Monday, February 1, 2010

Barney Frank's Fantasy World

This item spells out clearly how we got were we are with the US housing market.  Without question the Clinton administration embraced and promoted the use of Freddie and Fannie as a mechanism to support marginal lending with the implicit support of government as lender of last resort.  He also unleashed the deregulated securities industry. 


Bush embraced the policies in place and over time tweaked them higher.  There is no reason to think either Clinton or Bush truly understood the danger created by these new policies.  Those wanting to blame Bush cannot have it both ways.  The policies were created by a democrat regime and sustained as a sop to secure support for other initiatives.


We are in the process of getting affordable housing by destroying the mortgage market.  This was done once before during the great depression.  The problem is that there will be less takers because the middle class market is been shrunken


The take home lesson for all my readers is that once a credit bubble is underway, no one can stop it except the Federal Reserve through increasing bank reserves.  This was never done in a timely manner.  Instead we went the other direction in an idiotic attempt to keep the party going.


Credit bubbles in an isolated stock floatation is great fun and surprisingly common and harmful only to the players.  The housing market is the mainstay of the economy and needs to have a functioning credit system.  It continues to go unrepaired.



Barney Frank’s Fantasy World


At Big Think, they used one of my questions in their interview with Barney

Question: How can Fannie and Freddie be structured to avoid the moral hazard problem and a too-cozy relationship with regulators? (Russ Roberts, Café Hayek)

Barney Frank: Yes, in 2004 the Bush Administration significantly increased those housing goals and particularly ordered Freddie and Fannie to start buying up a lot of low income individual mortgages, and I opposed it at the time.
Interesting answer. Here is the relevant data on the housing goals from my soon (really) to be finished essay:
Starting in 1993, Fannie and Freddie have affordable housing goals—30% of Fannie and Freddie’s purchases of loans have to be loans made to borrowers whose income was below the median income in their area. These are interim goals. In 1996, the interim goal becomes firm at 40%. In 1997, the number rose to 42%. In 2001 it rose to 50%. The Bush Administration increased this number to 52% in 2005, 53% in 2006, and 55% in 2007.
So it turns out there was no increase in 2004 and a minimal increase in 2005. The big increase was in 2001, the legacy of Clinton and Andrew Cuomo his HUD chief. Of course Bush embraced the housing goals and did increase them. But “Bush in 2004″ is a red herring.
I’d love to see the evidence that Frank “opposed it at the time.”
And none of Frank’s answer addresses the moral hazard problem–that people kept lending to F and F as the quality of their portfolio deteriorated because they knew the government stood behind them.

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