Low rates didn't cause bubble, Bernanke says

[pissedoff01]

http://www.marketwatch.com/story/low-rates-didnt-cause-bubble-bernanke-says-2010-01-03

Low rates didn't cause bubble, Bernanke says
Lax supervision of toxic mortgages was bigger cause, Fed chief says
By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) - The Federal Reserve had a role in inflating the housing bubble, but it wasn't low interest rates in the U.S. that fueled speculation in housing around the globe, Fed Chairman Ben Bernanke said Sunday.

Rather, it was lax supervision of toxic mortgages by the Fed and other bank regulators -- along with excessive flows of capital around the globe -- that inflated the bubble, setting up the world economy for what may have been the worst economic crisis in modern history, Bernanke said.

In twin speeches at the annual meeting of the American Economic Association in Atlanta, Ga., Bernanke and his vice chairman, Donald Kohn, responded to critics who suggest that the Fed's policy of very low interest rates from 2001 to 2005 was the major cause of the housing bubble...

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Full speech at http://federalreserve.gov/newsevents/speech/bernanke20100103a.htm

China wasn't mentioned once.

[Oregone]

1. Oh yeah, cheap credit has no role--no role at all--in creating bubbles

In other news, the earth is flat

[FreakinDJ]

15. He has a point - remember the "Mortgage Broker Regulation"

No employment checks

barely a credit check

Fluffing the numbers

The Used Car Sales Man's credit fluffing techniques were used in the Home Mortgage officies

[Oregone]

17. So that is part of the problem, but so is cheap credit

Cheap credit will always accelerate borrowing, investment, economic growth, and be capable of producing bubbles, even with regulation (because it affects the actual market price of the assets being purchased).

But you can have complete deregulation with 20% prime rate, and no bubble at all. You can have great regulation and 0% interest, and you will have a bubble (refer to Vancouver real estate). While the deregulation & lack of oversight were ingredients in this specific case, low interest rates were a necessary ingredient that shouldn't be ignored

[Warpy]

16. The bubble could have been stopped by increasing interest rates

if banks and brokerages hadn't been working together with crooked mortgage companies to write such ridiculous paper that nobody with a functioning brain thought it would ever be paid off. High interest rates were irrelevant when you were writing a bogus mortgage on a million dollar bungalow for a couple of honest but underpaid schoolteachers.

As it was, hiking mortgage rates might have had a minor effect on price runups, but the crooked paper would still have been written and brokerages would have still made a killing on it by betting against it through derivatives after they'd sold it to pensions, states, and foreign countries.

This is the banking crime of the last century, since that's when it was set up. Bernanke is correct in that interest rates didn't cause it. He's wrong to say the Fed had no role when the Fed's looking the other way while the scam was constructed and completed was essential to the whole thing.

He's not totally wrong about interest rates.

[PSPS]

18. "a million dollar bungalow for a couple of honest but underpaid schoolteachers"

Yes, that's right. The "honest but underpaid schoolteachers" felt they could afford that "million dollar bungalow."

Don't forget the requisite "they were tricked/forced by the bank to sign the note without reading it, because nobody reads them anyway, regardless of their inability to understand that they couldn't afford it even though they are educated people."

Isn't that how it goes?

[Warpy]

19. Don't forget that the way the payments were structured

those people could afford them until the balloon payment kicked in. The way prices were going, they'd sell before the balloon payment started and make enough money to relocate to a cheaper state or put a decent enough down payment on a fixer to qualify for a real mortgage, and that no, we don't teach people this stuff in school and most of them trust the financial guys who are trying to "help" them afford what was a very modest California bungalow.

I won't blame you for not knowing how to read an EKG or pull an arterial sheath. I won't blame them for not knowing stuff I knew to look for because my parents pointed me in the right direction when I was a kid.

Jeez, it must be nice to be so superior.

[knowbody0]

2. perspective is everything

[mdmc]

3. YOU LIE!

[Oregone]

4. Well, heh, its a good thing he's not the guy in charge of fixing this mess

Hm, right? He's not the guy in charge, is he?

[SmileyRose]

5. I think he's wrong.

I realize it's pretty egotistical of me to think I (with no college degree) know more than a man with decades in the financial industry, but I think either Ben is wrong, or else he's deliberately not telling the whole story.

The problem, IMHO, is the ongoing unholy alliance between corporations and government. Unnaturally low mortgage rates, coupled with development that had no relation to supply and demand, coupled with speculators turning homes into equities rather than places to live, coupled with buying off the state and federal watchdogs that could have stopped it early on.

It has happened before, it will happen again. The predators will pick something, anything to blow up. They have already bought off the politicians and walk away with the profits - leaving us to pick up the mess.

[laughingliberal]

8. "The predators will pick something, anything to blow up. "

Yes, which should have us all asking ourselves why Goldman Sachs, et al are pushing for the passage of Cap and Trade.

[Hello_Kitty]

13. So they can trade credits and rake in profits!

Cap and trade is the new bubble.

[laughingliberal]

14. Ding Ding Ding Ding! We have a winner!

And most Democrats are completely unaware of this and are pushing for Cap and Trade.

I think a straight carbon tax makes more sense but what do you think?

[Hello_Kitty]

22. I agree. There's no incentive to cut your emissions if you can trade them.

And when you add Wall Street into the mix it's just asking for trouble. I've been sending this video around to people because it's a great and simple explanation of why Cap and Trade won't work: http://www.storyofstuff.com/capandtrade/

[sandnsea]

12. That's what the elite want you to think

They want you to think it was all the people, when the truth is, it was all the financiers creating this mortgage investment vehicles with little Fed oversight, just like Bernanke said. Countrywide was not allowed to become the giant that it was, pushing these crappy mortgages, without assistance from Wall Street and regulators.

[SmileyRose]

21. I must have stated my thoughts clumsily

I absolutely do not think it was "all the people". I think it was a group of economic predators and their government enablers. I think nothing has been, nor will be done to stop it and that same group will do it again. At our expense.

[laughingliberal]

6. One place he got it right...the lax supervision of toxic mortgages and I would add

the lax regulatory environment, in general including the passage for Gramm Leach Blilely.

[geckosfeet]

7. Also the insane practice of insuring the toxic mortgage backed securities for their face value.

When the securities became worthless the banks who had insurance cashed it in. The insurers (who were often the very backs cashing it in - robbing Peter to pay Paul) had to pay out big time and went belly up. Once the insurance policies became worthless the house of cards started to fall in earnest.

No. It was simply bank regulators watching this insanity take place on huge scale, and willfully ignoring it. The reasons for the lack of action need to be determined. I find it difficult to believe that the regulators honestly thought this was good investment policy. This leaves many other reasons for their failure to act including (some of my favorites)

1. They were afraid to call out the banks on what they were doing because of administration policy (bush/cheeney/KKKrove strong arming them)
2. They were/are afraid of the power of the banker themselves
3. They were/are completely incompetent (they would have us believe this)
4. They were/are complicit and made out like bandits with kickbacks and payoffs
5. All of the above

[laughingliberal]

10. I pick # 5. nt

[geckosfeet]

23. Me too - and there are probably another dozen or reasons not listed.

[That Is Quite Enough]

9. Well, I agree with -some- of what Bernanke said.

There's more to it than just 'lax supervision' though.

[xchrom]

11. It's unregulated stuff that gets you in trouble.

Low interest an unregulated -- well there's avrecipe
for disAster.

[jmowreader]

20. Is "lax supervision" what they're calling it these days?

There are five reasons the housing crisis happened.

1. The wrong homes were built. We all know what a McMansion is. Ronald Reagan taught America it was necessary to be rich. Builders wanted some too, but the problem here is, even though homes are vastly more expensive now than they were when Eisenhower was president, the profit margin in a well-built 1500sf home is about the same as it was in 1956. Unless something was done builders were going to have to continue living in modest homes and driving Buicks. The solutions were to vastly increase the size of the structure, increase housing density to minimize land usage, and add more and more luxurious amenities to the homes as they were being built. As a result, the average price of a new home increased from $76,400 in 1980 to $305,900 in 2006. (http://www.census.gov/const/uspriceann.pdf)

1a. The existing home market wasn't immune to this either. In the old days when a homebuyer couldn't afford new construction he would opt for an existing home. Enter the house flipper. By purchasing rundown homes, doing superficial maintenance to them and reselling them at new home-like prices, house flippers caused all homebuyers to have to buy into an inflated marketplace.

2. Prior to 1980, there was a correlation between the price of new homes and the income of the people who bought them: as income went up, people bought larger and/or nicer homes. That didn't happen during the Reagan Eighties and in the following administrations. American manufacturing--once the source of a vast number of good-paying jobs--gave way to foreign manufacture, and the domestic manufacture that remained often moved to low-wage "right to work" (or, as I like to put it, "right to get fired") states.

3. So we're dealing with a two-pronged problem: less income to spend on more-expensive homes. Here's where the mortgage people come in. There are some circumstances where exotic financing makes sense. Take the much-maligned "interest-only" loan, where the homebuyer pays only the interest on the note for a specified period of time. If you have a lot of money, quite often it makes more sense to take out an interest-only loan than it does to pay cash for the house. (I know: huh? If you've got five or six million dollars and you know of a secure investment that will pay you ten percent or so for the next five years, the magic of compound interest will let one of those millions turn itself into more than a million dollars.) Everything's great until you start selling interest-only loans, negative-amortization loans (where the principal amount actually goes UP during the life of the loan) and other similar speculative mortgages to people who really should be in a plain, boring 30-year fixed note. The only advantage to them accrues to the banker: he can issue a $300,000 loan to someone who really can only afford a $125,000 house. And to those who say the people signing for these loans should have "known" they couldn't afford them, think: if a woman in a $2500 suit tells you that you can afford a particular home, you'll believe her.

4. Mortgages are securitized--the mortgage company combines $10 million worth of mortgages into a tranche and sells bonds against it--and have been for a long time. If you tranche selectively, by mixing prime-rate paper from wealthy areas with subprime shit so bad Michael Milken wouldn't have bought it, you can turn a portfolio of really shitty mortgages into first-class paper. You then sell Credit Default Swaps against these tranches. First you sell a CDS to anyone stupid enough to buy these mortgage-backed securities, then you sell CDS to speculators, then you tranche the CDS and MBS into yet other derivatives. By the time you're done, a $100,000 house is good for about $2.5 million in derivatives value.

5. And then when the inevitable happens--when Joe Homeowner's exotic loan's interest rate resets and Joe can't afford to make his house payment, and the same thing happens to a million Joes all across this great land of ours--we have a mortgage crisis.

You can spin this crisis any way you want and it all comes down to one simple fact: the root cause of the mortgage crisis was the need to sell quarter-million-dollar minicastles to Walmart employees.