Crash starts with CRA

This is an extension of Stating the Obvious.

During the four years that have elapsed since Homeaggedon, you would think there would be some consensus around its causes. No, I don't mean the obvious one: all bankers are the unremitting, Snidely Whiplash personifications of total evil. Rather, whether there was some systemic element that ensured a housing bubble replaced the preceding secular trend in housing prices while virally undermining our economy.

Pace the MAL, there is a principal cause that by its very nature had to engender the worst recession in 60 years. Even worse, that cause came about only due to a breathtaking combination of stupidity, wishful thinking, untreatable ignorance and, in at least one case, destructive intent.

I am talking, of course about the Community Reinvestment Act.

The CRA was offspring of two seeming truisms. First, bankers were happy to take deposits from anywhere, but were racistly reluctant to lend in minority neighborhoods. Second, because home ownership is so strongly correlated with stable, law-abiding neighborhoods, government policies must step in where the market was so obviously failing.

Even taking those seeming truisms as given, analytical effort falling well short of mental exhaustion is sufficient to see the crater at which the CRA must arrive (as well as ascertain the MAL's, and ODLs', pervasive reality distortion field).

Since rascist bankers won't lend to the melanin gifted, they must be first urged, then increasingly forced, to do so in the face unyielding racism, as evidenced by the continuing reluctance to lend. But that means that money-grubbing bankers eager to make a profit wherever they can, must be first urged, then increasingly forced, to lend despite poor or non-existent credit ratings, limited employment history, and non-existent down payments.

Of course, bankers have always been willing to lend to people bearing those unfortunate stigma, but at a price: interest rates that reflected the associated higher default risk.

This is where, right at the beginning, the crash became inevitable. See if you can follow along; it really isn't too tough:

• Homeownership is an unalloyed good.


• Racist profiteering bankers willfully underserve challenged neighborhoods.


• The lack of employment history and savings is unrelated to default risk.


• Therefore, bankers must be encouraged to overcome their unwillingness.


• When enouragment proves insufficient, coercion follows and erosion follows.


• Coercion takes the form of congressional intervention in banking business decisions, based upon compliance.


• Erosion takes several forms: elimination of downpayment requirements, employment and credit history.


• The underlying presumption is (pick one or more) [extremely racist | a perfect example of magical thinking | fully intended to undermine the banking system].


• Racist, because melanin gifted populations with otherwise identically risk enhanced financial characteristics are not nearly as likely to default as their melanin challenged counterparts. (As it turns out, the Boston Fed, through through the kind of incompetence and mendacity that is always accompanied by the modifiers "monumental" and "criminal" directly abetted that preposterous conclusion.)


• Magical, because it required believing a simple, government imposed, solution could possibly solve a much more complex problem that by its very nature had to lie beyond congressional fiat.


• There were some who both advocated the CRA, and hoped for its intended effect. (Note: this isn't part of the logic train, but rather an unanticipated consequence of looking into how inevitable the crash was.)


• In order for the CRA to function (a goal hoped for by the drooling lackwits of both parties), the following had to happen:
  
  
  • A vast expansion of GSEs and the secondary market.
  
  
  • Bundling of mortgage backed securities.
  
  
  • The hiding of high risk mortgages within those bundles

In short, the route from CRA to crater was so direct as to resemble the shortest, and most obvious, distance between points. It was a route that would never have been traveled without (mostly) well-intentioned idiots (Dodd, Frank, Clinton, Bush) forcing decisions that would never have occurred otherwise.

It is odd — okay, maybe it isn't — that the inchoate, incoherent, ill-educated (or wholly ineducable) flocks that comprise the ODLs never once mention the pivotal role that the CRA had in creating our crater. Just as no one seems to mention the Greek government, or the European Union, for the string of staggering stupidities that led them to their own perfectly foreseeable smoking hole.

Instead, it's all on Snidely.

---

It will take awhile to read these, but your time will be rewarded. Presuming, that is, you find being appalled rewarding:
Anatomy of Trainwreck: Causes of the Mortgage Meltdown
The Community Reinvestment Act, Evaluated
The Community Reinvestment Act's Harmful Legacy

Stating the Obvious

For those who can't determine the link between the CRA and the collapse of the housing market, look here (read it in its entirety):

The data shows that the principal buyers [of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages] were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

No surprise, really. The logic of the CRA ensured this outcome to anyone more sentient than Barney Frank.

Tilting to the Left. Just a Little.

My son, a freshman at Washington State University, is taking one of those courses that are the backbone of a university's core mission: to produce broadly educated minds. Or, to say it more concisely, a gen-ed requirement -- History 105, Contemporary Issues.

This the prompt, quoted in full, from his class's most recent assignment:

Some pundits, academics, and politicians often talk about the “unintended consequences” of global capitalism (Joyce Appleby uses this phrase in the final assigned section).  Others argue that there is nothing unintended about capitalism’s consequences – that those in power are fully aware of the potential results, including financial crises like the one that shook the global economy in 2008 and continues to plague people’s of all nations (Naomi Klein makes such an argument).

In a succinct, clearly written, three-page double-spaced essay that uses multiple historical examples from not only Appleby but from other readings, lecture notes, and discussion notes, answer the following question:

Why has the capitalism/socialism debate been so divisive?

Use the 2008 financial crisis and the ensuing global recession as a starting point for a discussion of the historical and very contentious “consequences” of and responses to capitalism – arguably one of the most defining historical processes of the modern era.

On taking a look at this, some questions came immediately to mind:

• In what universe, no matter how distant in space or time, does Naomi Klein make an actual argument?
• Others argue there is nothing unintended about capitalism's consequences. Are there other Others who argue that socialism's bugs are actually features?
• Based upon the prompt, what is "arguably one of the most defining defining historical processes of the modern era?"
• Again based upon the prompt, why would the students suspect the professor would be able to tell the difference between a succinct, clearly written essay and a pile of fish dead for three days?
  
• Why does leaden, prolix and ungrammatical writing plague the collectivist professor's of all humanities?
• What the heck is the question, anyway?
• Is that even important to providing the correct answer?

Remember, this is a prompt for a writing assignment. What is the prompt prompting? On the face of it, that is easy — discuss some ways in which the intellectual divide between socialism and capitalism persists. And, for the clairvoyant students, not just the ways, but the whys, too. At some point, our entering arguments become axiomatic. In many cases, there is no proving that a greater degree of individualism is preferable to more collectivism, because the notion of "preferable" itself is also at stake.

So, if the prompt had gone on from the seemingly simple question and focused it by saying "Use the 2008 financial crisis to show why the argument between socialism and capitalism will continue", then the student could take the fundamental tenets of each, and show how the crisis both undermined and substantiated them. (The CRA was an instance of socialism, and, by ignoring risk, destroyed the housing market. The banks, through looking only at personal enrichment, privatized gain while socializing risk.)

But that isn't what the prompt says. Instead, it amounts to a non-sequitor. One might just as well ask "Why are the arguments between Yankee and Red Sox fans so divisive? Using the recent doping scandals in athletics, explain why baseball is bad."

And that is before getting to the ambiguous references. What, arguably, is the most defining historical process of the modern era, the 2008 financial crisis, the responses to it, or capitalism?

Then there is the fundamental viewpoint of the prompter, who really seems to be asking "why, since socialism is so obviously superior, how can there possibly be, absent those possessed of malevolent intent, any capitalists around with whom to argue?"

But wait, there's more. My son got his paper back today — he got a middling B. That's reasonably good, I suppose, unless you are one of those Others who suspects that, in the humanities, A's are already a seriously debased coin of the academic realm.

Here is the content portion of his grade:

Content 17/20 - You do a great job of outlining some of the key differences between the two ideologies and giving modern examples. There are a few key elements that are missing from your essay, however. YOu do not discuss the role of the Cold War and World War II in the assoctaion of socialism with communism and the major propaganda efforts to solidify this idea in the minds of capitalistic nations. You also do not talk about the Great Depression, which is one of the most important events that Socialists point to when condemning Capitalism.

Others who argue that academia hasn't tilted so far to the left that only its Wiley Coyote ignorance of physics has kept from long ago toppling over should hang their academic head in shame, should such an emotion still be available to them. This is a perfect example of the kind of shameless bias that comes with collectivists' unquestioned — and let's savor the irony here — religious beliefs. Yes, the banking sector stunk the place up. But the ways in which the financial crisis of 2008 continues to plague people’s of all nations, particularly those lashed to the Euro, can hardly be separated from that socialist paradise which is Greece.

At this point, though, I must say there is one particular area where capitalism is inferior.

In socialism, you don't have to pay for reeducation camp.

Tick. Tock.

As of two weeks ago, Chez Skipper is an empty nest. Both the woman and man children are now at Washington State University.

For the last half year or so, if I stopped what I was doing, I could hear the ethereal pendulum of an invisible clock swinging remorselessly, slightly louder with each descent. Of course, time is marking off for all of us always, but some events, rubicons, whose approach is sufficiently obvious, particularly tune our ears to its relentless march.

When the other SWIPIAW and I headed for the airport, the rest of their lives, and ours, started.

As portentous as all that is, in all senses of the term, over the months my mind couldn't help but wander away from the universe's escapement mechanism. Frequently, it ended up in the financial morass we call higher education.

I am not, by any stretch of the imagination, a collectivist. I'll leave that to those whose visions are without constraint. Yet I can't help but apply that collectivist term "fairness" to the ravenous monetary maw college educations have become: $26,000 per year, not including books, travel, or incidentals. It is worth noting that we picked WSU for its proximity and cost. It is the closest suitable college to Alaska that is only four times as expensive as it should be, instead of ten. And while the Skipper sprogs are no doubt exemplars of their kind, I don't doubt there are many every bit as meritorious, but whose choice of parental units was less fortunate. For them, even a decidedly middling college is either out of reach, or attainable only through the prospect of years laboring out from underneath debt.

The questions are, or at least should be, obvious. Colleges impart no more education now -- leaving aside for the moment the intrinsic value of what higher education pedagogy hurls from its podia -- yet the cost to purchase it has skyrocketed.

Consider a microcosm of the college experience, textbooks.

When it comes to economics, one the nice things about books is that once invented, they have scarcely changed, making the concept of inflation far easier to apply. Over the last forty years, without any adjustment, the number of dollars required to purchase a hard back book has roughly tripled. Over that same period, the unadjusted cost of college textbooks has increased over seven times. As for the wider picture, I'll bet the average college budget top line is an order of magnitude greater. Why?

Two reasons, probably. Just as the CRA created the housing bubble, government attempts to ameliorate unfairness have just made the problem worse. James Taranto has also theorized that court decisions eliminating aptitude tests with racially disparate outcomes has caused companies to look elsewhere for talent proxies: college diplomas have become de rigueur where they once were beside the point.

No matter. Despite being an admission against interest, the sooner this government fueled and fortified fleecing collapses, the better for all of us.

To Own, or Not To Own

For years The "Economist" has been on something of a jeremiad about tax policies that subsidize home ownership, typically through a mortgage interest deduction. Now, they are taking on the question of whether home ownership makes sense at all.

On the plus side, homeowners accumulate wealth, invest more in their neighborhoods, pay more attention to schools, etc. To the extent that is true,

Home ownership, in short, benefits everyone—not just the homeowner—and the more there is of it, the better. Which is why it is usually encouraged by the government. In America, Ireland and Spain, homeowners can deduct mortgage-interest payments from taxable income.

Yet, against this must be weighed the worldwide financial crash, which was tied directly to "... this supposed miracle of social policy:"

The disaster began with defaults on American subprime mortgages, a financial instrument designed to spread home ownership among the poor. It gathered pace after the failures of Fannie Mae and Freddie Mac, two government-sponsored enterprises that provide cheap home loans. As a result, the home-ownership rate in America has fallen for four years, the first time that has happened in a quarter of a century. In 2008, 2.3m families lost their homes or faced foreclosure—double the average before the crisis—reducing the home-ownership rate from 69% in 2004 to 67.5% at the end of 2008. The number of owner-occupied dwellings also slipped in Britain in 2007-08 for the first time since the 1950s.

Hence the scare quotes around "Economist." The sheer dunderheadedness required to equate the social argument for home ownership -- regardless of its actual merits -- with government induced corruption of lending standards would earn an instant scathing on any free-to-read blog. Why the heck does anyone pay for this dreck? (Speaking as one who pays for it ...)

The main arguments for home ownership, though, are not primarily economic, but social. Home ownership, argue those who want to expand it, benefits society because it encourages stable, more law-abiding communities; it makes people more likely to vote in local elections and join clubs; and it benefits future generations because, it turns out, the children of homeowners do better at school and have fewer behavioural problems than children of renters.

...

[And,] More stable neighbourhoods are more law-abiding. According to a study of New York City, the home-ownership rate was second only to income as an explanation for different crime rates.

Further, children of homeowners do better at math and reading, graduate high school far more often, and have far fewer teen pregnancies.

However, correlation is not necessarily causation. Such consequences could flow from the birds-of-a-feather effect. Or not. Unless they do. Given the distribution of human talent, it is hard to argue against the possibility of the successful herding with their own kind, with the knock-on effect of sequestering relative failure.

Too bad The "Economist" left off perhaps the most potent argument for home ownership of all: self sufficiency. Renters need do nothing for themselves; they need take no precautions, nor think of prevention. They can simply, and only, call the rentier.

In contrast, and here I will induce from personal experience to discover the general rule, successful homeowners must take charge of their own conditions. For example, last winter I called on a heating contractor to do an inspection. As a consequence, I learned the fan motor, because of starting current exceeding spec, was giving signs of failure rather sooner than later.

As a renter, I would have relied upon the rentier to figure that out ahead of time, and paid for that figuring, and paid for someone else to do the work, most likely after the thing failed.

As an owner, I bought the motor, and, with my son, replaced it. We, as a family, gained the economic benefit of self sufficiency. He, as a man-child, learned how to approach a novel problem in such a way as to prejudice the future into providing a solution: having never done such a thing myself, success was only possible through careful analysis and proceeding very methodically.

These lessons, far from trivial, are unavailable to renters. The lesson they learn is depending upon someone else to provide.

But what of the subsidies to homeownership? In essence, the mortgage interest deduction represents a transfer of wealth from renters to homeowners, led to the housing asset bubble, and weakened financial services.

Right?

Hogwash. To arrive at that conclusion requires ignoring that rentiers also get to deduct interest, along with a whole host of other things, from income. Removing, as The Economist desires, the interest deduction for owner occupied housing amounts to preferring dependence upon others instead of self-provision. Further, by focussing on ownership, the article completely neglects what renting entails. Owners provide their own property management and, in a great many cases, their own maintenance. For a given amount spent on housing, paying for these things must mean smaller and meaner accommodation.

Of course, purchasing a home amounts to an automatic savings plan. Over, typically, thirty years, a homeowner will have put aside a substantial amount of money. On the flip side, though, people could have put their down payments into equities and rented rather than owned. Over the last 30 years, those equities would have been the better bet. (Also, oddly enough, the article faults equity tied up in houses as being illiquid, while two paras prior faults homeowners for using the equity in their houses. Which is it?)

Right?

Well, perhaps. Owning property as well as shares is called diversification, which, last I heard, is A Good Thing. Taking the longer view, though, owning property is a form of retirement planning. Paying off a mortgage means one's living costs plunge: all that is left is maintenance and property taxes. Until his dying breath, a renter continues to buy property for the rentier, while also paying for maintenance and property taxes.

Ultimately, this article failed. It performed a journalistic non sequitur, blaming home ownership for grotesquely stupid government policy, then used the consequences of doddery as proof that homeownership isn't such a good idea after all. The focus on mortgage interest deductions for homeowners is equally mystifying, giving further credence to the suspicion that The Economist's primary value lies in twee literary stylings, rather than any particular knowledge about economics.

So, To Own, or not to Own?

Homeowners are self-selecting. Absent CRA infections of traditional lending standards, being able to purchase a home requires significant self discipline and planning for the long term. No one should be surprised if communities comprised of such individuals are statistically temperamentally different than those that are not.

A free society should encourage self-sufficiency over dependency. Renting does just the opposite. Instead of rewarding the acquisition of a dozen skills, renting makes them pointless. And instead of providing the freedom to shape and improve one's own environment, renting leaves people at the whim of others.

For those who, through choice or fate, have the personal skills to, in effect, set up a business of their own, home owning makes sense. For society, whether to encourage owner occupied housing depends a great deal on how much that society values freedom.

The Economist ends with this:

As Adam Smith wrote in “The Wealth of Nations” two centuries ago, “a dwelling-house, as such, contributes nothing to the revenue of its inhabitants.”

Apparently they have not read, or do not remember, The Theory of Moral Sentiments