The Coming Crash

[4est_4est_Gump]

A look at why history will repeat itself.

Eight years after the nation's financial system began its rapid slide into calamity, we all know why. Greedy Wall Street operators, aided by the repeal of the 1933 Glass-Steagall Act and only feebly regulated by the Bush administration, ran wild in the pursuit of greater profits for the rich. Eventually many big banks failed and were bailed out by taxpayers. But in 2010, President Barack Obama and the Democratic Congress took bold action to create powerful new government regulatory machinery. Still, much more regulation is needed to forestall future damage.

This narrative of the economic debacle is heavily promoted in the mainstream media and by regulators. But in Hidden in Plain Sight, financial scholar Peter Wallison argues that the story is laughably false. Worse yet, he says, the true causes of the debacle have not been dealt with, and there is every reason to believe that the same thing can happen all over again.

...

How Washington and the mainstream media responded to that financial crisis occupies a large portion of the book. Wallison shows that the response was founded on two large ideas. The first was the belief that without large capital inflows from the Treasury and the Fed, the whole "interconnected" financial system would have fallen apart and the world as we know it would have come to an end. The second was that lax financial regulation allowed this crisis to happen, and therefore the financial sector should be subject to more muscular controls.

Wallison's views on three issues are worth exploring in detail. A major argument on the left, recently advanced on behalf of Sen. Elizabeth Warren's proposed 2014 financial legislation, is that the 1999 "repeal" of the 1933 Glass-Steagall Act removed the restrictions that kept investment banks from using commercial bank deposits to speculate in an unregulated marketplace. Wallison authoritatively refutes this contention. He points out that while the 1999 act allowed affiliates of commercial banks to engage in investment banking (and other financial activities), the 1933 Glass-Steagall firewall protecting insured deposits against speculative investing is still in full effect.

The second issue is the March 2008 forced merger of the investment firm Bear Stearns with JP*MorganChase, greased by $29 billion in Fed-supplied capital. Wallison shows that there was never any need to bail out Bear Stearns in the first place. But he also argues that the Treasury and the Fed's refusal to bail out Lehman Brothers in September 2008, after giving the financial world the impression that the government would bail out "interconnected" firms of that size, "changed the perceptions and ultimately the actions of all major financial players," leaving them "weaker and less prepared to deal with the enormous financial panic that occurred when Lehman was allowed to fail." Wallison accuses Bush-era Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke of, essentially, bungling the management of events in that crucial year.

Finally, Wallison sharply attacks the "false narrative" of the financial crisis offered by activists, politicians, and regulators with a direct interest in sweeping new regulation. We would have done much better, he writes, "if the narrative about the financial crisis had properly located the problems in the reduction of mortgage underwriting standards brought on by the government's housing policies and implemented largely through the affordable housing goals." Continuing belief in this false narrative, evidenced by the Dodd-Frank Act, the Financial Crisis Inquiry Commission's myopic 2010 report, and proposed legislation in the most recent Congress, makes it likely that there will be another financial crisis in the future.

John McClaughry
Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again, by Peter J. Wallison

http://reason.com/archives/2015/04/05/is-another-financial-crisis-on

 

[Que]

That is almost word-for-word how the usual administration apologists recite the catechism.

Greedy Wall Street operators, aided by the repeal of the 1933 Glass-Steagall Act and only feebly regulated by the Bush administration, ran wild in the pursuit of greater profits for the rich. Eventually many big banks failed and were bailed out by taxpayers. But in 2010, President Barack Obama and the Democratic Congress took bold action to create powerful new government regulatory machinery. Still, much more regulation is needed to forestall future damage.

I have given up explaining in intricate detail what actually happened what the lending guidelines were, especially when what were once illegal seller kickbacks were made not only legal but having such programs were nearly a requirement for any institution doing conventional housing loans.

I watched it happen. THe end results were predictable, yet the above mantra is repeated as if it was even contributory to the problem. If housing was not artificially inflated by each and every subsequent transaction being bumped 5% to cover the buyers down payment, the market would not have risen as fast as it did, buyers with no down payments (which means NO SAVINGS, NO ABILITY TO REPAY in the future) would have been renters and rental rates would have driven prices as they should, not the greater fool theory of investing causing an inflationary spiral in only one sector.

Those feeding on that sector, me included at the time, made out well and that gave the entire economy an artificial boost but it was all illusory and it was ALL because of FNMA and FMAC guidelines. Period. The entire problem.

Nothing has changed, other than we needed a new crop of low-income, low information, low savings, high debt margin buyers to reach the age of majority. When there were no more new buyers the scheme collapsed. They will do it again.

PS. I wrote all that after only reading the portion I quoted. I wanted to see how close my version lined up.

 

[4est_4est_Gump]

I have pointed out on several occasions since when politicians began lamenting the dearth of low-income and minority buyers in the "saved" market and how we needed to loose standards that they made too tight in the wake of the crash...



If you want to hold on to the false narrative, then yes, you will repeat the pattern.

 

[JAMESBJOHNSON]

In 2003 my daughter built a house near Orlando for 150K. In 2006 she sold the house for 300K and bought a POS in Jacksonville for 400K. The market then collapsed and she lost her ass.

I warned her to rent rather than buy during the bubble. But I don't know shit.

But it shut the papers fat mouth about property taxes. Our state constitution limits tax increases and decreases to 3% per annum. During the bubble the paper demanded tax increases based on bubble prices.

 

[Ishmael]

A look at why history will repeat itself.


John McClaughry
Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again, by Peter J. Wallison

http://reason.com/archives/2015/04/05/is-another-financial-crisis-on

Oddly enough it was the NYT, in a Dec. 2002 editorial, that predicted exactly what occurred in 2008. The editorial centered around Clinton's plan to use 'affordable housing' as the means to jump start the economy to recover from the Bush I recession (a recession that had ended 8 months before he took office). The short of it is that the editorial urged Clinton NOT to do what he did and correctly predicted the consequences. It took damn near 16 years for the chickens to come home to roost, but roost they did.

Ishmael

 

[toubab]

Oddly enough it was the NYT, in a Dec. 2002 editorial, that predicted exactly what occurred in 2008. The editorial centered around Clinton's plan to use 'affordable housing' as the means to jump start the economy to recover from the Bush I recession (a recession that had ended 8 months before he took office). The short of it is that the editorial urged Clinton NOT to do what he did and correctly predicted the consequences. It took damn near 16 years for the chickens to come home to roost, but roost they did.

Ishmael

Chickens always come home to roost. The only time they don't is when there are no more chickens.

 

[Wat_Tyler]

I have a great recipe for fried chickens. Just as Parody - she'll hook you up.


I think I may be the only sub-prime success story out there. and I have worked in the misnamed "affordable housing" industry in some form or fashion since the mid-90s. Even the well-meaning people, the bleeding heart do-gooders, were busy renovating and selling houses to people in stable clerical jobs who would likely never be promoted. These folks could count on their annual 3% raises - maybe - and were qualified at low-to-mid 30s percent of income, thereby guaranteeing that they'd be house-poor for half the life of their mortgage . . .


unless the market boomed and they could sell out for twice the money. I did watch one woman who was a tad shrewder make $40K in one year's ownership. I watched another couple make $50K between contract and closing. They stayed four years and doubled their money, almost all of which was the bank's money. Banditos be them.


Better'n shootin' craps . . . .

 

[Que]

Meritage was the second biggest subprime lender in the country. I was their favorite appraiser in the Phx metro area. They were using an AI model to "score" appraisals to make sure that the appraisals conformed to some reasonable standards. They KNEW that a lot of these loans were going to be first payment defaults. Those are every realtor, appraiser, loan officer, and underwriters worst nightmare.

They get full autopsies. Because the thing goes belly-up so fast, it looks like fraud and none of us four that are just earning our daily crust are going to jail for something that is really just someone that heard everyone else was "making money" and wanted to get in on it.

EVERYONE qualified. I KID YOU NOT. People that I personally would not loan $20 to with any hope of getting it back QUALIFIED. I do not mean that I inflated the value, the realtor engaged in an illegal kickback, the underwriter was asleep, or the lender fudged the application.

I mean they ACTUALLY qualified. Maybe not this program or that one but there was a program for EVERYONE.

There were stated income loans for people that lied to the IRS about how much they made. You could get a home by being "honest" about your tips, or your drug dealing or anything that made you money. The program was if they write a number on the paper it not can be accepted, it must be accepted. Can't have a suspicious underwriter empowered to consider whether it was likely or not, that would slow down the rush for 100% homeownership.

Don't want to exaggerate? There were programs where there were low or no doc loans where no documentation was required. No one had to commit fraud because everything was legal.

The one and only thing that could put all of us in jail was the value which is where I came in. If I was wrong, and it could be proved that my opinion was not supportable, it would look as if there was probably some money under the table somewhere. I had a few deals that had that fragrance to me. I crossed my "i"s and dotted my "t"s twice on those.

Because of those risks, the AI system was calibrated to set off the alarm bells if there was any possibility that a review appraiser MIGHT come up with a lower figure. Most appraisers set off the bells every time, this meant the underwriter had to send a query, (not me... an actual question) the appraiser had to respond to the query and this went in the file to justify that they made damned sure that the appraiser was not crooked, or incompetent. I learned how to beat the AI, which was really when you think about it nothing more than a great tutor. It gathered the collective wisdom of generations of appraisers and it was pretty simple really. If you work hard to compare the most similar of properties, whatever it takes to do that, there will be less needed adjustments. With less being adjusted the level of certitude of the value is higher.

I got out two years before the alleged top of the market when I could no longer appraise a house in that fashion with those appraisal guidelines for what they were, in fact, selling for.

Not a single one of my appraisals from that boom ever even got me a letter requiring an explanation. Everyone and their brother got into appraising and made up wild assed adjustments to explain why you just sold house A for $100K and house B is now an "Ameridream" (I give you 3 guesses what ameridream was aimed at "solving) House b "needs" to appraise for $105K because the seller is "contributing" a $5k donation to the "Ameridream" foundation and cooincidentially, "Ameridream" is "granting" a $5k "grant" to the "disadvantaged" buyer. The house was never worth $105K. The next guy wants $105K for his house but his buyer is another "dreamer' (my, my, wonder what sort of politicians thought this shit up?) so now house C has to appraise for $110,200 because the seller is contributing $5,200 towards the buyers down payment.

Rinse and repeat until the crash, then blame everyone but the Nehamyah and Ameridream creating entities FNMA and FMAC that were immune from scrutiny and under the protection of none other than Barny Frank and Chris Dodd. Yes the same dodd/frank from the famous bill that solves NONE OF THIS.

You cannot make this stuff up. By progressives sure can make up a cover story.

 

[Ishmael]

And then there were the untold thousands that didn't sell but cashed out their equity and pissed the money away.

Ishmael

 

[Wat_Tyler]

I remember being told that I qualified to borrow waaaaaaaaay more than I felt comfortable with. My 2nd wife and I borrowed to the limit on our house and the squabbles about being broke helped destroy that marriage. I borrowed about 70% of what they would lend me, and as bad as 2011 was around here, I couldn't have kept this house otherwise.


It "appraised" for 10% more than contract. That was maybe 26% or so above assessment, which in this town is pretty close to value. There had been some work done to the house, but not that much.


I might not have gotten a house otherwise, so I'm actually okay with the whole thing.

 

[RobDownSouth]

The #UsualSuspects are out peddling their usual revisionism about the Bush housing crash of 2008

"Those poor bankers were innocent! Repealing Glass-Steagall had nothing to do with the crash! It was #ThosePeople! They were...UNQUALIFIED!

....And....and....THE CRA!

....And.....and...FANNIE AND FREDDIE!

Teh Market CANNOT FAIL! It can only BE FAILED!"

 

[Wat_Tyler]

https://pbs.twimg.com/media/CBver6mUMAEI7Zl.jpg:large

 

[Que]

You can only shake your head at the idea that- refuting out their weak white-wash that consists of a snappy couple of three lines they all recite... with insightful, detailed analysis of actual events (which in my case were witnessed first-hand) is somehow "revisionism."

Truly beyond caricature. A cartoon, really.

 

[RobDownSouth]

^^^ sez the fool who was just spluttering "but...but...FANNIE 'N FREDDIE!" just last week.

I'm glad you found some confirmation bias for your opinions.

 

[Que]

Here let me help you say what you are trying to say until Salon's paperbo,y King Orfeo, can come by and give you the hymnal:

SINS

#Greedy Wall Street
#Glass-Steagall Act
#Unregulated
#Bush administration
#Excessive Profits
#The Rich
#Big banks

SALVATION!!!

#Noble and Wise President Barack Obama
#Democratic Congress
#Dodd/Frank
#Bold action
#Powerful new government
#Regulatory machinery
#Much more regulation is needed.

There, don't you feel you have contributed to the discourse?

You are welcome.

 

[RobDownSouth]

Oh that's right, you have first-hand experience with the Bush real estate crash of 2008, you were pumpin' out inflated appraisals back then.

Kinda made you a bit player in the meltdown, but I'm sure the statute of limitations have expired and in any event you can no longer work in that field.

 

[patient1]

My concern is that the banks that were too big to fail before are even bigger now that they have absorbed some of their failed competitors.

Will they be more careful with the depositor's money now, or have they been taught that catastrophic losses are nationalized, while profits are retained, ( creating the biggest bonuses for the bosses, therefore take some risks ) ?

 

[JAMESBJOHNSON]

In the coming crash expect government to stick liens up your ass to bail out the Clintons and Wall Street. Hillary will use the liens to print cash for the elites, then collect money from your house/business when you die or sell it.

 

[Sean]

Would anyone like to tell me why it's Obama's fault that banks in Britain, Germany, France, Spain and the far East were crashing too?

 

[eyer]

My concern is that the banks that were too big to fail before are even bigger now that they have absorbed some of their failed competitors.

Will they be more careful with the depositor's money now, or have they been taught that catastrophic losses are nationalized, while profits are retained, ( creating the biggest bonuses for the bosses, therefore take some risks ) ?

I believe we know those answers before we even ask them...

...and the only reason we go ahead and ask them anyway is because we fantasize the answers could be other that what they truly are.

It's like hoping your mate isn't cheating on you, coming across solid evidence your mate is cheating on you...

...and then asking your mate, "You're not cheating on me, right?", while hoping against all reality that the answer could be anything but the truth.

It's totally devastating for someone truly in love to cut the cord cleanly...

...but that devastation is fully required for any rebirth to be possible at all.

The marriage has long been over now...

...we really do need to start moving on.

 

[Que]

Would anyone like to tell me why it's Obama's fault that banks in Britain, Germany, France, Spain and the far East were crashing too?

Yes. I can. You and those like you will ignore the answer.

Because they provided a lot of money to fuel the bubble of phony value. They (and American banks of course) bought bundles of securities that had been packaged into groups with identified risk levels on them that provided a healthy ROI. They bought these derivatives because it was felt that the oh-so sophisticated quasi-governmental entities that had created the standards for assessing the risk of the various groups of loans were both honest and accurate in describing those risks.

When you inflate the largest economy in the world with artificial values all of that overage has to come from someone's pocket. When a house of cards collapses all, not just some, of the cards hit the table.

When the inflated housing sector collapsed it not only wiped out all of the inflated value, it took with it a bit of the actual, reasonable value. It also removed from the economy all projected future earnings that would have been earned by any person or entity that was connected to that huge sector. This is what caused the recession and the stagnation that continues to this day, despite cheerleading over the random odd bit of good news.

Less money flowing in all of the world's economies means less money for all banks since they make their money on the movement of money.

 

[Que]

My concern is that the banks that were too big to fail before are even bigger now that they have absorbed some of their failed competitors.

Will they be more careful with the depositor's money now, or have they been taught that catastrophic losses are nationalized, while profits are retained, ( creating the biggest bonuses for the bosses, therefore take some risks ) ?

Dodd/Frank not only did not fix any actual problems, it made the actual problems such as mega banks and decisions on loans being made far removed from anyone that knows an area and values much worse. It encourages the survival of only the biggest of banks and like most lobbyiest written legislation created a bar to entry for new startups that might compete with those big banks.

 

[Sean]

Yes. I can. You and those like you will ignore the answer.

Because they provided a lot of money to fuel the bubble of phony value. They (and American banks of course) bought bundles of securities that had been packaged into groups with identified risk levels on them that provided a healthy ROI. They bought these derivatives because it was felt that the oh-so sophisticated quasi-governmental entities that had created the standards for assessing the risk of the various groups of loans were both honest and accurate in describing those risks.

When you inflate the largest economy in the world with artificial values all of that overage has to come from someone's pocket. When a house of cards collapses all, not just some, of the cards hit the table.

When the inflated housing sector collapsed it not only wiped out all of the inflated value, it took with it a bit of the actual, reasonable value. It also removed from the economy all projected future earnings that would have been earned by any person or entity that was connected to that huge sector. This is what caused the recession and the stagnation that continues to this day, despite cheerleading over the random odd bit of good news.

Less money flowing in all of the world's economies means less money for all banks since they make their money on the movement of money.

Quasi government entities? Like Standard and Poor, you mean? You have no fucking idea what you're talking about, do you?

 

[Que]

Quasi government entities? Like Standard and Poor, you mean? You have no fucking idea what you're talking about, do you?

Standard and Poor are not in the business of bundling mortgages, writing the standards for loan approvals or disclosing the risks in those bundled mortgages.

Rating agencies can only make assessments based on the information disclosed to them about what is included in the instruments that they are rating.

As I said, your kind believe what was spoonfed to you about the crash and cannot be educated further. Banks were bailed out because banks had a legitimate cause to squawk about what they had been sold with the backing of the US Government.

Not only did they have in their possession some of the actual bad loans, depending on what part of the stripped bundle they got they might well have original loan documents, appraisals and the loan application. They also have analysts capable of distilling that information into a very newsworthy format about exactly what sort of loans were not only accepted but actively encouraged by FNMA and FMAC.

I realize that it is what you do best, but go peddle smug and all knowing whilst imparting absolutely no analysis to someone else.

 

[Killswitch]

Would anyone like to tell me why it's Obama's fault that banks in Britain, Germany, France, Spain and the far East were crashing too?

This is all bullshit. McClaughry is a short seller of stock and wants the market to go down so he can make money.

It's like vegas. You can bet on a stock to win...OR lose. Most people don't realize this.

I love these short selling naysayers.

I laugh all the way to the bank at them.