Sunday, 1 January 2017

Market Failure eh?

I bought The Big Short ( which is a good watch. It's about the 2008/9 financial crisis using the vehicle of the experiences of a few people who saw it all coming and worked out how to short the US housing market.

And as you'd probably expect from Hollywood it doesn't tell the whole story, It starts at what I think of as halfway up the argument.  In particular it makes only passing comment on the role played the USA's Government Sponsored Enterprises (GSE's); Fannie Mae and Freddie Mac (and Farmer Mac)   in wildly fanning the flames of credit expansion. Nor does it deal with the 'anti red-lining' legislation and its exploitation by 'community organisers' using companion anti-discrimination legislation against banks to drive lending to unsuitable borrowers.

But serendipity strikes again.  This little gem from here:-

Even before he became president, as I noted a week later, no US politician had done more to precipitate that banking crash. As a young politician in Chicago, he had in 1995 played a leading role in the amending of the Community Reinvestment Act, requiring US banks to lend billions of dollars to buy homes for millions of poor, mainly black Americans, guaranteed by two giant mortgage associations, Fannie Mae and Freddy Mac." 

(Cards on the table - I've always considered Obama as a clever, arrogant, vacuous, vain, economically ignorant, largely incompetent, dangerous fool with a massive chip on his shoulder),

And over here, at about the same time, we suffered from Blair's parallel agenda to expand home-owner-ist credit expansion, which was enabled by his equally (and massively) flawed Financial Services and Markets Act 2000 which brought into existence the utterly failed Financial Services Authority.

Every time you bother to look into some financial crisis or other behind it you find some ill thought out government intervention.  And just to illustrate the point I am also reading Legislating Instability by Tyler Beck Goodspeed; an analysis of the Scottish banking crisis of 1772.

And guess what? Yep. Yet again the roots of that crisis were grounded in an earlier age's version of ill thought through intervention.  Then the Chartered Banks lobbied for legislation to protect themselves from competition (they naturally argued that it was to protect the public) and in doing so confirmed Adam Smith's saw about how businessmen will come together to work out ways to defraud the public by seeking special privileges from government.

Governments and money.  You know they don't mix.


DBC Reed said...

The Big Short is pretty marvellous: I loved the scenes where young financiers sorrowfully agreed ,much against their consciences, to supply our heroes with the financial vehicles to bet against the American housing market, "knowing" that American house prices were rock solid.Yock Yock.
Having a go at Obama is somewhat misplaced.I was always amazed right through the Credit Crunch to see, preserved on the official White House e-mail notice board, George W Bush fatuously extolling his mission to increase American homeownership.Now an archive item:' Fact sheet President Bush calls for expanding opportunities to homeownership' on Net seems to be what he was saying then as I remember it.

Lola said...

DBCR. Without any doubt Bush (Snr and Jnr and Clinton) were as culpable. It was Clinton's legislation that was used by Obama. But Obama's economic incompetence and his hand in the Community Reinvestment Act(s) were, are, seminal in all this. For him to pretend otherwise is hypocritical in the extreme.

(We spotted the issues with housing in about 2003/04 but rather than short it we did what we are supposed to do and advise our customers about the problems. I am extremely annoyed with myself for not being smart enough to short the UK mortgage lenders).

Lola said...

DBCR - and just to add, Roosevelt's New Deal progeny, the 'GSE's' Fannie May, Freddie Mac etc are certainly very culpable. Their whole remit is credit expansionary.

All this has a long history; a long time coming if you prefer. The seeds were set in about 1914.

paulc156 said...

In actual fact though the GSE's (public/private hybrids) played a peripheral and johnny come lately role in sub prime. Econned by Yves Smith was a good overarching view of the crash. It drilled down into the nitty gritty of some of the bad CDOs as well as the malaise in the field of macro economics that laid some of the foundations for the crash. That and the demise of the old respectable brokerage companies and investment houses.

KJP said...

A lot of people disagree that CRA was to blame; CRA mandated loans didn’t default at higher rates. To quote an extract from Bloomberg:

It wasn’t Harlem, Philadelphia, Baltimore, Chicago, Detroit or any other poor, largely minority urban area covered by the CRA. No, the crisis was worst in Florida, Arizona, Nevada and California. Indeed, the vast majority of the housing collapse took place in the suburbs and exurbs, not the inner cities.

Lola said...

P156 / KJP. I am aware of the Miami etc situation. John A Allison ( ) discusses that in his book ( ).

Look, I just made a short post to illustrate that behind all this is massive predictable, abject and unremitting government and bureaucratic failure and that that has always been the case.

Mark Wadsworth said...

As far as housing and credit bubbles goes, they were all as bad as each other Obama, Bush, Clinton, first Bush etc. No doubt Trump will be worse, so a tad unfair blaming just Obama.

Apart from that, partly agreed. The only real solution to land and credit bubbles is government intervention - just the right kind (LVT or at least Georgism Lite).

The problem is that it's usually the wrong kind of intervention (untaxing land, tax breaks for borrowing, bank deposit guarantees, bank bail outs, subsidised loans to 'first time buyers' etc).

Lola said...

MW. I was not 'blaming Obmana'. He's been spending all his time saying it was not his fault but the 'fault' of 'market failure'. Just trying to bury that.

Mind you I could have made that clearer.

I don't think that LVT is 'government intervention'. I think it is the only 'just', or better 'equitable', way to raise tax to pay for what makes that value possible - security of property rights.

DBC Reed said...

Of course the American mortgage market has the fabulous "non recourse" mortgage which led last time to much of the jingle mail. Googling around on the Net, it would appear that these are still being offered.
Does anyone know their present status ?

Derek said...

You can still get a non-recourse mortgage in Canada, specifically Alberta. However the banks will do their best to provide you with a recourse one, so you need to know what you're doing if you want one. It's awfully easy to be led astray by the "little extras" with which the banks tempt prospective borrowers in order to get them to take on a recourse mortgage.

I'd imagine that it's the same in the States.