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Once the framework was in place to give out garbage loans, people across all income levels leveraged the opportunity to get houses they shouldn't have. This ju

Once the framework was in place to give out garbage loans, people across all income levels leveraged the opportunity to get houses they shouldn't have. This just shows how poisonous it is when the government screws up a market by essentially mandating that banks throw away their normal risk assessment process.

camelite 8y ago
What government interventions caused the doubling of subprime lending from 2004 to 2006?
- Eliezer 8y ago
  FDIC insurance. A private insurance market for bank accounts sends a price signal about reliability. Subsidizing that insurance in a way that doesn't eliminate the price signal and the customer risk, like requiring 20% private insurance for 90% of the account face value and the govt providing the remaining 80% insurance at the same price or at a discount, could make sense if insuring more accounts was a policy goal. Having the government ensure everything for free with no internal price differentiation just tells banks they might as well go wild.
  - naravara 8y ago
    FDIC only ensures bank deposits, such as checking or savings accounts, not mortgages. It's not at all clear what that has to do with the proliferation of subprime lending.
    - Eliezer 8y ago
      It's a root cause of bank irresponsibility. If not for free FDIC insurance, a bank making risky loans would cause the cost of insuring an account at that bank to rise. Securitization does change this, but all the CDSs on AIG's mispriced insurance on CDOs were ultimately taking place against a background of too-big-to-fail and flat-priced government insurance.
      - lovich 8y ago
        Why would a bank spend any money on insurance to cover accounts in the event that they run out of money? That's just the end of the bank, they don't care at that point. It's not like the executive officers would have a chance of going to jail over it.
camelite 8y ago
What laws did the government pass which "screwed up" the market?
camelite 8y ago
What law did the government pass that forced the banks to ignore their risk assessment processes? Particularly, supposing you can point to some law or intervention, why do you suppose the banks are so childish and naive that when a law forces them to do one thing they don't want to do (make dumb loans to low-income groups), they'll respond by over-generalising and doing a whole other bunch of things they hadn't up to that point wanted to do (make dumb loans to middle- and high-income groups).
- tooltalk 8y ago
  I guess the following would be a good starting point of discussion: https://www.forbes.com/sites/norbertmichel/2015/01/26/government-policies-caused-the-financial-crisis-and-made-the-recession-worse/#6d2179b8564e https://www.forbes.com/sites/norbertmichel/2015/01/26/govern...
  - naravara 8y ago
    It's really not. First of all, the affordable housing market isn't where the housing market was most inflated so the author's entire premise is wrong. Secondly, the author of that article is pretty clearly shilling to privatize Fannie Mae. Thirdly, nobody here seems to understand what the community lending standards actually were and just wants to use it as a post to rest their argument on. This is a much better, though still critical of the CRA article that goes into actual detail on what the problems were: https://www.city-journal.org/html/financial-crisis-and-cra-10483.html https://www.city-journal.org/html/financial-crisis-and-cra-1... But it's still an overly reductive and misguided argument. As Noah Smith points out here: https://noahpinionblog.blogspot.com/2012/12/did-risky-mortgage-lending-cause.html https://noahpinionblog.blogspot.com/2012/12/did-risky-mortga...
- inthewoods 8y ago
  Amazingly there wasn't even a requirement for basic income checks when issuing a mortgage - that came after the crisis. If we look at the mortgage pipeline, the problems become obvious, but none of them have to do with the government, except in that the government should have regulated. Start with the mortgage origination companies like Countrywide who could easily offload mortgages to the other banks to collateralize. Since these companies could completely offload their risk, they were highly incentivized to give a mortgage to everyone. Move on to the rating companies and the big banks creating financial products of doom and you've got the whole mess. All without the government "creating the problem." I do agree, however, that the government giving these companies an implied put option via a bailout gave them every reason they needed to take huge risks. Still amazes me that no one from the banks ended up in jail.

camelite 8y ago

What government interventions caused the doubling of subprime lending from 2004 to 2006?

Eliezer 8y ago
FDIC insurance. A private insurance market for bank accounts sends a price signal about reliability. Subsidizing that insurance in a way that doesn't eliminate the price signal and the customer risk, like requiring 20% private insurance for 90% of the account face value and the govt providing the remaining 80% insurance at the same price or at a discount, could make sense if insuring more accounts was a policy goal. Having the government ensure everything for free with no internal price differentiation just tells banks they might as well go wild.
- naravara 8y ago
  FDIC only ensures bank deposits, such as checking or savings accounts, not mortgages. It's not at all clear what that has to do with the proliferation of subprime lending.
  - Eliezer 8y ago
    It's a root cause of bank irresponsibility. If not for free FDIC insurance, a bank making risky loans would cause the cost of insuring an account at that bank to rise. Securitization does change this, but all the CDSs on AIG's mispriced insurance on CDOs were ultimately taking place against a background of too-big-to-fail and flat-priced government insurance.
    - lovich 8y ago
      Why would a bank spend any money on insurance to cover accounts in the event that they run out of money? That's just the end of the bank, they don't care at that point. It's not like the executive officers would have a chance of going to jail over it.

camelite 8y ago

What laws did the government pass which "screwed up" the market?

camelite 8y ago

What law did the government pass that forced the banks to ignore their risk assessment processes? Particularly, supposing you can point to some law or intervention, why do you suppose the banks are so childish and naive that when a law forces them to do one thing they don't want to do (make dumb loans to low-income groups), they'll respond by over-generalising and doing a whole other bunch of things they hadn't up to that point wanted to do (make dumb loans to middle- and high-income groups).

tooltalk 8y ago
I guess the following would be a good starting point of discussion: https://www.forbes.com/sites/norbertmichel/2015/01/26/government-policies-caused-the-financial-crisis-and-made-the-recession-worse/#6d2179b8564e https://www.forbes.com/sites/norbertmichel/2015/01/26/govern...
- naravara 8y ago
  It's really not. First of all, the affordable housing market isn't where the housing market was most inflated so the author's entire premise is wrong. Secondly, the author of that article is pretty clearly shilling to privatize Fannie Mae. Thirdly, nobody here seems to understand what the community lending standards actually were and just wants to use it as a post to rest their argument on. This is a much better, though still critical of the CRA article that goes into actual detail on what the problems were: https://www.city-journal.org/html/financial-crisis-and-cra-10483.html https://www.city-journal.org/html/financial-crisis-and-cra-1... But it's still an overly reductive and misguided argument. As Noah Smith points out here: https://noahpinionblog.blogspot.com/2012/12/did-risky-mortgage-lending-cause.html https://noahpinionblog.blogspot.com/2012/12/did-risky-mortga...
inthewoods 8y ago
Amazingly there wasn't even a requirement for basic income checks when issuing a mortgage - that came after the crisis. If we look at the mortgage pipeline, the problems become obvious, but none of them have to do with the government, except in that the government should have regulated. Start with the mortgage origination companies like Countrywide who could easily offload mortgages to the other banks to collateralize. Since these companies could completely offload their risk, they were highly incentivized to give a mortgage to everyone. Move on to the rating companies and the big banks creating financial products of doom and you've got the whole mess. All without the government "creating the problem." I do agree, however, that the government giving these companies an implied put option via a bailout gave them every reason they needed to take huge risks. Still amazes me that no one from the banks ended up in jail.