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The Housing Bubble Villains Deny Responsibility
The central bankers of the world gathered last weekend for their annual meeting at Jackson Hole, Wyoming. This was an opportunity to talk about the major issues confronting the world economy, as well as an opportunity to spend some time in a very beautiful vacation spot.
When they met in Jackson Hole in 2005, the meetings were devoted to an Alan Greenspan retrospective, honoring his 18-year tenure as Federal Reserve Board chairman, which was due to end the following January. A number of papers were presented analyzing his record at the Fed, including one that raised the question of whether Mr. Greenspan was the greatest central banker of all time.
The elite Jackson Hole crew did not debate whether Greenspan was the greatest central banker of all time this year. The world is now facing the most serious financial crisis since the Great Depression. At least, that is the assessment of Alan Greenspan. With house prices plunging, unemployment and inflation rates rising and banks failures mounting, Greenspan has a pretty good argument.
How did we get here? The centerpiece in this story is the United States allowed an $8 trillion housing bubble to grow unchecked. Between 1996 and 2006, house prices rose by more than 70 percent, after adjusting for inflation. In the previous century, from 1896 to 1996, house prices had just kept even with the overall rate of inflation.
When there is suddenly a sharp divergence from a long-term trend like this, it is reasonable to look for an explanation. Was there some fundamental factor on either the supply or demand side that was suddenly causing house prices to skyrocket?
A quick investigation revealed no obvious suspects. On the supply side, there were no major new constraints that were impeding construction. In fact, housing starts were at near record levels over the years 2002 to 2006, so there was no reason to believe any developments on the supply side could explain skyrocketing house prices.
The demand side also didn't feature any obvious culprits. The rate of population growth and household formation had slowed sharply. If demographics could explain a sharp rise in house prices, then we should have seen the surge in the 70s and 80s. That was when the huge baby boom cohort was first forming their own households. In the current decade, the baby boomers are preparing for retirement.
There also was no plausible income story. Income grew at a healthy but not extraordinary rate in the years from 1996 to 2000, but income growth has been very weak throughout the current decade.
Finally, if the run-up in house prices could be explained by the fundamentals of the housing market, then we should expect to see a comparable increase in rents. But there was no unusual run-up in rents. They did slightly outpace inflation in the late 90s, but they actually were falling behind inflation by the early years of this decade.
If the run-up in house prices could not be explained by the fundamentals, then it was a bubble, which would burst. This was easy to see for anyone who cared to look, but Greenspan and his sycophants could not be bothered. Greenspan insisted everything was fine - there was no housing bubble - and virtually the whole economics profession, including his fellow central bankers, acted an enablers touting Mr. Greenspan's wisdom.
While the exact timing and path of the housing market's collapse and the resulting turmoil in financial markets could not be predicted, the basic course of this tsunami was entirely foreseeable. The collapse of the bubble will destroy in the neighborhood of $8 trillion of housing wealth. Most of these losses will be absorbed by homeowners ($8 trillion comes to $110,000 per homeowner), but if just ten percent of the loss ends up on bank financial sheets, the losses will be $800 billion.
That is enough to put many banks under. Losses of this magnitude were virtually certain to sink Fannie Mae and Freddie Mac, the two huge government-sponsored enterprises that created the secondary mortgage market in the United States. The current financial crisis was, therefore, an inevitable follow-on to the collapse of the housing bubble and will almost certainly amplify its negative impact on the US economy.
This all seemed painfully obvious from even a quick look at the housing data back in 2005 when the central bankers were honoring Alan Greenspan. In fact, it should have been obvious at least three years sooner.
But the Jackson Hole economists were convinced everything was just fine. Now, they are all saying no one could have foreseen the current crisis. And they say no one, at least among the Jackson Hole crowd, saw any problems coming.
The really tragic part of this story is there are no consequences. The same group of economists that led the economy into this catastrophe still has its hands on the wheel. Holding them accountable for their disastrous performance is simply not on the agenda.
Central bankers are not like dishwashers and custodians. They don't get fired when they mess up on the job. They don't even get a pay cut.
So, lets all hope the Jackson Hole crew had a good time at their summer retreat. We've paid a big price for it.
- Posted in
35 Comments so far
Show AllAnyone who bought a house during or after 2005 deserves to take a bath. If you were that STUPID to buy at the top of a bubble, do not come whining for my tax dollars to bail you out.
Anyone who refinanced 5 times believing that their house was a piggy bank can now go sleep in the park, as far as I am concerned.
You need to take a breath and try to regain your perspective. Think about the heady days toward the end of Greenspan's tenure, when everybody that could find a TV camera was shouting "Buy a house, buy a house!" Think about the predatory lenders that thought up the unholy schemes to finance this cruel hoax. This author is right: the criminals who perpetrated this crime will keep their money and not suffer at all.
I am thinking about all of this. Somehow, I and everyone intelligent I know was able to avoid these blandishments. Why should my tax dollars be confiscated to pay for those who were not so smart?
Because they were preying on minorities and the poor caste.
This was a willfull deception of a group of people who are kept ignorant on purpose.
Preying on people is wrong.
Forcing the rest of us to pay for the people who were too dumb not to be preyed upon is also wrong.
Follow the money, YOU'VE got it backwards
Those you lost their homes, and everything they paid in --- were our net positive cash flow = value
Why you say these people were dumb is more a reflection of your own understanding, than theirs.
Those bankers and realtors that have made trillions from all of this --- our net negative cash flow = profit ( w/o risk of loss )
American taxpayers are paying bailouts for the profiteering of the uber rich !
Where exactly do you think all of these 8,000,000,000,000.00 dollars went ?
Namaste
Indeed, the average yank shouldn't have to pay for this mess. Tax the ones who profited at a rate of 95-99 percent, use that to refund the victims of this banking fraud.
I love it.
That's the best idea yet, other than I'd tax them at 110 to 120%, to make the "PROFITEERS" pay for their criminality.
If they cannot pay the "fee" for screwing the masses of the American people -- it's really quite SIMPLE -- we just return the "favor" and foreclose on their a$$ets
Namaste
You have a valid point. But so do the others. Just think, the chairman of the Federal Reserve is telling these folks to take an ARM loan for God's sake. Something no one with a lick of sense would touch.
There was also a lot of fraud involved with these sub-prime loans. How is someone that has a hard time reading the paper sopposed to know that an appraiser has added $50,000 of phantom value to the house or that they told the mortgage lender that you make $75,000 rather than the $40,000 you really make.
Its the irresponsible lenders that are at fault here and they are the ones we should insist pay the bill.
At heart, you and I don't disagree: fundamentally I don't want to donate any money either to relieve this mess, the perpetrators of this mess should pay for it all. I'm not going to hold my breath and wait for that to happen.
As for who judged who is "smart" and who isn't, I'm not qualified for the job. Are you?
One reason 'your taxdollars' should be used to resolve this large-scale mess is because we are a society. No man is an island, eh? We're all in this together. It has never been sustainable to allow some segments of humanity to live with great want and to allow luckier segments of society to do well. When are we humans going to realize that we are all in this together.
Anyone who contributes to making this world a darker place, makes it darker for themselves as well, fredmuggs.
Maybe so. But the victims of this scheme are the one's suffering. When will justice be served?
What evidence is there that the so-called housing bubble/financial crisis WASN'T the intended effect? Just because something is generally regarded as bad for a majority of people doesn't mean it was begun "on accident".
Decentralized banking starts with decentralized government. Direct democracy is technologically possible.
agreed!
To anyone who can answer this question: Where the hell did all this money go? It didn't just evaporate. It has to be in someone's pocket. I've tried to follow this mess, but I just haven't a clue where it has ended up. Did it get distributed far and wide with no real winners but lots of losers? I just can't get a grip on this scam.
Greenspan strongly supported and arguably invented the idea of securitizing mortgages. It's basic premise is get rich sticking it to the poor. What these mavens failed to realize, because they were too divorced from mainstreet reality, is that the poor and marginalized are extremely sensitive to changes in economic conditions. When interest rates adjusted upward people began to increasingly default on their mortgages. From top to bottom everyone got rich on subprime mortgages; that is, for a while. Now the banking industry has shifted the burden of the mortgage meltdown to the tax payers via complicit Congressional legislation. These sweet hustles represent an overt acceptance of welfare for the rich. This is class warfare. The Congress, despite high rhetoric, is now and will continue to be bought by wealth. The only vote remaining is economic. To stop purchasing new items is painful for many but far less painful than continuing down the road to collapse. Many of us have joined the effort to restrict consumption to an absolute minimum and we are having an impact. The more people who join the effort the more impact we will have until such time that both government and corporations cry uncle.
JFREDMUGGS: I remember watching C-Span and another one of those clone Republican/authoritarians (I swear, they look alike) with his vacuous expression said into the camera that BUSH was responsible for this great rise in home ownership. That was a ploy on supposedly extending the American dream to all these people who now could proudly own a piece of it all, this great dream, this chimera thought up all right.
KANE JEEVES & UNFORGIVEN-1: A fellow from the forum advised me to check out a website with incredible analysis and insight into the layers of this debacle. I hardily recommend it: www.Solari.com (work of Ms. Catherine Pitts).
TRUTH TELLER: You need to alter your name, how about "compassion deficit"?
Compassion is sadly out of style these days. It's all a build-up of frenzy to find somebody to blame (as long as it isn't us!).
I remember well the days of the "Bush Economy." Funny how you don't hear that phrase bandied about anymore. Like most things about these past 8 years, it was indeed a cruel chimera cooked up to fool some of the people some of the time.
So how much more do you want YOUR taxes to increase to bail out the fools who bought or refinanced in 2006 or 2007. My dead pet dog would have known not to take out a lone in 2006. Why should I have to pay for those stupid enough to do so???
TruthTeller--That's cold!! I refinanced my house and at the time the mort. broker we worked with outright lied to us. When I told him we were not interested in a loan that would result in neg. amor. he said the loan we were getting was not that, he even had the underwriter explain to my husband that we were not getting that b.s. loan. When my husband went to closing, the broker was "on vacation" and when my husband asked about the mort. payment he was told the amt. would be what we agreed on. When the note came the following month, lo and behold it was much more expensive than what was agreed on. We tried calling the Broker day after day and he NEVER called us back. We had to find another lender to get out of the trap that was set for us. Thankfully we were able to get a loan w/ the terms we could afford. You see, it was deception from the beginning and I don't feel like we were responsible. I'm not a mortgage broker so I went to a professional, someone I trusted to handle our loan.
Should I be punished because I don't understand all the legal jargon in the contract? That is why people hire mort. brokers, realtors, etc., to help navigate through the process.
Typical Baker, he just cannot bear to state the truth which blares from the facts he presents!
"This was easy to see for anyone who cared to look, but Greenspan and his sycophants could not be bothered."
BALONEY!!
This is where you see Baker is a coward. In fact they ENGINEERED the bubble, they knew exactly what they were doing. They COULD be bothered, in fact they had their hand on the pilot's wheel the whole time.
Intent! That's what liberals like Baker deny. They pretend it was a 'mistake' an 'accident', rather than saying the truth that they DID IT ON PURPOSE IN ORDER TO ENSLAVE PEOPLE TO DEBT.
Never trust a liberal!
I think you're right Thomas Jefferson predicted this when he said:
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
http://www.quotationspage.com/quote/37700.html
It's sad to see that terrible prophecy come to fruition in my lifetime. If we on the Green decentralist anti authoritarian left were smart we'd form alliances with the paleo-cons against the globalists war mongers and bankers they also despise. Identity politics and other fads are how the economic elite keep us weak and divided. They tell us vote for the women or African American and that will change everything while they quite literally laugh their way to the bank whichever we choose. And no that not to say feminism gay rights, etc aren't important they are, it's rather to say in the bigger picture we all victims of the globalists, bankers, and corporations, black, white, poor, straight, gay, homeless, middle class, rural, suburban and urban, and our poor battered planet from the clear cut Redwoods of the west coast, to the depleated Cod stocks of the east, all of this have to be in this together against the tiny elite screwing the pooch. The subprime crises being a prime example of this.
Smart people read both deomcracynow.org and amconmag.org IMO. Antiwar.com is an example of a web site that does make those connections.
This is a thought provoking comment. Thanks.
Joe
You can bet that washington and wall street are planning the next scam as we speak.
to unforgiven 2:51
This is a subject that used to come up among my co-workers pre my retirement--that is, every time there was a major correction and people would see their 401k decline by a major amount and the panicky question would arise, where did the money go? As an elder I felt a responsibility to have a handle on such things. For better or worse, here is my explanation: It's like the losers on Jeopardy--it was never real money. If I've got it inside out, a more accurate explanation would be gratefully accepted.
"it was never real money"
That's a big part of it, you are correct.
Your ideas are accurate, but not empowering.
The cash value becomes "real" the moment you sell it ( and pay whatever tax burden ), up until that point it's "potentially" worth something, which can vary across quite of a range -- with many factors beyond your control.
I would hesitate to declare it to be "unreal", as that can only lead to disempowerment, when your ultimate retirement value comes from the combination of your educated response to
__ market forces, with
__ your own strategic fund management decisions
The best of all worlds is when you can anticipate the market forces ( while diversification guarantees principle value ) to chose proportionally the most effective mix of funds to match those current and future market conditions.
The time that you personally invest in fund management, is likely to be a major factor over the long haul -- as your own interests provide you that directly focused attention -- while stock brokers make their "profits" advising you to buy their latest "discounted" products, that they have incentive to "move" ( which may or may not ultimately be of value to your own long term needs )
Namaste
The partners in banks and brokerages never trade the way they advise their customers. You would have to look into the partner accounts to find the good moves. Unfortunately we don't get that opportunity. (Years ago my job required access to these accounts. It was very informative, but I could not disclose or use that information, even if I had had the funds.)
Joe
Kind of true but don't forget if the bank reposes a houses and resells it the payment clock is set back to zero and they get to collect interest TWICE up up to the point where the collateral was previous paid off. So some of the money is going into the bankers pockets, some probably was monopoly money, what percentage I couldn't say not being an economist.
What does puzzle me is why their isn't a populist rebellion like when bankers tried to reposes farms around the turn of the century and we got speeches about "being crucified on a cross of gold." IMO a populist rebellion combining lefty critiques of economic, social, environmental and imperialist injustice, and paelo-con critiques of globalists and the Federal Reserve, would be a very healthy thing right now.
They say NO one could have seen this coming.......
Well I do remember a statesman named LaRouche who addressed this issue, and advised Congress of the situation...... THAT was in 2005!
Coffeelover,,,,,,,,,
I totally agree. Taxes of 120% or MORE would wake up these "bankers" or "profiteers" or just plain thieves.
Profit should be "earned" so STEALING by lying and cheating and scamming and misleading...is NOT profit-taking - it is in fact stealing. So, get the BIG TAX/fine, take it all...then throw the sorry ass in jail- displacing a person (probably of colour) who does NOT deserve to be in jail. These people are numerous,and identified, so trading a functioning human being for a human turd would be a good deal. While buddy is in jail, investigate his ass for any other crimes, take more money- hey all to a good cause right- this vermin needs to be dealt with. NO death penalty, just the "invisible hand" of Democracy, keeping the pickpocketing hand of "the market" out of play and out of trouble!
Have these counterfeit high rollers ever taken the responsibility for anything? When they win they win big, when they lose they bitch and complain until finally their hirelings in congress volunteer to let the taxpayer pick up the tab. Never for the real victims mind you, only for the big campaign contributors.
Conservatives/Liberals the terms are outmoded. Governors are less interested in the governed than they are about Re-election. Would *Native Criminal Class be a better Descriptor? *Gore Vidal
May I ask A question about whether you gentlemen are considering the economically challenged individuals like myself, that will realistically "never", experience this "blessing", of the American Dream.
History is a very good teacher and if the incomes of this generation are averaging less buying force than our previous generations, then other Americans besides myself will be shutout of the dream as well.
My story is about average so there's no crying here, just a sobering look at lack of work place skills, lack of education, lack of time and money to attend college and increasing demands by a runaway economy and a housing/credit meltdown that defines the Class Struggle of every generation.
So, my comment is that the historical situation that you are referencing by stating that the "Rich get richer at the expense of the poor", is an Academic statement and other citizens like myself would benefit more from some attention focused on the problem, not the explanation of how a Mortgage Lender skips the guidelines about finding a mortgage applicant that would be suited to a Subprime interest rate and goes right after the preffered applicant who might not need the extra help, or the homeowners legal right to practice "Flipping", his/her house and resell the property for profit.
I want to play fair but I don't think that my interest is represented without a better understanding of the Mortgage Industry Practices and the Lenders requirements for Home ownership.
Anyway, no offense to you fellows but, I want some interest and some understanding like all of you to overcome this pitfall in the Road ahead. Thanks for reading.