The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

Further Thoughts on ‘The Big Short’

Posted on | June 22, 2017 | Comments Off on Further Thoughts on ‘The Big Short’

My reference to The Big Short and the housing bubble in my post about Tuesday’s special election prompted an email from a reader:

I was reading your discussion of the Big Short and you are exactly right about the people who got mortgages they could not pay being just as “guilty”, however you define it, as the people who gave them the mortgages. There are two things that infuriate me about the housing bubble. First, once people start getting loans they can’t pay back and don’t figure they ever will, they will always outbid honest people or if they don’t force honest people to pay more than they should have had to for a home. If I go out and get a loan I can afford to pay back, I can’t outbid the jackass who will borrow anything on the bet that he can flip the house. And that sucks. And as someone who was unable to buy a house during the boom, I resent the hell out of those people. The second thing about the situation is when those bets were paying off and people were flipping houses and making money, no one gave me any of that money. Those were their gains, not mine. But when the whole thing went tits up, I was supposed to feel sorry for them and view their having to give the house back to the bank and rent, something I had done my entire adult life as some kind of tragedy worthy of my aid. Yeah well screw them. Bubbles and speculation happen. But so do contractions. The fact that I ended up paying taxes to bail out a bunch of people who basically got rich at my expense is something I will never forgive.

Government intervention in the economy hurts real people in real ways. Democrats always talk of the way these interventions “help” people, but there is always a cost to be offset for every benefit. The costs in the case of subsidized cheap mortgages — including the notorious NINJA (“no income, no job”) mortgages that emerged during the housing bubble — included artificially bidding up home prices, in such a way that the honest would-be buyer was often priced out of the market. This also created an incentive for developers to build grotesque McMansions rather than more affordable family homes. Insofar as subsidizing mortgages function, as do most subsidies, as a form of deliberate economic redistribution, these programs amount to government picking winners and losers in the economy, which tends to create resentments and conflicts. The losers in such a redistribution scheme may not be correct in their choice of scapegoats to blame for their misfortune, but they are certainly justified in their belief that they’re getting screwed over.

Why do you think Hillary lost the election, huh? Here was a wealthy insider telling the “little people” about what she was going to do to “help” them, and the little people took a look at all those millions in the Clinton Foundation and realized that she really only cares about helping herself.

In 2014 Peter Wallison’s book Hidden in Plain Sight examined the role of “nontraditional mortgages” in causing the housing bubble. Here’s a US News & World Report article about the book:

Two decades ago, the major lenders employed mortgage underwriting requirements for collateral, capacity and credit history – the three Cs. Collateral meant that the home buyer made a down payment, preferably of 20 percent or more of the value of the house, never less than 10 percent. Capacity referred to the maximum share of a borrower’s income that could be devoted to mortgage payments and other debt service. Credit history meant that the borrower demonstrated an ability to manage credit responsibly, an ability which has come to be summarized in a credit score.
Nontraditional mortgages are those in which the lender deliberately waives one or more of the three Cs. Over a very short span of time, beginning in the late 1990s and culminating in 2007, the U.S. housing market came to be dominated by such mortgages. . . .
Government encouraged the growth in nontraditional mortgages. In the decades leading up to the crisis, government officials produced reports and statements criticizing lenders for sticking to the three Cs. They issued lending quotas to Freddie Mac, Fannie Mae and large commercial banks. To meet those quotas, those lenders had to turn to nontraditional mortgages.
The high volume and low quality of nontraditional mortgages was never disclosed properly. Fannie Mae and Freddie Mac instead reported that their portfolios included only one or two percent of “subprime” loans. . . .

People who want to blame “Wall Street” for what went wrong are simply ignoring the role played by government in causing the crisis.




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