot of time.” Why? Is he moonlighting as a checkout clerk on the evening shift? Or is he stalking that nice lady in Lighting Fixtures? As for Katie’s Restaurant, ah, I’m sure it was grand but apparently it closed in 1990. In the Diner of the Mind, the refills are endless and Senator Joe is sitting shootin’ the breeze over a cuppa joe with a couple other regular joes on adjoining stools while Betty-Jo, the sassy waitress who’s tough as nails but with a heart of gold, says Ol’ Joe, the short-order cook who’s doing his Sloppy Joes just the way the Senator likes ‘em, really appreciates the way that, despite 78 years in Washington, Joe Biden is still just the same regular Joe Six-Pack he was when he and Norman Rockwell first came in for a sarsaparilla all those years ago. But, alas, while he was jetting off for one-to-one talks with the Deputy Tourism Minister of Waziristan, the old neighborhood changed.
In a conventional presidential environment, Bidenesque fake authenticity would be enough. Up against Sarah Palin’s authentic authenticity, I’m not so sure. All I know is that the McCain campaign should have her out on the road and doing every interview she can over this final month. Oh, and send her snowmobiling hubby to Maine, which splits its electoral college votes. He’ll put their Second Congressional District back in the red camp, and the way things are looking that could be the 270th vote that saves McCain’s bacon.
IBD editors wanted the plan passed.
… All this could cascade into a deep economic downturn that will last years. The victims, however, won’t be gazillionaires on Wall Street. It’ll be you. That’s why, despite IBD’s impeccable free-market credentials, we support the rescue plan. Time for taking effective action is running short .
As the old saying goes, the perfect is often the enemy of the good. We agree that this rescue package is far from perfect. But with time of the essence, we’ll take the good and hope for the best.
It’s possible that once the Treasury has snapped up a good chunk of the damaged mortgage portfolios now on banks’ books, normal lending will resume and the economy will pick up. If so, the government will eventually be able to unload the bad mortgages at a small loss, limiting taxpayer cost.
This happened from 1988 to 1992, when the Resolution Trust Corp. unloaded a huge portfolio of real estate assets. Today as then, action is needed to prevent a meltdown.
Good post from Adam Smith.org lists 8 bullet points that help to understand the financial crisis
Good WSJ Op-Ed by George Mason’s Russell Roberts on the government’s hand in creating this crisis.
Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.
Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What’s missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets. …
National Review’s cover story this issue is on the origins of the mortgage crisis.
Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere near as risky as they actually turned out to be? Although there are many factors involved, the key and fundamental answer is that, in an attempt to increase homeownership — particularly among minorities and the less affluent — an attack on underwriting standards has been undertaken by virtually every branch of the government since the early 1990s. This weakening of underwriting standards had the intended impact of increasing home ownership and the unintended impact of increasing the price of housing, helping lead to a housing-price bubble that masked for many years the crucial (and predictable) problem of increased defaults.
After the government succeeded in weakening the underwriting standards, mortgages seemed to require virtually no down payment — which is the main key to the problem. There were also few restrictions on the size of monthly payments relative to income, little examination of credit scores, and little examination of employment history. This was the government’s goal and, as homeownership rates increased, there was self-congratulation all around. The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership and the increase in wealth that ensued. The decline in underwriting standards was universally praised as an “innovation” in mortgage lending.
The resulting bubble brought in a large number of speculators, in the form of individuals owning one or two houses in the hope of quickly reselling them at a profit. It is estimated that one-quarter of all home sales were speculative sales of this nature. The speculators wanted mortgages with the smallest down payment and the lowest interest rate: adjustable-rate mortgages, option ARMs, and so forth. Once housing prices stopped rising, these speculators tried to get out from under their investments made largely with other people’s money, which is why foreclosures increased mainly for adjustable-rate mortgages and not fixed-rate, regardless of whether the mortgages were prime or subprime. The rest, as they say, is history.
In good times, strict underwriting standards seem unnecessary. But like levees against a flood, they serve a useful purpose. When markets turn sour, these standards help ensure that homeowners will not bail out of homes at the first sign of price declines, that they will have the financial wherewithal to survive economic downturns, and that even if they can’t make their payments, mortgage owners will be covered by the equity remaining in the home. Removing these protections greatly increased the risk in this market when a storm did approach.
Unfortunately, it seems likely that our governing bodies have learned little or nothing from this series of events. If the proper lessons are not learned, it’s all likely to happen again. …
Geologists use stalagmites to track ancient earthquakes. The Economist has the story.
… Like trees, stalagmites are often composed of concentric layers that represent annual growth periods. Counting the layers is one way of assessing how old a stalagmite is. But radioactive dating provides a second, and sometimes more accurate, assessment. In this case the geologists drilled into the stalagmites and estimated their age from the way that uranium decays into an isotope of thorium. Many, they found, dated back to 1811, while others began life in 1917, the date of another nearby earthquake.
Subsequent investigation has confirmed a further seven big earthquakes previously suspected to have happened over the course of the past 18,000 years. An average interval between quakes of 2,500 years is a hopeful sign for New Madrid’s immediate future. But if the technique can be tried out in other places it might reveal areas now thought safe, precisely because there has not been a recent earthquake, that are actually under threat.