I wasn't going to write about this, because I really don't have much to add. But people keep mailing it to me, so in order to shut you all up, I'll chip in.
As everyone knows by now, we're in the midst of a really horrible
financial disaster. I've argued in the past on this blog that the root cause of the entire disaster is pure, simple stupidity on the part of people in the financial business. People gave out mortgages that any
sane rational person would have considered ridiculous. And then they built huge, elaborate financial structures on top of those mortgages, pretending that by somehow piling layer upon layer, loan upon loan, that
they were somehow creating something that could be considered real wealth.
They gave themselves bonuses that boggled the mind. Even after the whole ridiculous system came tumbling down, they continue to give themselves ridiculous bonuses. Insane bonuses. They've been writing themselves checks for millions of dollars to continue to operate their
businesses - even after taking billions of dollars in loans from the government to prevent them from going out of business. I consider
this to be downright criminal. But even if it's not criminal, it's
incredibly stupid. The very people who ran those firms right to the edge of bankruptcy, who nearly took down our entire financial system
are being rewarded. Not only are they being allowed to continue
to rut the businesses that they pretty much destroyed, but they've
been paying themselves an astonishing amount of money to do it. And now they're complaining bitterly about the fact that the government
wants to limit them to a paltry half-million dollars of salary per year.
They argue that they must be allowed to earn more than that. Because after all, the people who run those businesses are special. They're "the best and the brightest". They're
extra-smart. No one else could possibly run those businesses. We can't rely on anyone who'd accept a puny half-mil - they won't be smart enough. They don't have the special knowledge of the business that these people do.
There's one minor problem with that argument: it doesn't work. A couple of weeks ago, some idiot at JP Morgan circulated a chart that was supposed to summarize just how bad the financial disaster has been. The chart circulated for a couple of weeks - bounced from mailbox to mailbox, sent from one financial genius to another.
Only the chart was blatantly, obviously, trivially wrong, and anyone who had the slightest damned clue of the assets those businesses managed - i.e., the kind of thing that the idiot who drew the chart was supposed to know - should have been able to tell at a glance how wrong it was. But they didn't. In fact, the damned thing didn't stop circulating until (of all people) Bob Cringely
flamed it. Go look at the chart - it's up at the top of this post.
So what's wrong with it?
Look at the Citigroup circle. In 2007, the total market cap of
Citigroup was around $255 billion. Today, it's down to about $19
billion. That's a pretty damned dramatic loss, right? Citigroup is
worth less that one tenth of what it was worth just two years ago.
But if you look at that chart, the circles show it as as being
worth less that one one hundredth.
See, the idiot who drew the chart apparently doesn't understand
the idea that the area of a circle is quadratic. He drew
the circles so that the diameter of the circles is proportional
to the value - not the area. So if you take a really narrow slice down
the center of the circle - so that you wind up with a bar chart - that's the real relationship. But no one who looks at this chart is going to interpret it that way. Because in a chart like this, it's obvious that you're supposed to compare the areas. If they wanted to use a bar chart, they would have used a bar chart, right?
Compare that figure to this bar chart - which correctly represents the values by bars. Pretty dramatic difference, huh? Citigroup still looks piss poor - but they don't look anything like what they did in the original figure.
But no one noticed. For weeks, this circulated, and no one noticed. The people who generated the graph at JPMorgan never retracted it. They never realized that it was misleading. They published it, and allowed it to be circulated - even though the point that it was making was wrong, and it made them look even more incompetent that they we already thought they were.
The geniuses running those firms, the people who are so smart and so supremely skilled that they can't possibly be replaced by someone who's willing to work for a pathetic $500,000/year - those people don't know enough about what's happened to the values of their own businesses to
know how incredibly wrong the images on that chart are.
If I sound angry, that's because I am. I work in NYC, and live in a suburb with a lot of people who work for those firms. I know people who
worked for them, as lawyers, secretaries, programmers - people who are now either out of their jobs, or on the verge of losing them. People who don't earn a tenth of $500,000 are losing their jobs, because the financial firms "can't afford" to continue paying them. But the execs
who've ruined those businesses, and are trying to collect handouts from the government to keep them going - they think they deserve orders of magnitude more than that - and are complaining, bitterly, about how unfair it is. They're so damned incompetent that even as they talk about how they're the only people who can possibly save their businesses, they're not even capable of understanding something this simple.
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> The banking queen comment is not a just a shot at the man's sexual orientation, but his corruption and stupid views of banking.
Just so you know, the key word in that sentence is "just."
You seem like a smart guy in other respects, but you really undercut your argument that discrimination is just a smokescreen by giving evidence that you yourself are bigoted.
No matter how much you dislike Barney Frank's actions running the Banking Committee, and no matter how many good reasons you may have for disliking them, equating your complaints with bias against his sexual orientation makes it difficult to take you seriously. It's dificult because it implies that whatever data you have processed to try to understand the issues and buttress your points, you have done so specifically *looking for reasons to blame the problem on minority groups*.
In any case, whatever the data may show in Minneapolis, one of the core problems in the banking crisis had to do with "jumbo" loans that were not government-backed. If there's some reason that poor people are responsible for problems in loans to the well-to-do, I'd certainly love to hear what it is.
It looks like you put the same bar chart up twice.
These are the same people who prepare the financial reports for the stockholders and the government. I wonder if it's just simple incompetence or if they are so accustomed to presenting data in deceptive ways that it's now second nature.
Oh, sweet Isis.
This is actually one of the classic tricks in Huff's How to Lie with Statistics (1954). Appropriately enough, he illustrates it with moneybags.
Not only do they act like they're the only ones who can save their businesses, they act like they're businesses are the only things that can save the economy, which is also not true.
So someone got a bonus for publishing that chart?
Give me a break.
...On the part of government financial regulations would be much more accurate. No red lining, no disparate impact. These were government regulations.
Give the mortgage or face a costly investigation.
You should turn your scorn at Barney Fank, the banking queen.
Honest question: To what extent do you support elected officials dictating how the private sector operates?
Also, how about preparing yourself for a post on the Reagan deficits v. the Obama deficits?
As for me, I am consistent. If a bank wants to accept federal dollars, let it follow increased federal regulation. A welfare queen is a welfare queen, whether she has 10 kids and 8 baby dandies, or a multi-million dollar mansion and a government to blame.
Sharpen the guillotines. Another so called cult of reason is coming.
People like me who bought a home within my means, did not borrow money on the speculative rise in market prices--we're the ones who should be angry...and we should be angry with the government, for not only creating this mess, but also creating a situation that benefits those who abused the system, both from the top, and from the bottom.
"You should turn your scorn at Barney Fank, the banking queen."
I'm not sure how often it needs to be pointed out, but clearly it's at least one more time: the law that required banks to give more mortgages to low income folks DID NOT APPLY to the big investment banks that failed - they did do the stupid stuff on their own. They were not forced to make up these stupid things, nor were they forced to invest in them.
It's true that a good number of vocal critics on both the left and the right keep trotting this out in order to defend the system: it's also true that by this time they should realize they are not telling the truth.
First, hats off to William Wallace, who thinks Barney Frank's sexual orientation is worthy of comment/insult.
OK, now to the post.
As I also opined with regard to the Supreme Court opinion re Navy sonar testing, perhaps the use of area when linear measure is appropriate is less a symptom of stupidity than it is a sign of motivation to persuade that doesn't respect honest boundaries.
Regarding bonuses being doled out to higher-ups for terrible performance while line workers who probably did better jobs are kicked to the curb: This is of course happening everywhere, not just banking.
For instance, my wife works for Mack Trucks at its world headquarters. They were bought by Volvo a little while ago. Mack's Volvo managers have brilliantly cut Mack's market share in half in only a few years. So all the staff people who were there through good days and bad are being let go (World Headquarters will be closed within a year or two), while the executives who created the disaster are of course...OK kiddies, let's all complete the sentence together...that's right, paying themselves big bonuses!
The reason behind this, whether at Mack or in the financial sector, is dead simple. For me, there are a few jokes whose punch lines pretty well explain the world. So here's the joke that explains what we're seeing now:
Q. Why do dogs lick themselves?
A. Because they can.
Of course that's why we're seeing management dole out bonuses to themselves while cutting staff (or similar moves, like GSK shedding over 25,000 jobs in the same week they announced they're paying tens of billions for a competitor pharma company). Because they can. The only possible way for line people to comprise a competitive power center is in the form of unions, and you know how badly both union membership and union reputations are doing these days. So there's really no non-governmental way to stop what's happening, particularly when stock options have made executives centers of shareholder as well as managerial power.
(A) As others have pointed out, making fun of the sexual orientation of Barney
Frank really doesn't help your argument - all it does is make you look like an
(B) Despite the constant harping by certain liars on the political right, the fact of the
matter is that the anti red-lining regulations had *nothing* to do with the current
disaster. That can be easily verified in *multiple* ways.
(1) The anti-redline regulations didn't require anyone to give out mortgages to
people who didn't qualify. All that they did was require that in equivalent situations,
mortgages would be given regardless of the racial/ethnic mix in the location of the
home, and the race/ethnicity of the buyer. That "equivalent situations" bit is really
important, because it includes independent value assessments.
(2) The total monetary value of all loans given in the traditional redline
areas is not a significant portion of the current crop of bad loans. The exact numbers
are hard to come by, because banks don't like to provide too much information, but
the redline loans are less than 10% of the bad mortgages - and 10%
is probably high by a full order of magnitude.
(3) Several of the largest financial institutions currently in trouble do not have
a significant number of redline district loans.
No matter how you look at it - from whether the redline districts are more risky,
or by total proportion of bad loans, or by who has the bulk of the redline district loans, there is no meaningful correlation at all between banks that were affected by the anti-redline regulations, and the current financial crisis.
The banking queen comment is not a just a shot at the man's sexual orientation, but his corruption and stupid views of banking.
I am not sure where you are getting your other ideas, but the following should provide good cause to doubt your sources.
This is a map of foreclosures in North Minneapolis, and here is a map of far north minneapolis. By way of comparison, Lake Minnetonka area foreclosures.
As you move farther and farther out, you see that the foreclosure density is down. Measure it however you want: (bad loans)/acre, (bad loans)/housing unit, it doesn't matter.
But what's a little real data when your mind is already made up?
US Federal obligations conservatively exceed planetary GDP. Does $65.5 trillion debt terrify anyone? The real number is over $100 trillion. One fails to see how a few $trillion sloshed about will exacerbate the problem.
There was no way to continue the country after Baby Boomers' wallets slammed shut in retirement. The near-term solution is confiscation of their assets in replacement of their confiscated incomes. The sheep have been skinned for 45 years; now they will be skinned. The third turn of the screw is left as an exercise for the interested reader.
WorldNetDaily is not exactly what I consider to be a reliable, informed news source.
Even ignoring whether or not the specific values assigned to the debt and the planetary GDP are correct (and I don't know that they are, but considering the source, I'm inclined to doubt it), the comparison is meaningless.
The GDP figure cited is an estimated figure for one year. The debt figure cited is a rough guess of the total debt accumulated over many years, and which is expected to be paid back over a period of many years.
Using the same process that produces that number, if I work things out that way, I can calculate my personal debt over the next 20 years or so is conservatively somewhere in the 5 million dollar range. That sounds absolutely horrible. But it's also absolutely unrealistic - because that figure is reached by taking my current debt and my current interest rate, adding in expected debt (my kids' college tuition), and not paying off any of my current debt (my mortgage). If I *really* had five million dollars worth of debt, I'd be bankrupt - there's no way in hell that I could pay off 5 million dollars of debt on my salary. (Not that my salary isn't generous, but it's not generous enough to cover 5 million worth of debt.)
But my debt isn't $5 million, and it never will be. That number is an artifact of a misleading computation.
The US national debt is horrifyingly large. Paying it back is not going to be an easy or a painless thing. But it's also not nearly the catastrophe that so many right-wingers are claiming. (I'll just note in passing that the *same people* who complain about how horrifying that debt is didn't think that the debt was a big deal back in the 1980; then they were suddenly horrified by it in 1993; then it wasn't a big deal again in 2001; and now suddenly it's a catastrophe in 2009. Why do you think that is?)
My comment illustrating with actual data that you were wrong got lost somewhere probably in a filter.
That WorldNetDaily article confuses the deficit with our national debt.
It must be pretty scary to be you, Al.
I agree on both parts. The #9 should be bumpbed to #10...
The same criticism goes the other way. The Reagan deficits in comparison to U.S. GDP were about 6%, but expected to be 14-20% under Obama. Worse, according to left wing partisans, Carter is blameless in regard to Reagan, but Bush is blamed for Obama's problem by the leftwingers. (Actually, I agree that Bush has responsibility in the current mess. As a Paleo-conservative I think that Bush was left of Clinton on many economic issues, and indeed he was a radical when it came to foreign policy.)
It's more than a bit of an oversimplification to blame this all on the people giving mortgages out like candy. They were incented to do so, and in many cases forced to do so by law. The keystones of the industry were given extra special leverage power which added additional incentive to roll up more mortgages and stamp them with the special "good as T-bills" stamp.
Further, the higher ups in Wall Street did a great deal to shield many smart traders from understanding their whole part in the game.
When incentives and government regulations are so poorly designed, this is what we can expect -- the straight and ordinary path of individuals following their incentives.
I thought that the "forced" loans actually had a better payment history than the "regular" loans. As pointed out above NOBODY was forced to make a loan to unqualified people, just forced to measure everyone by the same measuring stick. No more red-lining. Once this happened you had a backlog of highly qualified buyers who were also highly motivated to make things work out and keep their neighborhoods intact.
In contrast the recent problems were trash loans to people just wanted to make a quick buck, plus excessive loans to others who were forced to buy in an overpriced market due to the former. It was obvious to anyone who gave it a moment's thought that there was a day of reckoning coming, I just expected it in 2005 or so. Since this is a science-y blog, let me draw an analogy to stellar death: :-)
star: one spouse can support the mortgage.
white dwarf (electron degeneracy): both spouses must work to meet the mortgage. Financial disaster if either is unemployed for substantial period.
neutron star (neutron degeneracy): you have to take an ARM or balloon mortgage in addition to both spouses working. You can't meet the mortgage if rates reset or you don't sell the house by the time the balloon ends.
black hole: you have to take a negative amortization loan and gamble that property values will rise. There's simply no way to meet the mortgage.
The trigger happened about two years ago when ARM rates started resetting higher. People barely squeaked by with teaser rates and after a few years they reset right as the underlying rate also started climbing. A lot of people found their mortgage payments double or even triple since the teaser rate was so low and mortgage interest makes up such a huge fraction of the loan payment in the first decade.
You had a wave of defaults and foreclosures. Predictions of many, many more as the 2- and 3-year teaser rates reset.
That's the core of the sun becoming an iron ball and yanks out the support from the rest of the star. Mortgages defaulted and nobody really knew how much mortgage-backed securities were worth, and *whomp* everything tumbles down.
"I've argued in the past on this blog that the root cause of the entire disaster is pure, simple stupidity on the part of people in the financial business. "
I'm going to shout: IT'S NOT STUPIDITY, IT'S THEFT!!!!!
The people making the loans flipped them immediately to resellers, while collecting bonuses for 'productivity', those resellers flipped them immediately, while collecting bonuses for 'productivity', and the big financial boys sliced, diced, pureed and molded allegedly good financial products, which they sold to suckers, while collecting bonuses for 'productivity'.
The only stupidity was that many institutions followed the 'bigger fool' theory too long (which, to be fair, is a tricky bit of timing). And even then the upper guys took vast yearly bonus checks for profits which were purely fraudulent, checks which cleared the banks years ago, and will be hard to claw back.
In short, we deregulated the financial sector to the point where the guys at the tops of various firms could suck the money out on the upside of a bubble, leaving everybody else f*cked on the downside.
You have to look at where the deficit is going, not just the absolute amount.
Look at kids in their late teens and early 20s. Many rack up tens of thousands of dollars in debt. Are they all irresponsible fools?
Of course not. The ones spending tens of thousands of dollars on college are usually considered praiseworthy. The ones spending the same money on really pimped-out cars are not.
That's how many of us see the different deficits. Many republicans can't seem to make the connection between 'deficit' and 'tax cut'. If they really want to close all public schools, then they should have the balls to come out and say that instead of silently wishing for it while cutting taxes as though it had really happened.
[That's not much of an exaggeration, unfortunately. Many states are facing staggering deficits and will be forced to make major costs. Many republicans refer to faceless "government employees", but these are really teachers and professors subsidized by state funds, the clerks at the DMV (read: even longer lines), the people who make sure your food is safe to eat (anyone want peanut butter?) or your doctor is qualified to do his job, the cop who might give you a speeding ticket but is more likely to be ticketing the guy who's really dangerous or helping at the scene of an accident, etc. I've read that Kansas may not be able to pay -any- state employees next week.]
On the flip side, many of us see the proposed stimulus package (not the watered-down version that passed) as much needed investments in infrastructure. Yeah, it might cost millions of dollars to refit schools and government buildings for energy efficiency. But guess what -- we need to maintain our buildings anyway, and by doing that now we'll reduce primary and secondary costs in the future. Lower primary costs since the buildings will be cheaper to heat and cool, and lower secondary costs since we won't all have to pay higher utility rates to pay for additional power plants (vs. spreading the current ones a little thinner as growth occurs).
If you still think infrastructure is a waste of money, let me invite you to a certain bridge in Minneapolis....
The bridge was being improved when it collapsed.
Meanwhile, liberals spent at least $700 million on the Hiawatha light rail line, and also resisted efforts to improve highway infrastructure in Minnesota. They were also responsible for removing the public trolley system in the 1950s. They are also responsible for turning train tracks into bicycle paths, and insisting that highways be built with high occupancy lanes, requiring twice as many lanes to be wasted as shoulders.
To a liberal, infrastructure means inefficiency.
"(1) The anti-redline regulations didn't require anyone to give out mortgages to people who didn't qualify."
Bologna. There were already anti-racism laws established. Anti-redline changed who qualified, and regardless of the factors or wrong or right the government changed who qualified for loans.
"(2) the redline loans are less than 10% of the bad mortgages"
Mark, you wrote an entire post a bout how small percentages can make a big difference but now you downplay the redline loans because '10% is a small number'? What if 10% fewer loans failed?
Give me a break.
If government policy contributed 10% to the financial crisis, then they are at least that much to blame. So what single person is more responsible for this mess than Barney Frank?
"(3) Several of the largest financial institutions currently in trouble do not have a significant number of redline district loans."
Fannie Mae and Freddie Mac
Well, they can't really say out loud that the real problem is attracting and retaining smart people with sufficiently questionable ethics.
you seem to have a problem with understanding, and with fundamental honesty - so does mike.
continuing to claim that the government forced the big banks to engage in the things that brought them down is false, it's been shown to be false, and continuing to claim otherwise is, simply put, a bold-faced lie.
"The bridge was being repaired when it collapsed."
Make it up as you go, William? The bridge was on a schedule of repeated inspection, and had been noted as being structurally deficient and in need of replacement in 2005. It was scheduled to be replaced by 2020, but (I'll type slowly, so you have a chance of understanding it) no repair work was being done on it when it collapsed. Quote:
In December 2006, a steel reinforcement project was planned for the bridge. However, the project was canceled in January 2007 in favor of periodic safety inspections, after it was revealed that drilling for the retrofitting would in fact weaken the bridge. In internal Mn/DOT documents, bridge officials talked about the possibility of the bridge collapsing and worried that it might have to be condemned
Gosh, it was Republican Governor Pawlenty who postponed the work. (Is he responsible for the collapse? Of course not - but your stupid accusation is equally false).
The NTSB study concluded the problems were due to design flaws.
Mike and William seem to be taking up the old Reagan procedure: when you don't like reality and facts, make up your own facts and tell bald-faced lies. They just aren't as polished as he was.
So the regulations didn't affect housing because you say so and the people who claim otherwise are "right-wing liars"?
Nobody has 'shown' that Frank's regulations did not affect or cause the housing crisis. Mark was just ridiculously saying that numbers like 10% are insignificant because they are small.
In my view, many American Liberals here are lying with numbers. The root of the problem was that since government regulations were enacted people were given loans they could not afford. Thus the root of the problem is not the people who gave out the loans but the governing body that pressured the lenders.
It's ludicrous to judge Frank's regulations by their wording and thus claim that they did not change the qualifications, for they had they stated goal of getting loans to more minorities regardless of qualifications.
If a Young-Earth Creationist writes a bad mathematical proof of the Earth's young age that didn't mention God, Mark and any reasonable person would still call that Creationist garbage because of its intent. Similarly if the government enacts legislation designed give loans to people who don't qualify without specifically mentioning qualifications, we should recognize it as racist garbage.
I never said that 10% was insignificant because it was small.
But if only 10% of the current mortgage failures are coming from traditional redline districts, then claiming that the entire disaster is the fault of those 10% is, frankly, ridiculous. Pretending that 10% of the failures are the entire problem, and that the other 90% don't count - that's ridiculous.
Further, you need to look at what redlining *really* meant, and what the *real* effect of the anti-redline regulations have been.
Redlining meant that on the basis of race or the racial makeup of the neighborhood, people who qualified for loans by objective financial standards - on the basis of
income, assets, credit rating, and assessed value of home - were *denied* loans.
Redlining meant that someone with an $50,000 income, buying a home with an assessed value of $100,000 with a 20% downpayment would get a loan if they were white and they were moving into a white majority neighborhood - but that someone with the same income, the same downpayment, buying a home worth the same amount of money, would be denied solely because the majority of the people in the neighborhood were black.
When people like you come along and claim that redlining meant something different, I do presume that there's something missing from the conversation - and it's not that some evil liberal wanted to force banks to give out bad loans. It's good old fashioned racism. Anti-redlining never meant "give loans to people who don't deserve them"; and if you actually look at the set of failed loans, it's really pretty clear that anti-redlining didn't result in that.
Look across the country at the foreclosures. Compare the percentage of loan failures in white neighborhoods to the percentage of loan failures in formerly redlined neighborhoods. Check the percentage of loans granted in white neighborhoods to the number of loans granted in formerly redlined neighborhoods.
It just doesn't add up. The total number of loans - the *total* number of loans! - granted in redline areas - even if *every single one* of them failed, they wouldn't be enough to cause the current mortgage meltdown. And if you look at the failure rates of the traditional redline districts, compared against loans in non-redline districts for the same home value granted at the same time, you find that there's no difference.
While your description of redlining is technically valid, it is naively literal, causing you to miss the point.
In the Minneapolis area, we don't have redlining (very little, anyway). Formerly white neighborhoods are now multi-ethnic and even majority non-white.
But the unintended consequences of the government's anti-discrimination framework, together with "disparate impact" analysis, in which a corporation can be guilty of discrimination even if they had no intent--that is, merely if there is a disparate impact on a protected class--has caused many many loans to be granted that should not have.
In the Minneapolis area, as the links I previously provide show, the majority of failing loans are in areas that are now fully integrated, and often minority white neighborhoods.
These are the fully integrated neighborhoods that have the majority of the failing loans. North Minneapolis, Far North Minneapolis, Brooklyn Center, Robbinsdale, Hopkins, and so on and so forth.
Third ring suburbs, like Deephaven, MN, have very few homes in foreclosure. But the homes there are so expensive that it would be difficult for poorer people to be able to afford even one month's worth of interest only and property tax payments. Deephaven is also not very ethnically diverse, except for a few professional athletes or MDs originally from China or India.
Mortgage foreclosures are reported to and tallied by the county.
The housing prices were inflated, people were not required to prove their income, and lenders were afraid that if they were too demanding, and did not support government efforts to increase home ownership rates, that they would be slapped with nuisance "disparate impact" lawsuits.
Yes, people in the private sector profited from and used as cover the government programs. White people and minorities. Big time investment bankers and small time mortgage brokers. And so did the politicians.
But imagine the outcry if they didn't? "These lenders are so racist that they refuse to make a buck by promoting government planned minority home ownership, and instead don't lend, and instead rent out, keeping people of color in perpetual serfdom..."
Dude, you're either arrogantly ignorant, or lying.
The bridge collapsed because of shoddy construction (too thin gusset plates, shoddy analysis (incorrect modeling), and shoddy repair logistics, according to me. It did not fail because liberals did not have their demands to improve infrastructure heeded. If it were up to liberals, the bridge and connecting interstate highway would have been turned into a combined pedestrian, bicycle, and mass transit thoroughfare.
Would anyone like to explain to the wallace that _roadway work_ is not the same as _structural repair_? Does this idiot honestly think that patching the tarmac is the same as repairing the load-bearing construction?
Still, it's always amusing when he destroys his own credibility like that.
I invite you to [#19].
The only deceit here is on the part of the left wing ideologues.
Regardless of what the laws *really mean* they were enacted for the stated and specific purpose of giving loans to minorities regardless of qualifications and not by 'making things fair,' rather anti-discrimination laws already existed and these new laws accomplished their agenda through intimidation and arbitrary enforcement.
Just consider literacy tests at polling facilities in America used to deny minorities their right to vote. The tests themselves are not inherently racist nor is the stated policy, but the laws were nonetheless enacted to deny minorities their civil rights.
Now, some of you probably see Barney Frank as a man innocently trying to make things fair for racial minorities in the racist USA, but I and many others see him as a racist pig who has no problem meddling with the market to further his partisan agenda. And, again, if Frank's policies were really responsible for up to 10% of failed mortgages (not a small number), then who in the world is more responsible than him for the world financial crisis?
What you're basically saying is:
- The well-documented phenomenon of redlining didn't exist.
- That government regulations are best understood by not looking at either what
the regulations say or how they're enforced.
- I should just blindly take your word for the effect of anti-redlining regulations
without any documentation of any kind.
Further, in answer to your question: "And, again, if Frank's policies were really responsible for up to 10% of failed mortgages (not a small number), then who in the world is more responsible than him for the world financial crisis?"
That's easy. The idiots who gave out the bad mortgages.
I don't know what percentage of mortgages were in former redline districts. I'm actually trying to look up some figures, but it's a bit hard, because what "redline" means depends on the city and the bank.
But: the absolute percentage of "redline" loans that defaulted isn't the relevant question. If 10% of the total loans given out were redlines, and 10% of the defaults are redlines, then there is no disparate impact caused by redline loans. It would just mean that redline areas are having exactly the same problems as everywhere else.
See, the problem with the whole "it's all the black peoples fault" type arguments is that they don't jibe with reality. Redline district loans are, at best a small portion of the total number of defaulting loans, and there's no evidence that they're any more likely to default than any other loan. To claim otherwise is just dumb.
Even if I make very generous assumptions in favor of your theory, it doesn't work. Suppose that 10% of all loans granted in the last decade were in former redline districts. (Which appears to be rather high.) And suppose that they defaulted at twice the rate of other loans (which is definitely a lot higher than any evidence I can find would support.) Work it out: they still can't have enough impact to be responsible for the current financial crisis. Under these ridiculously generous assumptions, the redline loans could account for 22% of the failed mortgages.
So where's the other 78% coming from?
Now, try running the same numbers - only do it with something closer to reality. Less than 10% of the total mortgages granted have been in traditional redline districts. And every source I can find suggests no significant difference between the default rates in redline areas compared to similar loans in non-redline.
Did you even bother to look at the foreclosure maps I sent? You'd be more believable if you just said something like "It's not surprising that homes in poorer and ethnically diverse areas end up in foreclosure, since poorer people are least able to pay their mortgages during economic hard times."
Nobody says that (though I do not doubt that you hear that).
It's the fault of Barney Frank and like minded liberals, who enact programs ostensibly to benefit minority people, but programs that seem to cause more poverty and problems for everybody, including the groups they purport to help.
It happens time and again.
Government declares war on poverty, and we have more poverty, broken families, and so on.
Government programs, regulations, and laws to increase home ownership, particularly among African Americans, and home foreclosures in minority areas are at record levels.
If you have time, take a look at this article, which discusses that the government induced the risky behavior, or "moral hazard".
The reason that I'm not using your maps is because they're *not* redline maps. Your argument is basically that because city neighborhoods in your particular city have higher default rates than non-city, that it must be the fault of the traditional redline areas.
But that's not true, at all.
You're trying to take one *possible* correlation - cities and ethnic diversity; say that it necessarily implies another possible correlation - cities and redline district; and then use that to argue for a third correlation - that because the city neighborhoods that you've (without evidence) asserted are redline areas, that therefore anti-redline regulation is the cause of the higher defaults in that area. Basically, you're picking out neighborhoods with high default rates, and using that to argue that they're necessarily redline, and then using your conclusion that they're redline to "prove" that redline areas have higher defaults.
But there are lots of different things that could be going on.
(1) There's no reason to believe that every city neighborhood is in the redline. Where's the evidence for that claim?
(2) In my area at least, home prices in the city are dramatically higher than home prices out in the burbs. In my fairly wealthy suburb, you can buy a home with 2000 square feet for around $500,000. In Harlem, you can buy a brownstone for close to a million dollars. If you want to go to a better neighborhood, Brownstones on Park Slope in Brooklyn were going for around 2 million a couple of years ago. Could it possibly be that foreclure rates vary by price of the home? And that price of the home varies by location? No. It's got to be the redline.
(3) You claim that there's nothing racist about your argument. But you keep harping on the idea that a specific government regulation
which prevented discrimination against minorities *must be* the only possible explanation for the current financial crisis. You refuse to consider any other possible cause: it's got to be the redline. No matter how small a portion of the total set of foreclosures are redline, the fault *must* be that the government forced banks to give loans to unworthy brown people.
You said some pretty nasty and dishonest things about my argument. I'll get to it.
I'm not denying redlining, but just because redlining existed does not mean it 1. is unfair 2. is not covered under anti-discriminatory laws or 3. should be dealt with by regulations. Saying that I deny redlining suggests that the existence of redlining undermines my point. It doesn't.
Mark, you characterize my argument as "it's all the black peoples fault," but that is dishonest and underhanded. My problem is with unqualified people getting loans as it pertains to the current world recession, not racial minorities getting loans as you suggested.
Laws can be understood by their intent, enforcement and effect. Frank's policies had the intent and effect of increasing minority loans regardless of qualifications. Literacy tests had the intent and effect of denying black people civil rights. China's anti-revolutionary laws have the intent and effect of limiting political freedom. The writing of all of those laws look just but are not.
If one percent of bad loans really were from anti-redlining policy, then it at least exacerbated the situation, and single percentages make a huge difference. That wouldn't just mean 1% fewer defaults but 1% fewer forclosures, 1% fewer bad investments, 1% fewer companies failing,... , maybe even 1% less of a recession.
Plus, Mark, I doubt you could name a single idiot who has given out more bad loans than Frank's policies are responsible for.
I understand that if anti-redlining loans defaulted at the same rate as other loans then there's no argument against anti-redlining loans.
But I doubt that government-forced loans default at the same or lower rate than spontaneous loans, and we can both recognize there is no data presented either way. Then again, I'm also looking at more policies than anti-redlining.
LA Times wrote in 1999:
(forgive me, I don't know how to code for block quotes)
"In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments--or with mortgage payments that represent an unusually high percentage of a buyer's income. That's made banks willing to lend to lower-income families they once might have rejected."
RONALD BROWNSTEIN. May 31, 1999. Page,5. PART- A; National Desk
There is also famous video of Barney Frank ignoring warnings about the financial instability of Fannie and Freddie and the housing sector. I don't want clog up your blog with copypasta, so I'll just end it here.
Another glaring example of the idiocy of the financial risk managers that contributed to their catastrophic risk exposure was also a basic, Statistics 101-level mistake:
They assumed that the probabilities of failure of their "diversified" investments were independent.
I'm oversimplifying only slightly, but roughly speaking they multiplied the likelihood of a mortgage default in one part of the country, for example, with the (assumed independent) likelihood of a default in another part of the country. They then packaged these together into a single collateralized security instrument, and assigned it a low-risk rating on that basis.
In fact, these risks were not independent. Many factors connected them including weakened federal regulations, corrupt and incompetent ratings agencies, commission-based brokers with a disincentive to fairly assess actual risk, the opacity of the collateralized debt packages, the innumeracy and groupthink of the risk managers, and others. The housing bubble's collapse rippled in many ways throughout the entire global financial market.
In reality, as they soon learned, there was not actually 10^-14 chance of failure as they had erroneously calculated. Since risk calculations are only as good as the assumptions they are based on, this is a quintessential example of Bad Math.
William Wallace wrote: But the unintended consequences of the government's anti-discrimination framework, together with "disparate impact" analysis, in which a corporation can be guilty of discrimination even if they had no intent....
This isn't correct as a description of the way disparate impact analysis works in the law. Because it is notoriously difficult to find "smoking gun" evidence proving intent in discrimination cases, the courts long ago decided that one acceptable way of proving intent is to show disparate impact. However, those accused of discrimination are permitted to refute disparate impact evidence by showing non-discriminatory reasons why the disparate impact occurred.
Fair enough. Gentrification has progressed in your part of the country more than it has in mine.
A key aspect of this is homes that should be worth $80,000 in North Minneapolis were selling for $250,000.
My hypothesis is reasonable, the evidence I provide is supportive (especially of you know the efforts the metropolitan council has been putting into moving ethnic diversity to the suburbs), but in order to make it convincing in a scientific perspective nationwide would be quite a research project. Only a conservative think tank would be able to undertake such a study, and even they may not, as it would be poo-poo'd as motivated by racism.
Tell that to the meat packing plants who required their workers to work with pork. They were recently forced to allow their Muslim workers to not work with pork, under threats of disparate impact lawsuits, because while the meat packer had a legitimate business interest in packing pork, an alternative business practice with lesser impact on Muslims was available (e.g., Muslims could be kept to processing chicken only). So now the Christians are stuck handling pork.
Do you think that these meat packers choose to process pork simply to keep Muslims from working there?
What's next, kleptomaniacs demanding they be given jobs as bank tellers? Muslim Liquor stores employees suing because they are required to stock and sell alcohol?
We already had similar attempts, with some Muslim cab drivers refusing to accept passengers who were transporting a bottle of wine home from the airport.
I wrote: This isn't correct as a description of the way disparate impact analysis works in the law.
William Wallace responded: Tell that to the meat packing plants who required their workers to work with pork. They were recently forced to allow their Muslim workers to not work with pork, under threats of disparate impact lawsuits....
Oh, silly me. Here I thought we were talking about financial institutions, redlining, and disparate impact. In that context, my description of the role of disparate impact analysis is correct.
The case you cited is not an example of a "disparate impact" case. Rather, it is what is referred to as a "reasonable accommodation" case. The issue is not whether an employer's practice has a disparate impact on a particular group. Disparate impact on a group of employees (or an individual employee, due to membership in a particular group) is a given in these cases. Rather, the issue is whether the employer can bend its practice - make some "reasonable accommodation" - that will not unduly hurt the business, but will make things better for the employee(s) for whom the current practice causes problems.
This meat-packing case, and other such "reasonable accommodation" cases, have nothing whatever to do with the mortgage crisis, so perhaps if you'd like to comment further you could make it on-topic?
Again, I am not sure what actual data will do when your mind is already made up, but it's worth a try:
First, apologies for the length.
@ William Wallace, #38: Ah, finally a cite to a relevant and authoritative source! Yes, I agree with what's stated on the page you cite. Note your cited source agrees with the point I originally made, that a finding of disparate impact is only the first step and is not sufficient in itself to constitute a violation of law.
I'd now like to get back to the original discussion with regard to the effect of government measures designed to encourage lending in certain communities. I want to explain why these measures did not and could not have caused the current near-meltdown of the financial sector, and talk a little more in depth about what *did* cause it. To do this, I'm going to take a bit of the long way around, discussing another financial sector upheaval and drawing instructive parallels.
The parallel example I want to use is the situation that caused the largest bank failure in U.S. history prior to the recent troubles. No, it's not the Great Depression. It's far more recent than that. It's the early 80s. Setting the economic scene for you, oil prices had risen since the 1979 oil crisis and stayed high, the non-oil-related economy was in recession, and cars in oil-producing states sported bumper stickers saying "Will the last person leaving Michigan please turn out the lights?"
Big banks all over the country were looking for some place to lend money where they could get a good return, because their local economies were tanking. They found the answer in a little bank in a shopping center parking lot in Oklahoma City, Penn Square Bank.
This is the first part of the situation from which I'm going to draw modern parallels: 1. There's a single sector of the economy - in this case oil - far outperforming other sectors. This fact creates tremendous financial institution demand to participate in the booming sector. 2. The source of supply is relatively small compared to the demand - Penn Square Bank had assets of $50 million, while the banks wanting to participate in the oil boom, Seattle First, Continental Illinois, Chase Manhattan, etc., had assets in the billions.
Penn Square was able to respond to the demand from these much bigger banks by doing what at the time was called "syndicating" oil loans. Federal regulations prohibit banks from lending beyond a certain multiple of their capital, so the dollar value of loans Penn Square could keep on its own books was small. Instead, they sold these loans in pieces to multiple big "correspondent" banks, and pocketed fees in return. The parallels I want to draw here are with the following: 1. Loans are being moved from the originating location to far-flung geographic areas. 2. The loans are being cut up into pieces.
Eventually the tremendous pressure of big bank demand and big fees for writing and syndicating loans resulted in Penn Square getting sloppy enough with documentation that loans were made for many times the value of the collateral or the underlying asset, or sometimes on no real asset value at all, and a single piece of a given loan could be sold multiple times. The parallel to be drawn here is that the value of the loan "slices" being booked by the correspondent banks was many times the value of the underlying asset. Essentially, Penn Square's sloppy bookkeeping enabled it to create a primitive form of leverage.
As long as oil prices stayed high, no one was inclined to look too hard and the whole carnival could stay afloat. But then oil prices cratered, Texas light sweet crude falling precipitously from a high of around $65 a barrel to an eventual low around $12, and federal regulators closed Penn Square Bank.
After regulators had some time to sort through the wreckage, they figured out that the $50 million bank in the shopping center parking lot had blown a $4 billion hole in the correspondent banks' balance sheets. The biggest chunk, over $1.5 billion, was from Continental Illinois, which regulators were also forced to close, making it the largest banking failure in U.S. history until 2008.
Now let's consider the recent past. While the rest of the economy was stagnant, housing was booming. This created a tremendous amount of demand from financial institutions worldwide (tens of trillions of dollars) chasing a relatively limited supply of mortgage lending. As with Penn Square, mortgage lenders tried to fill the demand by selling pieces of loans to multiple far-removed financial institutions, though by this time the mechanism was referred to as "securitization" rather than syndication.
Eventually, as with Penn Square Bank, the pressure of demand eventually led to financial instruments being sold for many times the value of the underlying assets, enabled by the fact that the original loans, having been sliced, diced and moved around the world, were near-impossible for buyers to trace and value. (They relied on rating services, which did a horrible job.)
The revolutionary change from the world of the 1980s was the amount of leverage enabled by modern financial instruments. Between securitization and credit default swaps (more on these later), the average dollar of private mortgage lending, whether of good or bad quality, supported more than $30 of financial instruments at the height of the housing boom. Fannie and Freddie loans, because government backing supposedly made them better risks, supported average ratios nearer 100-to-1. Mark has discussed in other posts the concept of "tranches," where the magic of AAA ratings from the services led companies to pay many times the value of the underlying assets for securities representing nothing more than the first chance to collect on those assets.
But way, way beyond tranches in terms of creating leverage were credit default swaps, or CDSs. If you don't remember any other term from the meltdown, remember that one. They are what brought down Lehman Brothers, caused the fire sale of Bear Stearns, and directly led to Hank Paulson asking Congress on an emergency basis for the $700 billion TARP bailout.
CDSs have a dual nature. They are in effect insurance, but they are also "derivatives." The term "derivatives" stems from the fact that their value is "derived" from the value of some other asset, which is a fancy way of saying the value of a derivative isn't always strictly tied to the underlying asset value. The way the derivative value varies with the value of the underlying asset is limited only by the creator's imagination (including math skills - some derivatives are valued by formulas invented by folks who did quantum physics or rocket science in previous careers) and what others are willing to buy.
In the particular case of recent world financial history, the credit default swaps were promises by the seller to pay the buyer if mortgage securities went belly-up. Fine in itself, except for two problems: 1. Being derivatives, the CDSs weren't just promises to pay what was owed on the mortgages, they were promises to pay **many times** what was owed. 2. The rules that limit lending in relation to capital for garden-variety banks like Penn Square don't apply to derivatives and investment houses like Lehman, Bear Stearns, or Merrill Lynch, or the investment subsidiaries of banks like Bank of America.
So in pursuit of a seemingly endless stream of fees (yet another way to make money from the only financial game in town, housing), investment houses sold CDSs for values that turned out to be far beyond the reserves available to pay buyers. (I say "turned out to be," because the assets that might have been used for reserves, such as stock in the investment houses themselves, plummeted in value at the same time mortgages did.) The risk involved in these CDSs - the chance that a large part of a mortgage securities portfolio diversified all over the country, in fact the world, would go bad at the same time - was happily assessed as microscopic (no chance the amount of fees had anything to do with that rosy scenario, I'm sure), so as long as mortgage values stayed high, the party continued.
As we've seen, the mortgage securities market was not diversified - in fact, the market created far greater risk by spreading the effect of bad news in that single economic sector to financial institutions around the world, and multiplying the pain tens or hundreds of times through leverage. When the normal housing cycle started coming down from its peak and claims began coming in on CDSs (Lehman and Bear Stearns each held tens of billions of dollars of these), the whole shebang crashed.
OK, back to the beginning: No, a few percentage points of bad mortgages in former redlined neighborhoods (or any other type of neighborhood) didn't cause the financial crisis. Housing values have risen, then fallen, for centuries without creating near-Depression-level risk to the financial sector. What caused this particular crisis was spreading the impact world-wide and sector-wide through securitization, and multiplying that impact 30- or 100-fold through leveraging, especially by CDSs.
Yawn. Clearly pointless in the case of Jud, but for the sake of others, more from the FDIC:
This is exactly what happened in the meat processing case cited above, which isn't surprising, because disparate impact analysis by the government is not relegated to just employment, or just lending.
But in the case of home lenders, why would a lender bother fighting the government when the government, via the enterprises they control and financially insure, Freddie Mae and Fannie Mac, are going to buy up the riskier loans anyway, as part of the government backed enterprises' efforts to increase home ownership among protected classes.
It would be foolish to fight government when the government is demanding equal (or more equal) outcomes via the FDIC, EEOC, DOJ, et al, and are willing to take on the increased financial risk via Fannie Mae and Freddie Mac.
Financial markets were induced by the government to behave financially reckless ("inducing the moral hazard").
Banks, for example, modify internal credit scoring systems so that they do not have a disparate impact on protected classes. See as an example Credit Scoring and Disparate Impact (2001) by Elaine Fortowsky & Michael LaCour-Little Wells Fargo Home Mortgage as just one illustration.
Anyone who thinks that financial institutions need government incentives to be reckless clearly hasn't been paying attention for the last few thousand years.
Real life is kinda hard, there is so much data involved that you can't avoid finding structure. It also doesn't help that it isn't always accurate and unbiased. Props to everyone willing to try and make arguments with government statistics and news reports.
The moron theory is all wrong.
I think that perverse incentives and opportunism are the biggest factor, not gut thinking. "If you want to get along, go along". In particular, the way things were structured, it was hard to profit from being right, and trying to do so was a big gamble. You had to be a bear at exactly the right moment.
These were educated, high IQ, focussed, hard-working guys. Perverse incentives, institutional collapse, corruption, magical thinking, herd mentality (which is social psychology or sociology, not psychology), opportunism, tunnel-vision compartmentalization, wishful thinking, and toxic optimism all played a part.
I think that there was institutional stupidity at the quant-finance interface; neither seemed to know or care what the other was really doing.
At my URL I have a three-fifths-serious theory that prescription drugs were involved.
You are absolutely right to be furious with the bags-for-brains that let bad loans get into the hands of investors ... however, I'm very certain that this graphic, the "area proportional to our financial burden" chart, was not used in the final decision making process that led to congress delivering their bail-out package or any other financial aid. It is just a P.O.S. statistic that was circulated and many people didn't ask twice when they happened upon it. Unfortunately, with its unique and eye-catching representation of the data, I can see how it would mislead even the most highly paid giants (as if nothing could). But I doubt that this was (even partly) responsible for the mismanagened allocation of funds.
dilbert catches up, belatedly
I think that a major part of the problem was when the median price of houses got to expensive for the average American. Then the ARM's and other exotic mortages were pushed as a way for Americans to afford houses that win reality were beyond their means. As for the bonuses, they were rewards for keeping an unsound system moving but as with all speculative bubbles there comes a point when creative stupidity runs out of ideas and reality bursts them. Now the idiots that created this mess think they should still get bonuses to fix them. Of course as someone mentioned earlier, 'why do dogs lick there balls' (and why does management continue to give itself outrageous bonuses), because they can.
The irony is here is that the millions of dollars dolled out in bonuses by JP Morgan and their squiddy ilk, was made by misrepresenting financial information in a compelling way. This is not an altogether convincing graph by any means, but none the less illustrates how a savvy presentation could help convince an unsuspecting party that buying a credit default swap... of a derivative... of a loan, that was originally a credit fault swap... signed in magic disappearing ink by a minimum wage part-time worker ends up repackaged ad nauseum and then sold to the books of a European bank.
The must have bad charting down to a science to pull off a scam that large for that long.
You're angry because it's misleading. But this is how they made/justify the big bucks in the first place. However, this is not to say that big bonus wallstreet dunces shouldn't be forever thrust into a never ending "Glengary Glen Ross" limbo script. I am just doubting that these graphs were generated without the express intent to mislead.
You make some good points here, but your anger at the banks for their complaints over compensation missed an important point. Banks compete with other financial-industry firms for talent. Capping compensation is another way of telling a company: you think you're in a mess now? Wait until everyone who is actually talented has left to go work at unregulated hedge funds, and *then* see how you fare.
People who work with a lot of money for a living tend to get paid a lot of money. In some ways, this is insurance for the employer, because (at least in theory) it gives those people a pretty strong incentive to try hard to do the right thing with the company's money, even if trying doesn't guarantee success.
I think everyone is aware of the fact that financial folks tend to be well compensated now. This means that anyone who strongly desires that income is free to pursue a career in finance, quantitative finance, or related fields, just as they're free to pursue degrees in computer science to get jobs at Google, free to pursue an acting career in Hollywood, free to try to become a sports star or a rock star.
I don't have any problem with the government limiting payscales in return for bailouts. But I also don't have any problem with an employer, in general, getting to decide on the appropriate compensation for their employees and executives.