Why The Meltdown?

At Cato Unbound Lawrence White blames Fannie, Freddie, and the CRA.  In response, Brad DeLong offers a big think perspective with many cogent points.

Missing from both papers is a linkage of the current meltdown to the long US/Japan/China waltz in which the US buys stuff from them and they buy US Treasuries from us.  I don't know why that is important but it ought to be. Also missing, or at least, under-emphasized - the global nature of the debacle.  For example, housing bubbles in Spain and the UK as well as the US helped blow up Iceland.

OK, I'll force a guess as to the connection - the relentless Asian bid for Treasuries in all markets and under any conditions put an artificially low level on US Treasury returns and prompted other investors to turn to seemingly low-risk, higher-returning alternatives such as the various mortgage-backed securities that floated all over the world.

At this point, with the dollar and Treasuries rallying in a flight from fear the Treasuries-only strategy looks like genius.  But at the time?

MORE:  The WaPo and Calculated Risk on Fannie and Freddie, who come off as neither leaders nor blameless.

Comments

[Pofarmer]

Greenspan's super low interest rates didn't help, either.

[Charlie (Colorado)]

Well, this is off topic but interesting: Rod Blagojevich has just been arrested on bribery charges, for trying to sell Obama's seat.

What's even more interested is that the FBI, using wiretaps, has apparently identified no fewer than five potential candidates talking with Blagojevich about what the price would be. Blagojevich was apparently quite blatant that if he didn't get a really good price, he'd damn well just appoint himself.

[Rick Ballard]

White covers Greenspan's actions pretty well. What I don't see in White's analysis is acknowledgment that California defaults contribute 50% of the dollar (not loan count) losses in subprime loans. The data is available and easily checked.

If he had looked at CA closely he would have found Prop 13 way down at the bottom of the mess. California counties substantially accelerated cost shifting through the '90's and really hit the gas at around 2000. Costs which had been covered through 30 year muni's were dumped in developers laps as "upfront" requirements. That resulted in a step up in lot costs with a concomitant jump in final new home prices. The avoided muni bond costs became part of the mortgage payment.

The jump in new home prices generated a "buy one now - tomorrow will be too late" attitude that was exacerbated by the Greenspan loose money policy. The fever spread into the Las Vegas and Phoenix markets and from there to the Miami market.

If you want to isolate the CRA aspect then you have to look at IL, NY and TX (primarily Houston in TX). That's where CRA worked its ill.

[clarice]

Rick, Don't forget Calif is one of those states where the lender is denied recourse to any of the debtor's other assets--only the property which is mortgaged is available to pay the debt--an unusual provision which encourages buyers to walk away when real estate values tumble.

[Soylent Red]

Well, this is off topic but interesting: Rod Blagojevich has just been arrested on bribery charges, for trying to sell Obama's seat.

What an unfortunate misunderstanding.

It was the former Senator who was for sale all along.

[Pofarmer]

That whole birth certificate thing might wind up not being so important after all.

[matt]

One cannot ignore the refusal of the government to regulate derivitives either. Wall Street is expert at packaging sow's ears as silk purses, and there was a concerted effort to ensure the SEC would not have authority to supervise those financial instruments.

Most of that stuff should have carried a B or lower rating, but Moody's and S&P somehow lost their bearings as well. Compared to the junk bond market of the 80's, this was pure, steaming horse manure, and that was the previous bottom of the barrel.

[kim]

Pofarmer, I half wonder if the powers that be have figured out that Obama is susceptible on the birth certificate, or the eligibility. Why won't he show it. And why has the Supreme Court distributed for conference Wrotnowski's follow-up to Donofrio? They could have just denied it.
=============================

[ben]

It seems like both the Chicago Tribune and MSNBC conveniently forgot to mention in their lead articles that Blago is a Democrat. Inadvertent, of course.

[ben]

If Blago was selling the Senate seat, he probably offered it to Obama through some emissary...it would be interesting to see if that happened.

[Rick Ballard]

"an unusual provision which encourages buyers to walk away when real estate values tumble"

Clarice,

That's true but historical default levels in CA were not dissimilar to those in jurisdictions where bankruptcy provided final protection. That may be due to the fact that a foreclosure "weighs" about the same on a credit rating as does a bankruptcy - you're 'collared' for 10 years.

What is surprising is the increase in the number of people willing to take the collar. I have a hard time believing all the terrible advice being given about 'just hand them the keys'. I also have a hard time believing the number of fools who have taken the advice. That collar weighs a lot more than they realize.

[ben]

"CNN) -- Illinois Gov. Rod Blagojevich is in federal custody on corruption charges, a law enforcement official said Tuesday.
Rod Blagojevich is currently serving his second term as governor of Illinois.

Rod Blagojevich is currently serving his second term as governor of Illinois.

Blagojevich and his chief of staff, John Harris, are charged with conspiracy to commit mail and wire fraud and solicitation of bribery, according to a statement from the U.S. Attorney's office for the Northern District of Illinois.

Both men are expected in U.S. District Court in Chicago later Tuesday.

A news conference is expected at noon ET.

Federal prosecutors say Blagojevich, Harris and others conspired to gain financial benefits in appointing President-elect Barack Obama's Senate replacement, according to the statement.

"The breadth of corruption laid out in these charges is staggering," U.S. Attorney Patrick Fitzgerald said in a statement. "They allege that Blagojevich put a 'for sale' sign on the naming of a United States Senator; involved himself personally in pay-to-play schemes with the urgency of a salesman meeting his annual sales target; and corruptly used his office in an effort to trample editorial voices of criticism."

According to the statement, Blagojevich is alleged to have discussed obtaining:

# a substantial salary for himself at either a non-profit foundation or an organization affiliated with labor unions;

# a spot for his wife on paid corporate boards, where he speculated she might garner as much as $150,000 a year;

# promises of campaign funds -- including cash up front;

# a Cabinet post or ambassadorship for himself."

CNN also forgot Blago is Democrat....we can just imagine the headline if he was a Republican..

"In another of a series of Republican scandals, Republican Governor So and So was indicted on federal charges, a setback to Republicans trying to overcome the Republican debacle in 2008 elections"

[hitnrun]

To call myself an armchair economist would be extremely generous, but the idea of sucking up treasuries seems crazy to me, especially for a semi-hostile nation like China. Basically, you're weakening the US's economic clout but counting on it remaining solvent, socially ordered, and politically reasonable. What if Obama or Hillary had run as a Hugo Chavez, substituting anti-Americanism for anti-third world labor rhetoric and rationalizations for not meeting our obligations? What if they'd won? What if things get worse and it happens in the future? China would be up shit's crick.

[hrtshpdbox]

What a strange sensation; I'm watching Pat Fitzgerald speak, and it's not giving me a stomach ache!

[RichatUF]

Off Topic for a bit:

Here is the Blagojevich indictment press release. Still hunting for the indictment.

Classy:

Two days later, in a three-way call with Harris and Advisor B, a consultant in Washington, Blagojevich and the others allegedly discussed the prospect of a three-way deal for the Senate ... appointment involving an organization called “Change to Win,” which is affiliated with various unions including the Service Employees International Union (SEIU) ... Harris said they could work out a deal with the union and the President-elect where SEIU could help the President-elect with Blagojevich’s appointment of Senate Candidate 1, while Blagojevich would obtain a position as the National Director of the Change to Win campaign and SEIU would get something favorable from the President-elect in the future.

Fiztgerald's career has just come to a screeching halt. I do recall that Valerie Jarrett was talked about to take the seat, but Obama waived it off quickly. Good stuff.

[RichatUF]

Found it-Here's the climinal complaint for Gov. Blagojevich. 78 pages .pdf

[RichatUF]

hitnrun (?)-

Basically, you're weakening the US's economic clout but counting on it remaining solvent, socially ordered, and politically reasonable.

How so? The Chinese are buying US Treasuries, and in doing so, they are not investing in their own country.

Also, I'm in a bit of a rush, but I didn't notice anything about oil import/dollar export, OPEC and Russia, and the oil superspike. Don't want to sound like a broken record but the US Asian trade relationship; Asian OPEC co-dependency; and oil priced overwhelemingly in dollars would probably be worth a few sentences in discussing the meltdown.

[Pofarmer]

FWIW, the dollar index certainly looks like it's forming a head and shoulders.

[Jim Rhoads a/k/a vjnjagvet]

The Chosen One's first real political crisis. Watch for the "Change We Can Believe In coming to a blog near you.

It seems that Fitzmas always comes at this time of year, doesn't it?

It looks from that indictment like Fitz is an equal opportunity AUSA and likes to be on the edge at all times. Elliot Fitz/Ness.

[Patrick R. Sullivan]

As this graph from the St. Louis Fed makes clear, Lawrence White is right to focus on the housing downturn.

Though it's nice that Prof. DeLong can do something other than insult and attempt to injure people with whom he disagrees.

[Rick Ballard]

Rich,

At $50 per barrel Japans oil import bill is $99 billion per year, China's is $58 billion.

As of September, Japan held $573 billion in Treasuries, China $585 billion.

Japan's 10 year bond pays 1.4%, China's 10 year bond pays about 4% and the US is paying 2.64% today (with a 10 year auction coming this week).

The solution to the "great mystery" of why China and Japan hold so much US debt is hidden in plain sight there - right at the top. When they start selling oil for yen or renimbi then I would imagine China and Japan might lighten up a bit on their US Treasury holdings. It's sort of interesting that the Chicoms bought another $118 billion in US debt this year. They really loaded up over the summer and have a nice profit if they sell tomorrow. Which they won't.

[Pofarmer]

I was just watching a segment with Gwen Ifill and two Senators, one was Shelby, don't know the other one. If anybody thinks this auto industry bailout isn't goint to be a PHENOMENALLY expensive disaster, speak right up. I can se 15 different ways the domestic auto companies are going to lose. Can you imagine being under govt "direction" while your competition (also built in the U.S.) is free to respond to the market?

[clarice]

Can't wait to see these guys who can't run their own candy and gift shop, run the auto industry. Short Detroit.

[Thomas Jackson]

Anyone who believes subprime financing blew up the world's economy might wish to contact me regarding some prime beachfront property in Utah with a grand view of the Pacific at sunset.

The idiots at Fannie Mae and Freddiue Mac aided and abetted by their poilitical allies in the dhimmierat party pushed affoirmative action loans counting food stamps, welfare and unemployment checks as wages. Can anyone explain to me how the 7.7 trillion dollar bailout totalling more adjusted for inflation than WWII, the Marshall Plan, Vietnam, Iraq I and II, the Korean War and the Great Society was caused by subprimes? Money is like matter, it cannot be destroyed, just transferred from one pocket to another.

Follow the money trail and you'll find those that planned this disaster. Do you really expect trials or investigations?

Contact me for that beachfront property if you believe there will be trials.

I also have magic beans and pixie dust for sale.