[ExI] Article From March on SubPrime

[Lee Corbin]

Fred writes about a March (!) 2008 article that very, very
clearly explains three ways that the federal government (
not it says, to be confused with the Fed reserve) contributed
to the current fiasco:

> Since there have been several posts about the current financial
> situation I thought that some might be interested in an article which
> covered many of these issues six months ago:
>
> http://www.investors.com/editorial/editorialcontent.asp?secid=1502&status=article&id=291507506135021

Thanks, Fred. Some highlights from that URL:

    To see how the government contributed to the subprime mess, we
    must look at the feds, not the Fed. The feds helped create the
    problem in three main ways.

    [1] First, the federal government contributes to what economists
    call moral hazard - that is, people taking risks because they
    know that if things turn out badly, someone else will bear a
    large portion of the cost.

    The federal government's semiautonomous mortgage agencies -
    Fannie Mae, Freddie Mac and Ginnie Mae - all buy and resell
    mortgages. Of the more than $12 trillion in mortgages in
    existence, one-third of them are owned by, or were securitized
    by, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing and
    Veterans Administration, plus other government agencies that
    subsidize mortgages.

    Although Fannie Mae and Freddie Mac are no longer government
    agencies, their status as government-sponsored enterprises causes
    people who buy their repackaged loans to assume an implicit
    federal government guarantee. Also, to the extent government
    views large lending companies and banks as "too big to fail," it
    contributes to moral hazard.

    For the market economy to function well, it needs to be a profit
    system and a profit-and-loss system, with the losses being the
    penalty for bad decisions.

    [2] The second way the feds contributed to the subprime mess was
    with a little-noted change in regulations by the comptroller of
    the currency in December 2005 that acted as the trigger.

    Financial planner Less Antman has pointed out that the
    comptroller started requiring banks to require minimum payments
    on credit card balances, causing increases of at least 50% for
    most cards and as much as 100% on others. Many people who hold
    subprime mortgages are people for whom a higher monthly payment
    on a credit card would be a problem.

    Imagine that you're such a person and that before you always made
    sure you made your mortgage payments. With the new regulation,
    you instead make your credit card payment but miss your mortgage
    payment, a widely observed transformation in the traditional
    American delinquency pattern.

    Thus the comptroller's apparently small change in regulations had
    the unintended effect of causing some mortgage borrowers to
    default.

    [3] The third federal contributor to the subprime crisis is the
    Community Reinvestment Act. This act, first passed in 1977 and
    beefed up in 1995, requires banks to lend to high-risk areas that
    they otherwise would avoid. Those banks that fail to comply pay
    fines and have more difficulty getting approval for mergers and
    branch expansions.

    As Stan Liebowitz, a University of Texas economist, has pointed
    out, a Fannie Mae Foundation report enthusiastically singled out
    one mortgage lender that followed "the most flexible underwriting
    criteria permitted." That lender's loans to low-income people had
    grown to $600 billion by 2003.

    Its name? Countrywide, the largest U.S. mortgage lender and one
    of the lenders in the most trouble for its lax lending practices.

    How ironic, then, that the same federal government, and many of
    its boosters, now attack Countrywide for following the very
    policies the government wanted earlier.

    Without any further bailouts, the government could reverse some
    of the steps that led to this debacle. Will it? Not likely.

Lee

> or with a preview tiny url
>
> http://preview.tinyurl.com/3dbt25
>
> And in the interest of full disclosure I am acquainted with both authors.