Credit snobs remembered....

As far as Cowen goes, I think he misrepresented Roubini. Roubini, in the things I've been reading over the past few years, was mostly talking about the actuality of the housing bubble and the likely wider consequences when it popped. I don't remember much about who to blame.

When housing equity is lost, it's more than just housing. People have tended to use houses to store their net worth, the way people used to use bank accounts, etc., and as speculation property. According to Dean Baker, IIRC, American homeowners have lost three trillion dollars in net worth, and everything they do will be shaped by that. People have a lot less cushion than they did, and the next generation has lost a lot of inheritance.

People have a lot less cushion than they did, and the next generation has lost a lot of inheritance.

right, but they lost something they never had. after the late 90s wage growth driven by productivity gains, probably technology related, the economy has grown on bubble.

I'm sure that a lot of people had equity before the bubble and none afterward. People were lured in various sorts of inappropriate behavior by the belief that they were wealthier than they were.

One consequence is that the newly-poor or newly-mediocre aren't going to be spending much. I always wondered how much the bubble economy's strength depended on people living beyond their means, e.g. with credit card debt.

Let's not forget, there are bad credit risks out there. Some are rich, some are middle class, many are poor.

People stay poor for many reasons. Some don't have the ability, some never get the opportunity. In many cases the poor stay poor because they don't know how to handle their money. They take risks and make decisions that waste their resources.

Now these faults are exhibited by rich and middle class people as well, but neither more so than the poor. And when I speak of the poor do not assume I speak of any particular race or group; blacks and hispanics are just as capable of financial foolishness as any white.

When you read a story about the disadvantage poor take careful note of who the report does not talk about; Koreans, South Asians, Chinese. They may start out poor when they arrive as immigrants, but very few of them ever stay poor. For along with being hardworking and forward thinking, they use their money wisely. They think long term.

People lost their homes because they did not think long term. They assumed the good times would last forever and made no provision for disaster. Very often they had no family, no community to call upon. They thought they were entirely self-sufficient, and suffered for it. To be blunt about it, they thought they were entitled to perpetual prosperity, ignoring the fact calamity can befall anyone. Now they're paying for it.

Things change. They can change for the better, they can change for the worst, but they change. Refusing to accept that can wind up killing you.

"Basic economics says that people should borrow so that they can consume based upon their permanent income."

Leaving aside the question of who, besides tenured faculty, have a "permanent income," is this actually what happened in the housing bubble? No. Many, many people extended themselves far beyond what could be supported by their income. Often it was a) an outright lie (fraudulent loan application, brokers gaming the underwriting system, etc), or b) not based on incomes, but on the increasing, and increasingly speculative, "value" of the house. Rising "equity" allowed people to borrow a lot of money they could never afford to actually pay back.

But also, "subprime" does not mean poor. It means a poor credit history, and there are plenty of not-poor subprime borrowers. Look at California, Florida, Nevada--is it poor folks getting wiped out at those Inland Empire upscale housing developments, the Vegas and Miami Beach condo towers? Uh, no. We are also now seeing historically unusually high default rates among prime borrowers. And a sizeable portion of defaults are (or have been) among speculators, investors, flippers, etc.

A lot of the bad loans were not subprime at all, nor were they mostly to poor people. Lenders and their middlemen were promoting loans very aggressively and deceptively and encouraging people to lie, and many people also borrowed against their bubble equity for mad money, or to start speculating in housing. Furthermore, the housing bubble isn't the only problem, since big finance companies devised ways of leveraging and trading on the debt they owned which had the long term effect of putting them under water too.

There's a meme out that it's all because of minority buyers, Barney Frank, Fanny Mae, Freddy Mac, etc., but that's just whistling in the dark and ass-covering. There were many more and bigger problems than those. (Barney Frank actually was one of the go-slow people on home-ownership).

My brother got two business refinance loans on his startup company during this craziness. He had good advisers and knew exactly what loan he wanted, and he told the loan officer that right at the start, and both times they tried very hard to sell him a different kind of loan that would have put him at risk. The lenders did a lot to make this happen. All the way from the bottom to the top they were promoting bad loans, and they were complicit at all levels in fraudulent or inadequate documentation.

I can't tell you how many phone calls I got from my bank when our house was paid off wanting to lend us money on it. It was ridiculous! Also, every week there was a note or card from a real estate agent wanting to list our house.

Don't think it was necessarily good financial management that kept us saying no to the bank. We were frankly enjoying having that house payment to spend every month. If we'd been wise, we would have saved it, or at least part of it.

We might have jumped to sell our house and buy a 'bigger and better' one too, had we not looked around and said "But we'd have to pack!"

In our own perverted way we ended up making what has turned out to be good decisions.

As for complex financial instruments, they remind me of the opposite of putting all your eggs in one basket -- taking the one egg you have putting separating it to put a bit in 100 baskets. What you end up with is useless and worthless no matter how well you guard those baskets.

Maybe the USA has a skewed sample of East Asians. All the same stuff happened in Hong Kong, Bangkok and elsewhere after the Asian Financial Crisis in 1997, and in Tokyo earlier. Bubbled stock market crash, followed by bubbled real estate crash. A lot of people in Hong Kong wound up with big negative equity, and some of those that couldn't face a lifetime paying off massive debt for a property worth a third of what they paid for it took swan dives off high buildings. I think that characteristic is more of poor first generation immigrants - the Italians, Greeks and Slavs arriving in Australia didn't stay poor, they worked hard and saved, same as the Chinese.

Pre-crash was the same - if you weren't in it, you were a fool and not getting rich like everyone else. Bubble? Nah, won't happen here...

In Australia the norm is for people to help to finance their retirement with real estate - they pay off a big house while working, then when the kids move out, they sell it, downsize and bank the difference. Meanwhile they live on debt - mortgage debt, personal bank loans, vehicle financing, credit card debt. It's the norm. As soon as their credit cards are not maxed out, they buy more or go on another overseas trip. You tell people you have no debt and they won't believe you, or look at you like you're crazy.

The bottom just fell out of everyone's superannuation in Australia - all of the super funds were invested in equities. Same as in the US. It will be a big burden on taxpayers, because old age benefit has a means test, and now a lot more people will qualify. And it's real subsistence living now, if a person is really careful he can just about afford to eat.

And same same - poor people in Oz are not the only mortgage defaulters - plenty of people bought property in high priced suburbs who are now having to bail out with negative equity, and plenty of speculators/flippers are defaulting. It's probably not as bad as the average in the US, but it's worst in the high priced areas, where the poor folks don't live.

"People lost their homes because they did not think long term. They assumed the good times would last forever and made no provision for disaster."

Hmmm... Lets say one squirreld money away, wisely 'investing' in diversified index funds. Those are worth less today than they were 7 years ago.

Buying a new Prius would have been a smarter choice.

There's all kinds of culprits in this mess and I don't think we can dismiss anything - like CRA - yet. For example, there's Steve Sailer's documenting of the multi-trillion dollar bidding war for takeover rights among big banks over the last decade.

I'm guessing an old-line Democrat like Barney Frank would be more realistic about the CRA, thinking it's just a way for whites to subsidize development in minority neighborhoods. If it had just been that - handing out loans to various boondoggles in impoverished urban centers - the economy could have absorbed that. But presumably some of those clever out-of-the-box financial wizzes figured instead of just frittering away profits in the ghetto, they could promote minority home ownership and make some beaucoup bucks at the same time hustling toxic mortgages to these ready suckers. And of course they had another whole group of ready suckers in government to give them their blessing (not to mention, of course, the suckers among the free-market cheerleaders in academia).

The post defended payday loans. These loans have interest rates that can be hundreds of a percent a year. The companies try to defend it by saying its a short term loan but when people go back over and over it might as well be a straight 1 year, 300% loan.
Its not that poor people are bad with credit. Its that if you have money you get things cheaper. Watch the Bill Moyer's show on the "poverty industry" to get an idea of how companies rip of poor people.

"There's a meme out that it's all because of minority buyers, Barney Frank, Fanny Mae, Freddy Mac, etc., but that's just whistling in the dark and ass-covering"

No, it's worse than that--it's plain old right-wing bullshit. They want to put the blame on government (CRA) and pseudo-government (the GSEs), when neither of these things are to blame. The numbers just don't support it--most of the worst of the lending went through nonbank lenders not subject to CRA reporting. And through the bubble, the GSEs actually lost a lot of market share, for the simple fact that so many loans didn't meet their standards.

I do blame Barney for pushing the GSEs to take more and larger loans, and weaker loans, at a time when they were still trying to get over their accounting problems and their capital position was already very weak. I do think he had a big part in pushing the GSEs into "conservatorship." He's done whatever he can to keep the bubble inflated.

Prime/jumbo loan defaults: http://www.bloomberg.com/apps/news?pid=20601213&sid=ab4hyMC6aJf0&refer=…

Yeah, it's worth noting that there have been real estate bubbles elsewhere where "first-time minority buyers" were not a factor at all. That whole issue is a diversion. As I've said, there are people who would blame a rising cancer rate on illegal immigrants.