Wednesday, September 18, 2013

Who caused the Crash of 2008? Government.

In his speech on Monday September 16, 2013 President Obama spewed his usual vomit of dishonest partisan talking points.  As in:
They said that they wanted entitlement reform -- but their leaders haven’t put forward serious ideas that wouldn’t devastate Medicare or Social Security.  And I've put forward ideas for sensible reforms to Medicare and Social Security and haven’t gotten a lot of feedback yet. 
Oh really Mr. President?  I haven't heard a whisper about your ideas on entitlement reform.  But I have heard about Rep. Paul Ryan's Medicare reform, a sensible idea to switch to a straight subsidy.  And if you are interested in entitlement reform, why don't we hear more about it?  Why aren't you barnstorming up and down the land, like President Bush did for his Social Security proposals in 2005?

But I really want to deal with the president's mendacious narrative on the Crash of 2008.  President Obama said:
And as we worked to stabilize the economy and get it growing and creating jobs again, we also started pushing back against the trends that have been battering the middle class for decades.  So we took on a broken health care system.  We invested in new American technologies to end our addiction to foreign oil.  We put in place tough new rules on big banks -- rules that we need to finalize before the end of the year, by the way, to make sure that the job is done -- and we put in new protections that cracked down on the worst practices of mortgage lenders and credit card companies.  We also changed a tax code that was too skewed in favor of the wealthiest Americans. 
Let's take these item by item, Mr. President:
  • Broken health care system.  The problem with the health-care system is that it is cartelized by government.  Principally, the problem is that most people don't pay directly for routine care.  Your Obamacare will make these problems worse.
  • New American technologies. I suppose this is an oblique reference to all the green energy crony capitalism and boondoggles that your administration has backed.  But the decline in foreign oil addiction is due to the "fracking" revolution.  And your administration is trying to slow it down and hinder it.
  • Tough new rules on big banks.  You mean, I suppose, the endless boreal forest of Dodd-Frank rules.  Here's a tip for you Mr. President, which might help the next Democratic president avoid 5 years of sub-par growth.  The time you need tough new rules is during a full-bore boom.  That's when you need to bump up credit-score requirements for loans and down-payment requirements.  Right now, when asset values are down, banks should be taking a flier on new loans.  And anyway, the big banks know that they are too big to fail.  They know that the government must bail them out.  Nothing has changed.
  • Worst practices of mortgage lenders and credit card companies.  This is the one that stuck in my craw.  The number one thing we need to learn from the housing bubble is that it was government, through the Community Reinvestment Act and the GSE mortgage lenders, that forced mortgage lenders to lend to people with bad credit.  The "worst practices," Mr. President, were forced on lenders by people like you working with ACORN in Chicago in the 1990s. Remember that?
  • Taxes favoring the wealthy.  How come the share of federal income tax paid by the 1% went up as tax rates were lowered?
Let's get down and dirty with the mortgage meltdown. Here's a real cool chart on mortgage delinquencies in 2008 by credit score.

Gosh, golly, geewillikins.  It looks like the lower the credit score the more likely people were to default.!  Who would have thunk it?  So here's the smoking gun, according to Tom Bloomer.
Fannie Mae and Freddie Mac did their part by lowering borrowers’ credit score approval thresholds in their automated underwriting systems for loans they would purchase from originating lenders. The key changes, according to a mortgage brokerage executive with whom I spoke in 2006, involved reducing the conventional loan threshold from a FICO credit score of about 670 to 630 and the subprime threshold from about 630 to 590 (other online sources I’ve found indicate that each threshold may have actually been an additional ten points lower).
Notice how, on the chart, 670 is just the place where you want to draw the line.  15% defaults. Perfectly manageable.  But if you go to the new subprime threshold of 590, you get to 51% default.  No bank or GSE is long for this world when it is suffering 51% defaults.  Especially if the government has forced lenders to lower their down-payment requirements.

The credit system, sports fans, relies on two things.  It relies on the confidence that other people will make their payments.  And it relies on the confidence that the assets backing any loan would liquidate the loan balance if the debtor defaulted.

Liberals spent twenty years turning that upside down with their government coercion of banks into lowering credit thresholds -- thus increasing the probability of defaults, and lowering down-payment requirements -- thus increasing the chance that loans in default couldn't be liquidated.

Thanks liberals.  You guys are so brilliant I gotta wear shades.

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