Friday, September 19, 2008
The Best Take on the Subprime Crisis
Steve Sailer's piece in Taki's magazine is, I think, the best analysis of how we got here, and he's not an economist. When you think about something that gestated for 10 years, you get a better sense of how inevitable it was, because the people warning against this 10 years ago were all 'proven wrong' a long time ago. The key is that everyone wanted more home ownership, which we know is correlated with all sorts of good socioeconomic things: lower crime, more education, etc. But some people are not meant to be owners, that is, there is an equilibrium amount of home-owning, and it is less than 100%.
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I'm sympathetic to the idea, but it just down't seem like banks writing a higher than usual amount of bad loans is really the "but for" cause of our troubles. These loans were packaged and prettied up and resold among the Wall Street Circle jerk in avariety of derivatives, each of which got more expensive. That seems to have converted an Annoying Problem into a Big Probelm.
Its also a poorly written article in that it hammers home a single point relentlessly and ehaustively without connecting the dots to where we stand. That's assumed away.
that's a canard. if it wasn't for houses they would have pushed lbo's to even more insane levels or smth else and the result would have been the same. also not sure how many minorities are in the manhattan market.
more troublesome is the complete paralysis in front of what could be historic moments. capitalist us&uk trip over each other to ban shorts while communist china's concession after 70% decline is a token trading stamp tax reduction. maybe jim rogers is onto smth. basically 2 guys frightened spineless congressmen to approve what could be game changing laws and nobody did anything. i bet 1930's germans thought the system had checks and balances too and hitler could not happen.
Best analysis? You gotta be kidding. Most of the article is quotes from politicians saying along the lines of 'every american should own a home' Low interest rates? Growing secondary market for structured assets? No these things dont cause bubbles.
I had to stop reading when I saw:
"Wall Streeters assumed that the federal government would bail them out rather than see so many NAMs turned out on the street. "
Yes thats what politicians care about. Not their firends, influential people or people who fund their campaigns. In fact LTCM was bailed out so that NAMs would not see the $5000 invested intheir retirement accounts drop.
here's an idea
unfortunately it's fair, rational and protects everyone so is not going to happen.
(...) capitalist us&uk trip over each other to ban shorts while communist china's concession after 70% decline is a token trading stamp tax reduction. maybe jim rogers is onto smth.(...)
Note that the remninbi is down 10% since early september...
This is probably the best analysis of the crisis:
Sailer missed the point.
The problem wasn't the lower-income people who took out the loans. It's the bankers who thought they could get a premium over other loans by lending to them.
So the racism is misdirected: the problem isn't the blacks that received the loans, it's the jews that tried to exploit them.
Interesting article - yes, the problem is much deeper. As a real estate professional I know people want houses more than any other material product, despite the fact it can be too expensive for them and renting would be much better choice. I think it's connected with human nature - everybody wants his own "cave", now, not in the future. And the second thing - generations have seen real estate prices just growing (of course there were some bubbles in the past, but it's incomparable), so people began to believe real estate is always good investment...
While Sailer might be interesting, I don't think a national financial policy of "Don't lend to Black People" is our solution.
Cited is one result that a result that shows NAM's (Non Asian Minority) with the same income as WPs (White People)have lower credit scores. Several comments:
1) This does not control for the family's assets.
2) This does not control for income variability (which might be different across races)
3) Part of the problem is that lower income people were told, by their neighborhood mortgage broker, to lie about their income to get loans.
Rather than using race to decide to lend to, a less provocative way to lend would use:
a) Credit score
b) Family assets
c) More than 1 year of tax returns
d) Factor in default rates in the neighborhood where the property is located
Of course, d) would be described as racist.
If you use teaser rates to qualify low-income people with no safety net for, essentially, 100% LTV (no "skin in the game") loans at a variable rate several points higher than everyone else ... you will have a lot of defaults.
If you don't verify credit or income, a lot of people will lie.
If you incentivize your mortgage brokers to find these people and pull them in, they will do that.
It seems pretty obvious that there will be a high percent of defaults. It would be shocking if there isn't.
But don't worry, Uncle Sam will save your bank.
And Bloggers will use this as an opportunity to reveal their racist beliefs.
But who is the bigger fool here: the unsophisticated person trying to buy a home or the sophisticated, well educated, banker that loaned money to people that can't pay it back?
These people buy one house. But bankers loan money every day.
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