Thursday, September 14, 2017

Housing: Part 258 - YOU rigged the economy.

Maybe this is repetitious, but I'm not sure if I have written about this is exactly this way before.

Consider two of the most widely and strongly held opinions about the financial crisis:
  1. The system is rigged.  We bailed out the banks who did this to us, and we left Main Street and regular families high and dry.
  2. We have prudently put new safeguards in place in order to prevent the reckless lending and speculating that caused the bubble.  One fortunate result of the federal takeover of the GSEs, the passage of Dodd-Frank, and the collapse of the subprime market, is that lenders are now much more selective about who they sell mortgages to.
Think about that for a minute.  What were the bailouts, really?  There were a few examples of the government basically taking over the equity position in some firms, generally at a profit.  There was general monetary accommodation.  And, there were various emergency loans.  Generally, in panicked markets, the Fed was engaging in one of its core roles - acting as lender of last resort.

Basically, the government loaned money to various firms and financial institutions, to make a liquid market, expecting to earn a return on those loans.  And, in the end, it generally has.

So, if the government had treated both "Wall Street" and "Main Street" the same, then, what would it have done?  It would have funded mortgages in illiquid markets as a sort of lender of last resort, expecting to earn a return.  So, then, why didn't it do that?  The answer: See point two above!

The reason the government didn't "bail out" "Main Street" is because we wouldn't stand for it!  Consider the oddity.  It's like we insist on not having our cake and being upset about it too.

At exactly the same time that the federal government was funneling trillions of dollars to "Wall Street", it was knocking the wind out of middle class housing markets at Fannie and Freddie.  After the takeover, the GSEs completely eliminated any growth in mortgages outstanding for FICO scores under 740.  This, coming on the heals of the complete collapse of the subprime and Alt-A securitization markets that had been serving some of that market.

In a panicked market, the federal government turned out the lights, and we cheered for it between our complaints of rigged markets.

Given this situation, what could the federal government have possibly done to mimic on "Main Street" what they had done for "Wall Street"?  We wouldn't dare let them be an actual lender of last resort.  That left a bunch of unlikely and costly second best options that were never going to amount to much.  And, so we complained that they weren't trying hard enough.

The lack of any reason for this becomes more clear as we realize the full picture of the markets of the time.  The new paper from  Stefania Albanesi, Giacomo De Giorgi, and Jaromir Nosal is just one in a line of papers that show the owner-occupier market was not in need of retraction.

This is clear even in basic national survey data, like the American Housing Survey and the Survey of Consumer Finances.  Homeownership had peaked in 2004.  The number of first time homebuyers had been declining pretty steeply since 2005.  There had never been any expansion of homeownership among households with lower incomes who would have difficulty making payments.

And, because the federal denial of a lender of last resort was so targeted at these credit constrained households and neighborhoods, it was the period after this when home values really collapsed in those markets.

There was a housing contraction in 2007 and 2008, and a financial crisis in late 2008.  Then, because of belief number 2 above, there was a third crisis in 2009 and 2010 that was actually more severe than the main housing contraction we all recognize.  That crisis only hit working class neighborhoods.  We rigged the system, and we're still patting ourselves on the back for it and demanding that someone, somewhere, correct this vexxing injustice.

We were nearly unanimous in our opposition to a Main Street bailout.

1 comment:

  1. Great blogging.

    The "solution" to the "housing bubble" was to cut off lower- and middle-inome people off from credit markets. Only Kevin Erdmann has reported on this.

    No national effort was made to reduce property zoning and building restrictions, or barring that, reduce the current account trade deficit.

    There is a lamentable and amorphous resentment against "the globalists" by many in the middle class. (There is a related issue of heavy outlays and taxes for a global military posture, said to be necessary due to our globalized economy).

    People should not be xenophobic. Maybe they should not be "isolationist" (although after Vietnam, Afghanistan and Iraq….)

    On the other hand, the result of housing and trade policies is to sell housing to better-off foreigners, while cutting off middle- and lower-income Americans from the market. And to keep the supply of housing tight in many markets.

    Are people "xenophobic" if housing markets are kept artificially tight?

    Yes, let's invite immigrants, btw we are not building enough housing, especially where the jobs are.

    I see no solution in sight.