Perch gets called out as a monkey

[wiegie]

Get Me ReWrite!

By Barry Ritholtz - May 13th, 2010, 7:20AM

 

My approach to everything I have written, studied and analyzed in this space is pretty straight forward: Start with the data and evidence and go forward from there. Figure out what the “Truth” is; try to get as close to the objective reality beneath the noise in order to make intelligent investing decisions for myself and my clients.

 

There are others who do not share this objective. Their goals are either political (winning the next election) or ideological (having their belief system become dominant). Truth is irrelevant to these people.

 

Not surprisingly, these folks — many of whom contributed to the crisis in a mighty way — are desperately trying to duck responsibility for what happened. Those who helped cause the crisis are engaged in an ongoing effort to rewrite its history.

 

Their goal? Exonerate their own bad behavior, throw off any responsibility for the collapse, blame anything but their own ideology and horrific decision making. They want to keep pushing their tired political agendas, despite the damage they may have caused.

 

When writing Bailout Nation, I tried to steer clear of partisan finger pointing. I kept the focus on what actually occurred, what could be proven mathematically. I blamed Democrats and Republicans — not equally, but in proportion to their actions, and what they did. Unsupported theories, tenuous connection, loose affiliations were not part of the analysis.

 

To be blameworthy, every legislative change, each regulatory failure, any corporate action had to manifest themselves in actual mathematical proof.

 

This led me to ascertain the following 30 year sequence:

-Free market absolutism becomes the dominant intellectual thought.

-Deregulation of markets, investment houses, and banks becomes a broad goal: This led to Glass Steagall repeal, unfettering of Derivatives, Investing house leverage exemptions, and a new breed of unregulated non bank lenders.

-Legislative actions reduce or eliminate much of the regulatory oversight; SEC funding is weakened.

-Rates come down to absurd levels.

-Bond managers madly scramble for yield.

-Derivatives, non-bank lending, leverage, bank size, compensation levels all run away from prior levels.

-Wall Street securitizes whatever it can to satisfy the demand for higher yields.

-”Lend to securitize” nonbank mortgage writers sell enormous amounts of subprime loans to Wall Street for this purpose.

-To meet this huge demand, non bank lenders collapse lending standards (banks eventually follow), leading to a credit bubble.

-The Fed approves of this “innovation,” ignores risks.

-Housing booms . . . then busts

-Credit freezes, the markets collapse, a new recession begins.

 

You will note that the CRA is not part of this sequence. I could find no evidence that they were a cause or even a minor factor. If they were, the housing bubbles would not have been in California or S. Florida or Las Vegas or Arizona — Harlem and South Philly and parts of Chicago and Washington DC would have been the focus of RE bubbles.

 

Nor do I blame Fannie and Freddie. Now understand, there is no love lost between myself and the GSEs. For years, I have called them “Phoney and Fraudy.” Since George Bush and Hank Paulson nationalized them, I have accused the government of using these two as a backdoor bailout for banks — a hidden PPIP/TARP used to buy all the garbage mortgages that banks are desperate to get off their balance sheets. Longtime readers will recall we very publicly shorted Fannie based upon their fraudulent practices and horrific balance sheet when FNM’s stock was in the $40s (it soon after collapsed).

 

But even I cannot reconcile reality with the movement to place all of the world’s troubles at the feet of the GSEs. Not, at least, according to the data.

 

That lack of evidence, however, doesn’t stop ideologues from trying. Consider this attempt at rewriting the causes of the credit crisis by Kevin Hassett:

 

“The worst financial crisis in generations was set off by a massive government effort, led by the two mortgage giants, to make loans to homebuyers no matter whether they could make the payments. Lenders were willing to lend money to just about all comers, no matter how low their income. Why? Because the lenders knew Fannie and Freddie would purchase the loans from them for a high price before bundling them into securities to sell to investors.”

Now, this makes for a fascinating narrative that plays into a number of different ideological beliefs. It exonerates the radical free market deregulators, it ignores what the private sector did, and it somehow ignores the fact that Congress was controlled by a very conservative GOP from 1994 to 2006 — the prime period of time covered leading up to and including the beginning of the crisis.

 

But worse than all of that, the data supporting Hassett’s position simply isn’t there.

 

Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.

 

Specifically, I have requested some data or evidence that DISPROVED the following facts:

 

-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;

 

-The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders

 

-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.

 

-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie

 

-In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.

 

-After 2005, Fannie & Freddie changed their own rules to start buying these non-conforming mortgages — in order to maintain market share and compete with Wall Street for profits.

 

-The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.

 

These are data supported facts I pounded on in BN.

 

Of course, folks like Hassett hate this factual history, as it conflicts with their goals and politics. Rather than produce evidence, they create story lines unsupported by facts. But Monkeys love a good narrative, and so they give that to them.

 

However, as an investor, I demand evidence, data and facts. The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof.

 

Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.

http://www.ritholtz.com/blog/2010/05/rewri...-credit-crisis/

[Azazello1313]

funny. we're watching the beginnings of the death spiral of the welfare state over in europe....but capitalism is a failed philosophy because we have a recession.

 

in any case, some good info in response here. excerpt:

 

I agree with Ritholtz that Hassett grossly exaggerates the role of Fannie and Freddie. But Ritholtz understates it. His first three points are absolutely right:

 

-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;

 

-The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders

 

-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.

 

But Ritholtz ignores why subprime was so profitable. And part of the answer is that Fannie and Freddie had been buying up a lot of mortgages made to low-income buyers pushing up the demand for low-income housing. That in turn pushed up the price of houses in low-income areas.

 

The following chart is not in my paper but it should have been. It shows the growth rate in housing prices in the cities in the Case-Shiller index, divided into thirds. So the low-tier is the bottom third of the housing market in that city–the houses with the lowest prices. The middle tier is the middle third and the high tier are the highest priced houses–in the top third.

 

Housing Price Growth from 1998 to 2003, percent

Low Tier Middle Tier High Tier

San Diego 133.4 104.0 82.3

San Francisco 117.4 84.8 64.3

Boston 116.5 88.3 68.4

Los Angeles 100.4 91.8 71.1

New York Commuter 93.4 83.4 67.4

Minneapolis 91.7 66.1 57.6

Miami 79.9 66.5 62.1

Washington D.C. 71.8 72.0 66.5

Denver 65.5 52.2 43.0

Tampa 63.3 55.3 46.4

Chicago 48.1 46.0 40.8

Atlanta 42.0 28.5 27.2

Phoenix 41.9 31.3 36.7

Seattle 41.7 37.3 32.7

Las Vegas 37.8 37.2 36.8

Cleveland 33.7 23.4 18.9

 

In four American cities, the prices in the bottom tier doubled or more than doubled in five years. The average increase across these cities in the bottom tier was 71%. For the top tier it was 50%. In the previous five year period, 1993-1998, the growth rate among the bottom tier was 27%. In the top tier, 20%. Something happened between 1998 and 2003.

 

I think Fannie and Freddie had something to do with what changed around 1998. Under the housing mandates imposed on them by HUD and cheered on by both Clinton and Bush II, Fannie and Freddie became increasingly aggressive in purchasing loans made to low-income borrowers, especially between 1998 and 2003:

 

(This chart and the next one are from my paper on the crisis, Gambling with Other People’s Money)

 

Ritholtz is wrong when he says Fannie and Freddie bought only conforming mortgages before 2005, if by conforming loans, he means loans with at least 20% down:

 

UPDATE: As some commenters have noted, conforming usually refers to the size of the mortgage not the amount down. But others define it as “meeting Fannie and Freddie guidelines.” Most people think that Fannie and Freddie required 20% down and that was true until 1997. Below I mention that Fannie and Freddie did require PMI on low down payment mortgages. But I also point out below, I’m not interested in winning the $100,000. I’m interested in whether Fannie and Freddie contributed to the bubble. I think they did. They helped inflate the housing bubble that in turn helped create the demand for subprime. But either way, the really important underlying cause was the prospect for creditors to be rescued.

 

another chart

 

A loan-to-value ration above 95% means that the borrower put 5% down or less. By 2003, 714,000 loans—28 percent of Fannie and Freddie’s total volume of home purchase loans—were loans with less than 10 percent down.

 

Fannie and Freddie were aggressively involved in mortgage with less than 20% down.

[Perchoutofwater]

Wegie, why do you hate capitalism? Why don't you go to the socialist utopias of Europe?

[bpwallace49]

Wegie, why do you hate capitalism? Why don't you go to the socialist utopias of Europe?

 

Perch, dont you find it odd that the majority of the "free market" capitalistic countries have suffered the most the last few years, while countries that have some state control in major industries have thrived?

 

Like Canada in their banking and financial system?

[Azazello1313]

Perch, dont you find it odd that the majority of the "free market" capitalistic countries have suffered the most the last few years, while countries that have some state control in major industries have thrived?

 

whoa whoa whoa. excuse me?

 

here, why don't you check out these rankings of countries by economic freedom, and tell me which of those "most free" economies are in worse trouble than greece, portugal, spain. notice that for various reasons, canada ranks as being "freer" than the US.

[wiegie]

Wegie, why do you hate capitalism?

uh, I love capitalism except where there are market failures

 

(As for economic freedom and economic growth, could we please hold off on that debate for a few months? I currently have a paper on the topic under review at an economics journal. If it gets accepted, I will give a summary of the findings.)

[bushwacked]

whoa whoa whoa. excuse me?

 

here, why don't you check out these rankings of countries by economic freedom, and tell me which of those "most free" economies are in worse trouble than greece, portugal, spain. notice that for various reasons, canada ranks as being "freer" than the US.

 

 

Canada performs particularly well in business freedom, financial freedom, property rights, and freedom from corruption. Straightforward regulations facilitate entrepreneurial activity. Overall, regulation is thorough.

 

Edited May 14, 2010 by bushwacked

[bpwallace49]

whoa whoa whoa. excuse me?

 

Excuse you. lol . . . heritage foundation stuff never gets old . . . . .

 

What countries have grown their economies and GDP over the last few years? After you answer that, ask yourself some of the basis of those economies, including gubmnet influence. Havent the BRIC nations GROWN in economic strength over the last few years AZ? And how involved is the gubmnet in their economies?

Brazil

Russia

India

China

. .and Canada has remained stable with heavy gubmnet involvement in their banking systems. (they dont take massive gambles just because they are "free" to do so like their American counterparts . .)

 

Perhaps more gubmnet oversight isnt the evil boogeyman? Or maybe we need BETTER gubmnet oversight. Oversight is the key word here . . before you get your panties in a bunch crying "socialism! socialism! we are turning into venezual!!"

[Ursa Majoris]

Exactly. Capitalism without regulation is as worthless as socialism.

[Azazello1313]

Excuse you. lol . . . heritage foundation stuff never gets old . . . . .

 

What countries have grown their economies and GDP over the last few years? After you answer that, ask yourself some of the basis of those economies, including gubmnet influence. Havent the BRIC nations GROWN in economic strength over the last few years AZ? And how involved is the gubmnet in their economies?

Brazil

Russia

India

China

 

you're talking about borderline third world countries that started from a far lower baseline and have actually been becoming more free. they still lag far behind the developed world in per capita GDP, standard of living, and economic freedom. are you arguing that our economy would perform better if our government were more oppressive like china's? because that is a pretty stupid argument...

 

Perhaps more gubmnet oversight isnt the evil boogeyman? Or maybe we need BETTER gubmnet oversight. Oversight is the key word here . . before you get your panties in a bunch crying "socialism! socialism! we are turning into venezual!!"

 

 

we're not becoming venezuela. we're certainly becoming more like the EU. how's that working out for them right now?

[Azazello1313]

 

it shouldn't be that hard to comprehend. their regulatory environment is "thorough" (which counts against their score), "but transparent" (which counts in favor).

 

funny thing...canada's "financial freedom" score, which relates most directly to banking regulations, is 80. the US's is 70. strange that you guys are arguing we need stronger bank regulations to be more like canada.

 

edit to add: australia's financial freedom score is 90, and their banking system seem to be weathering the financial crisis alright. new zealand's is 80, and ditto. hong kong's is 90, but they also weathered the storm pretty well.

Edited May 14, 2010 by Azazello1313

[Ursa Majoris]

funny thing...canada's "financial freedom" score, which relates most directly to banking regulations, is 80. the US's is 70. strange that you guys are arguing we need stronger bank regulations to be more like canada.

Why is it strange? Wouldn't you favor taking actions that elevated our so-called "freedom score"?

[bushwacked]

it shouldn't be that hard to comprehend.

 

No, it shouldn't, but you were arguing against regulation a couple posts ago. Time to change the argument again, eh?

Edited May 14, 2010 by bushwacked

[Azazello1313]

Why is it strange? Wouldn't you favor taking actions that elevated our so-called "freedom score"?

 

umm, yes. but you realize a higher "financial freedom" score means LESS regulation, right?

[bushwacked]

Wouldn't you favor taking actions that elevated our so-called "freedom score"?

 

Something tells me that Az didn't really know that Canada's thorough regulatory framework elevated the freedom score in the link he provided.

[bpwallace49]

Why are wasting time debating a post by the hyper=partisan Heritage Foundation?

[Ursa Majoris]

umm, yes. but you realize a higher "financial freedom" score means LESS regulation, right?

Right but Canada is famously regulatory yet hits 10 points higher than we do.

[bpwallace49]

Right but Canada is famously regulatory yet hits 10 points higher than we do.

 

And dont they have "socialized health care"?

[TimC]

And dont they have "socialized health care"?

 

Well, if we could save trillions by throwing our entire National Defense budget on to another country, I'd imagine we'd be in better shape too. Think how many free surgeries you can provide to your people if Mexico paid for those multi-billion dollar aircraft carriers and stealth planes.

[bpwallace49]

Well, if we could save trillions by throwing our entire National Defense budget on to another country, I'd imagine we'd be in better shape too. Think how many free surgeries you can provide to your people if Mexico paid for those multi-billion dollar aircraft carriers and stealth planes.

 

Military aint in the discussion . . it was the evaluation of "free markets" and the growth/gubmnet involvement thereof . . .

 

Defense is a whole separate issue . . . and a valid one.

[Square]

You guys have a funny way of enjoying a Friday. At least in my area, it's beautiful outside (of my cubicle). This is how I picture you guys. =)

[Azazello1313]

Right but Canada is famously regulatory yet hits 10 points higher than we do.

 

apparently not in their financial system.

 

wow, are you f'ers really this dense?

 

bush, are you really arguing that the heritage foundation thinks that more regulation means more freedom? I know you've already set the bar pretty high, but that is perhaps one of the stupider assertions you've ever made.

[Azazello1313]

Military aint in the discussion . .

 

it certainly affects "fiscal freedom" and "government spending"

[evil_gop_liars]

Somewhere there is a boy playing "Paprazzi" on the piano...

[Azazello1313]

here is a good post on this whole comparative growth and economic freedom issue.