"Let's begin with some numbers that are not well known--even now. There are 25 million subprime and other non-prime mortgages outstanding, with an unpaid principal balance of over $4.5 trillion. . . . 25 million subprime and Alt-A loans amount to almost 45 percent of all single family mortgages in the United States. These subprime and Alt-A mortgages are defaulting at unprecedented rates. As these mortgages decline in value so does the capital and the financial condition of every bank and financial institution that is holding them. This includes not only US banks and financial institutions but banks and other financial institutions around the world. More than any other cause, the sharp decline in the value of these mortgages accounts for the world-wide financial collapse we are now experiencing."
Thursday, April 30, 2009
A Cautionary Tale
Given my education and background (MBA etc.), I am a reasonably knowledgeable reader when it comes to business and economics. Recessions come and go and, perhaps, we were about due for one. But this has been a particularly scary recession because of the problems in the financial sector. The question is this: What really triggered the world-wide financial crisis that has taken down some of the largest and, we thought, safest financial institutions? From the beginning, I thought Peter Wallison of AEI had it about right. He recently gave a speech on this topic as part of a debate with Richard Posner. It is a bit lengthy, but well worth the effort. If we are to come up with the right solutions, we need to understand and admit the causes. Here is an excerpt:
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It's definitely an interesting read. Wallison delivers plenty of facts which, in my view, he uses to bolster his politically concervative message. Understanding the causes of the financial crisis is important, but I think we need to look for additional sources outside the AEI for an unbiased view. I don't watch FOX News as my only source of current events.
His speech/article seems like a history of containment to me. Contain the blame. When you get to the end, who fault is it? "Regulators", Fannie, and Freddie. Don't blame Congress, the President, banks, wall street, or risk ratings companies, thier hand was forced by Fannie and Freddie. Realize that supporting these business and concervative interests is the mission of the AEI. That doesn't prove what Wallinson wrong, but does call for an additional level of scrutiny.
I did find this one part almost humorous, "At the time, there was a Republican Congress and a hostile Republican administration. Strong legislation had been proposed..." The vigilant Repbulican Congress and President were poised to save us but alas, "it was too late." They were outmanuvered by those that favored "homeownership rates, especially in low income communities" which you are to read a the minority Democratic party.
If we are to take Wallison's tale as the cause of the crisis, what solutions does it prescribe? Repeal of the CRA and dismantling of Fannie and Freddie. That is completely insufficient in my view.
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