Megan McArdle (Replying to: Nimed) December 12, 2009 9:55 AM
The worst villains in this process--the people who indisputably knew that they were defrauding the investors in securitized loans--are the mortgage brokers who do not have particularly flash lifestyles.
JoshinHB (Replying to: Megan McArdle) December 12, 2009 11:04 AM
"The worst villains in this process--the people who indisputably knew that they were defrauding the investors in securitized loans--are the mortgage brokers "
The mortgage brokers are not the villains, they were cogs in a machine built by Wall Street.
The villains are the Wall Street wizards that took loan securitzation to new levels, and created a new type of fractional reserve lending.
The mortgage brokers actions were dictated by WS, which needed new loans to keep their leverage machine going.
As the bubble progressed, the quality of loans had to decline. The safest loans were made first, then the almost safest, then the marginally ok, then the not safe at all, then the "there's no way this is going to get paid back".
WS knew this and didn't care as long as the leverage machine was cranking out billion dollar profits.
McArdle does not do the very simple, obvious, utterly necessary step of following the money. Her vision is so limited and thinking so narrow that she simply accepts the most flattering explanation available for the current crises.
In some ways, I wonder if we aren't looking too hard for an answer. The fact is, asset markets display bubbles. They display bubbles without a modern fractional reserve banking system to provide leverage (Tulip mania, South Seas bubble, Albanian ponzi schemes). They display bubbles without much outright fraud. (The tech bubble). They display bubbles in lab experiments where students trade imaginary financial instruments for picayune returns. Bubbles seem to be a feature of asset markets. And when the bubbles are in full force, they draw working capital from investments that would ordinarily be attractive, but can't compete with annual returns in excess of 20%.
This certainly isn't the first real estate bubble. The history of the 19th century is rife with land speculation--and catastrophic collapse. Before we had the stock market bubble of the 1920s, we had the great Florida Real Estate Bubble, which was the beginning of the state's ascendance to one of the biggest states in the union. Accounts of the bubble in books like Galbraith's Great Crash or Frederick Lewis Allen's brilliant Only Yesterday, sound eerily similar to the Florida real estate bubble we just lived through.
The Florida real estate bubble was amplified by the rivers of gold pouring into America from Europe. In our own decade, we have Asian central banks and Asian savers pouring their capital into our markets. When central banks buy dollars, they don't want to park them by taking a flyer on a tech stock; they invest in some form of fixed income security, aka debt. That led to an expansion of credit markets.
Given that house prices are basically set by the size of the monthly payment that buyers can afford, rather than some deeper notion of intrinsic value, it's hardly surprising that looser credit caused house prices to rise--nor that, in the wake of WorldCom, the recent history of steady appreciation in American real estate led naive buyers and lenders to think that housing was "safe". The ingredients of a bubble are always, to some extent, sui generis, but they have a common theme: the price of something starts going up in a way that deludes investors into thinking they've found a sure thing.
So I don't think the problem is some intrinsic lack of investment opportunities in the United States. Rather, I think that markets sometimes miscalculate. In the long run, however, the bubbles burst, and people's appetite for speculative bets on asset price appreciation abates. Unfortunately, we're usually left with a hell of a hangover when it happens.
If there were a prize for Greatest Stupidity In A Professional Capacity, these paragraphs would surely make the cut. Asians save too much of their money, so we had a housing bubble. It utterly ignores the actions of everyone that McArdle just so happens to support, coincidentally vilifies everyone McArdle personally dislikes, and reduces her audience to a respectful, awe-filled appreciation. ("That's a heck of a post, Megan".)