Misleading intro to article. The expansion of credit was not due to over ambitious politicans who wanted homeownership for the poor. It was fueled by lax accounting and regulatory standards which expanded private securitizations of mortgages (did not involve freddie and fannie). This generated money which went into legislator pockets though.
It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result.
Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much.
I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.
This is completely wrong. Credit standards not only dropped dramatically at Freddie/Fannie, but they drove the decline elsewhere. Causality is clear: Private banks issued loans that they knew that Freddie/Fannie would securitized; as the government agencies decided they'd buy crap, the private banks provided it. (For crying out loud, the government agencies CREATED the subprime market.)
In actuality, about half the bubble has been directly traced to the lowering of underwriting standards by Fannie/Freddie, which in turn was directly caused by....a desire to provide home ownership for the poor.
I'm hesitant to wade into this debate, but this is a pretty sophistic argument, for a few reasons:
* He largely ignores the potential for a catastrophic financial collapse in 2008-2009. At the time, pretty much everyone agreed that stopping the bleeding was a good idea. Among economists, that some sort of vigorous action was necessary is close to a consensus view. To completely dismiss this is ridiculous. Further, he doesn't address how expensive TARP actually ended up being, or that the majority of the money has been paid back.
* The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The only meaningful tax increases that I can recall come as part of the Affordable Care Act.
* The author makes no concrete arguments for why no changes to financial regulations are unnecessary. Instead, there's a glib aside that the 'government also announces a series of regulations to “fix” the problem'. Really? This is important. Tell us why. If the government had stopped banks from selling Heidi's bonds as AAA-rated securities, wouldn't this crisis have not happened?
Overall, this is a simple, facile metaphor with many implicit assumptions, designed to bolster the author's libertarian worldview. To the author's credit, he does a good job explaining the fundamentals of the housing crisis.
Tarp money was mostly paid back. The Fannie/Freddie bailout was not and is unlikely ever to be.
The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office.
The funds were obtained on credit. Most people believe the only way the US can pay down this debt is to raise taxes.
This is a bit like going out to lunch with some friends, agreeing to split the check evenly, having one of them start ordering incredibly expensive bottles of champagne, protesting, and being told "don't worry, nobodies had to pay for their share of Bob's drinking". Sure, not yet. But the bill hasn't been presented yet...
Also, sure, stopping banks from selling risky bonds as AAA-rated securities would have helped. But no regulation announced to date in the US has stopped or will stop credit rating agencies from calling a risky MBS AAA-rated, or banks from selling a risky but AAA-rated MBS to a willing buyer. Indeed, no such regulation is even possible; it would fall afoul of the US constitution.
The author's glib dig about regulations that "fix" the problem is arguably the best bit in the article. Can you name any regulation promulgated since the crisis that might, even in theory, help? The biggest one so far has been Dodd-Frank, and it's a joke; many analysts think it made the problem worse.
The quoted $18 price plays no role in the story; the point is that it was bought on credit, with the people taking the credit being insolvent, and that there was a systemic bias towards issuing them credit anyways.
The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing. In this story beer went to $18 and everyone was willing to pay it, not because it was worth $18 but because no one was having to actually SPEND anything (yet) for it (except those buying the bonds).
It may not have been the most important thing, but you need the "bubble" in the story for the bubble to "pop":)
If you seriously think that this whole debacle hasn't taxed our economy and the value of our currency more than $19B...then you're smoking something really good. :)
I know we have -3% unemployment in tech. Not quite so elsewhere, my friend.
He seems to think it was "free market principles at work" that caused this. It was those dangling carrots in front of poor people and convincing them that letting any Joe Scmoe borrow money for a house was a good thing. Now these same people are out there sympathizing with the people whose lives they destroyed and promising more things, such as putting all their loans under control of the government.
At least the bank can't send a swat team to my house to collect payments.
[+] [-] fanboy123|14 years ago|reply
It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result.
Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much.
I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.
[+] [-] aaronklein|14 years ago|reply
Go look at government-backed Fannie and Freddie and what they did in partnership with their cronies like Angelo Mozilo at Countrywide Home Loans.
Big Business and Big Government have formed a cartel to make money off each other. And that is exactly what led to the Great Recession.
[+] [-] yummyfajitas|14 years ago|reply
[+] [-] Codayus|14 years ago|reply
In actuality, about half the bubble has been directly traced to the lowering of underwriting standards by Fannie/Freddie, which in turn was directly caused by....a desire to provide home ownership for the poor.
[+] [-] stephenjudkins|14 years ago|reply
* He largely ignores the potential for a catastrophic financial collapse in 2008-2009. At the time, pretty much everyone agreed that stopping the bleeding was a good idea. Among economists, that some sort of vigorous action was necessary is close to a consensus view. To completely dismiss this is ridiculous. Further, he doesn't address how expensive TARP actually ended up being, or that the majority of the money has been paid back.
* The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office. The only meaningful tax increases that I can recall come as part of the Affordable Care Act.
* The author makes no concrete arguments for why no changes to financial regulations are unnecessary. Instead, there's a glib aside that the 'government also announces a series of regulations to “fix” the problem'. Really? This is important. Tell us why. If the government had stopped banks from selling Heidi's bonds as AAA-rated securities, wouldn't this crisis have not happened?
Overall, this is a simple, facile metaphor with many implicit assumptions, designed to bolster the author's libertarian worldview. To the author's credit, he does a good job explaining the fundamentals of the housing crisis.
[+] [-] yummyfajitas|14 years ago|reply
The funds weren't obtained from "new taxes levied on employed, middle class, non-drinkers who have never set foot in Heidi’s bar." There has been no increase in federal income taxes since Obama took office.
The funds were obtained on credit. Most people believe the only way the US can pay down this debt is to raise taxes.
(I disagree, spending can also be cut. But neither major party is unwilling to cut spending - look what happened the last time they claimed they would cut spending: http://www.economist.com/blogs/democracyinamerica/2011/08/de... )
[+] [-] Codayus|14 years ago|reply
This is a bit like going out to lunch with some friends, agreeing to split the check evenly, having one of them start ordering incredibly expensive bottles of champagne, protesting, and being told "don't worry, nobodies had to pay for their share of Bob's drinking". Sure, not yet. But the bill hasn't been presented yet...
Also, sure, stopping banks from selling risky bonds as AAA-rated securities would have helped. But no regulation announced to date in the US has stopped or will stop credit rating agencies from calling a risky MBS AAA-rated, or banks from selling a risky but AAA-rated MBS to a willing buyer. Indeed, no such regulation is even possible; it would fall afoul of the US constitution.
The author's glib dig about regulations that "fix" the problem is arguably the best bit in the article. Can you name any regulation promulgated since the crisis that might, even in theory, help? The biggest one so far has been Dodd-Frank, and it's a joke; many analysts think it made the problem worse.
[+] [-] a3camero|14 years ago|reply
Seems like this has limited hacker relevance.
[+] [-] davidw|14 years ago|reply
Maybe it's a honeypot:-)
[+] [-] aaronklein|14 years ago|reply
[+] [-] zeteo|14 years ago|reply
[+] [-] enjo|14 years ago|reply
The market for beer bonds doesn't exist if there isn't an ever increasing ceiling on the price of the asset that bond is backing. In this story beer went to $18 and everyone was willing to pay it, not because it was worth $18 but because no one was having to actually SPEND anything (yet) for it (except those buying the bonds).
It may not have been the most important thing, but you need the "bubble" in the story for the bubble to "pop":)
[+] [-] brunnock|14 years ago|reply
[+] [-] aaronklein|14 years ago|reply
I know we have -3% unemployment in tech. Not quite so elsewhere, my friend.
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] ericmoritz|14 years ago|reply
[+] [-] mdda|14 years ago|reply
[+] [-] aaronklein|14 years ago|reply
[+] [-] rsanchez1|14 years ago|reply
At least the bank can't send a swat team to my house to collect payments.
[+] [-] cateye|14 years ago|reply
[+] [-] burgerbrain|14 years ago|reply
[+] [-] aaronklein|14 years ago|reply