And Then the Roof Fell In

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The Wall Street Journal

BOOKS

And Then the Roof Fell In
By JAMES R. HAGERTY
July 9, 2008; Page A13


Chain of Blame
By Paul Muolo and Mathew Padilla
Financial Shock
By Mark Zandi


Who killed the U.S. housing market?

Some finger former Federal Reserve Chairman Alan Greenspan, for cutting interest rates too low and believing that mortgage bankers could be trusted to make sensible loans. Others blame Angelo Mozilo, the recently retired CEO of Countrywide Financial, the nation's largest and most aggressive mortgage lender until it stumbled into the rescuing arms of Bank of America. Mr. Mozilo's espresso-roast tan, sharp suits and snarling voice make him Hollywood's obvious choice of villain. But no single person can carry the can for the housing bubble, its deflation and the current plague of foreclosures. That much is clear from two books – "Chain of Blame" by Paul Muolo and Mathew Padilla and "Financial Shock" by Mark Zandi – offering instant history on what may turn out to be the worst economic disaster of our time.

Messrs. Muolo and Padilla, financial journalists, say that Wall Street caused the mortgage-default crisis that spread to corporate debt, the stock market and even municipal bonds. Mr. Zandi, chief economist for Moody's Economy.com1, indicts millions of perpetrators, including investment bankers, mortgage lenders, loan brokers, regulators, Chinese exporters, terrorists and the hordes of Americans who gambled that house prices would rise indefinitely. Some degree of excess was probably inevitable. Once technology stocks collapsed in 2000, Mr. Greenspan's Fed cut interest rates to spur a slumping economy out of recession. That made it cheaper to buy houses just when Americans, disillusioned with stocks, saw real estate as a safer bet. The 9/11 terrorist attacks reinforced the notion that there was no place like home – especially if it was a trophy home with walk-in closets as big as what we used to call bedrooms.

Meanwhile, China and other big exporters to the U.S. had to find something to do with all the dollars we sent them. Many of those dollars flowed back into U.S. mortgage securities. That lowered the cost of home loans further, helping more Americans buy houses. We then needed more Chinese-made stuff to fill those closets . . . This global dollar dance was wildly profitable for Wall Street. The investment banks got fees for packaging home loans into complicated securities and selling them to investors at home and abroad. Wall Street firms also lent money to the mortgage banks so that they, in turn, could lend to consumers. Finally, the investment banks' lust for home loans became so great that they opened or bought their own mortgage-lending firms. In one of the worst-timed acquisitions ever, Merrill Lynch agreed to pay $1.3 billion for subprime lender First Franklin in September 2006, just as defaults were starting to surge.

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In "Financial Shock," Mr. Zandi, an adviser to the McCain presidential campaign, doesn't trot out any colorful characters. Instead, he provides a concise and lucid account of the economic, political and regulatory forces behind this binge. Among them was the belief of regulators that it was healthy for U.S. mortgage risk to be spread to myriad investors, avoiding concentrations that could blow up a single big bank. In the end, Mr. Zandi says, risks became "so widely dispersed that no one was forced to worry about the quality of any single loan. . . . Everyone assumed someone else was in control. No one was."

Today's debacle, Mr. Zandi believes, is more than just another of our periodic market panics, such as the stock-market crash of 1987 or the Russian debt crisis of 1998. He sees the housing bust as the end of a gaudy era in which Americans routinely spent far more than they earned. "No longer can we count on rapid gains in stock and house prices. Lenders will be less forthcoming with credit.... Social Security and Medicare benefits will almost certainly be cut for most of us. We will all have to save more and be more careful how we invest."

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URL for this article:
http://online.wsj.com/article/SB121556128130737541.html

[trthnd4jstc]

1. Deregulation, and Easy Credit

The two culprits are Deregulation, or Lack of Regulation, and Easy Credit.

Further, our Bankruptcy laws do not allow a person to keep their home when they go through a decrease in income, and that person is not able to pay her/his bills.

No-one should be allowed to lend thousands of dollars to people who have no realistic means of paying it back. For example, I have heard of a 62 year old woman, making in the high $20,000.00's given a home loan for $110,000.00. She defaulted. On this show, so did several other women and men.

Further, why should Triple, B Bonds have been allowed to be sold above their value. Germany gets involved in their markets. Their markets are more stable, and the people are more content. The current model of free markets do not work for the interests of the majority. This economy is a heartless tyranny.

[question everything]

2. Perhaps someone has to explain this to Bush, who, apparently, claims

that it all started "decades before he came to the White Hosue."