Insights about the whys and whats of our mess from former IMF chief economist Raghuram Rajan. Snippets here, do read the whole thing.

Easy Credit, Hard Landing

…Rajan offers a bold and convincing diagnosis of how a screw-up in the regulation of poor people’s mortgages in one country has brought the world to the brink of economic disaster, where it teeters still. He goes beyond the proximate causes of the problem—the subprimes and derivatives and trade imbalances and the like. The ultimate cause, Rajan convincingly argues, is a widening of economic inequality that American politicians of both parties found politically intolerable, and chose to fix by turning the credit market into an under-the-table welfare state…

…This is an account of what ails us that is radically at odds with the familiar tale of greedy bankers in $5,000 suits. “Almost every financial crisis has political roots,” Rajan writes. The credit market—at least as regards housing—was distorted by government policy, not by a sudden and mysterious escalation in “greed.” The trends that shook the world economy came out of Fannie Mae and Freddie Mac, out of the Federal Housing Administration, and out of their “regulator,” the U.S. Department of Housing and Urban Development.

By 2000, HUD required that low-income loans make up 50 percent of Fannie and Freddie’s portfolios. Out of “compassionate conservatism,” perhaps, the Bush administration raised that mandate to 56 percent. Rajan cites Fannie Mae’s former chief credit officer, Edward Pinto, who notes that, by 2008, “the FHA and various other government programs were exposed to about $2.7 trillion in subprime and Alt-A loans, approximately 59 percent of total loans to these categories.” Peter Wallison of the American Enterprise Institute found that government-mandated loans accounted for two-thirds of “junk mortgages.”

Another way of looking at this problem is provided in a study done by Rajan’s Chicago colleagues Atif Mian and Amir Sufi. They found that, if you look at the period between 2002 and 2005, the number of mortgages obtained in a given ZIP code “is negatively correlated with household income growth.” In other words, lenders preferred un-creditworthy borrowers to creditworthy borrowers. In a market governed by “greed” and undistorted by government pressure, such a result would make no sense.

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3 Comments | Leave a comment
  1. morecowbell says:

    Excellent article. Thanks Tammy, it’s spot on.

  2. Maynard says:

    Yes, that’s an important article. The problem is, although the underlying issues are straightforward enough, a big majority of the electorate will simply never understand this stuff. That’s how we got into this mess: It’s politically impossible to do the right thing (because you’ll be painted as an uncaring bigot and worse) and politically advantageous to do the wrong thing (because you’re “helping” people). What can we possibly do about that? I appreciated what Ross Perot did, coming before the public with trend charts and the like. I’m not saying Perot had all the answers, but at least he tried to bring us closer to an adult discussion with numbers, instead of the usual touchy-feely voodoo (to make a point, Perot actually used a real voodoo wand as a pointer). Perot helped changed the focus of the discussion for a short time, even though he didn’t prevail as a candidate. It would be nice if someone could do something like that again. Dammit, some of those politicians (even Democrats) know they’re leading us off the cliff, but they do it anyway. I think, for example, Bill Clinton is smart enough to know that Obama is murdering us, and yet he still carries Obama’s water. What’s wrong with everyone?

    • ladykrystyna says:

      Maynard, I agree with you. And I’m one of those people where it’s hard to understand the real nitty-gritty of economics and really need a guide like “The Economy for Dummies” in order to help me understand it.

      I’m looking forward to reading the article and hoping to learn more about the problem than I already do, which is sketchy. I especially want to learn more because Lefties I run into on message boards keep blathering about deregulation and derivatives, but my understanding is that the heart of it is the Community Reinvestment Act and sub-prime loans.

      Anyway, I do agree with your frustration – these Dems have to know the truth. I mean, the choice is – they are really really dumb, like dumber than Forrest Gump, or they know exactly what they are doing and they WANT it to happen – destroy the economy, destroy the Republic and put a Statist government in its place to take over the insuing chaos.

      Or maybe I’ve been listening to Glenn Beck for too long! ;-D 😀

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