Posted by
Andrews on Friday, October 10, 2008 6:45:12 PM
Earlier I wrote about those trying to defend the Democrats from accusations that lax lending policies they sponsored were at the root of today's financial problems, and I even briefly mentioned the argument they seem to be favoring. This argument is that some of the banks which are failing didn't give subprime loans, but were catering to high end customers.
That is simply nonsense. Or, at least, shows a lack of understanding about the current crisis.
Part of the reason the current crisis got so bad was the housing bubble. In fact, it helped fuel that housing bubble. Low interest rates, monetary inflation, liberal policies restricting building in many urban areas, and the bidding up of houses due to lax lending, all worked together to puff up the housing markets to absurd levels, causing 100%, even 200% increases in prices in some markets in the past decade.
And that inflation helped keep the subprime crisis from being noticed.So long as a subprime borrower stayed in a house for 6 months or so, it was a win-win. He got a house for six months, and, thanks to appreciation, even with little money down, the foreclosure paid off the loan. Because houses were appreciating so rapidly, even with almost no money down, there was simply no way to lose. A borrower who found himself unable to repay could walk away, and the lender still broke even, or better. It was the same phenomenon which drove the ARM craze. If interest rates fell, ARM borrowers won, if they started to rise, thanks to increased paper equity, it was simple to refinance into a fixed rate. It was a no-risk ARM.
But when interest rates started to rise, and housing prices started to stabilize, all those ARM borrowers suddenly needed to refinance, and found they couldn't. And thus the housing bubble began to burst. With almost no money invested in the houses, a lot of borrowers began to simply walk away, as it cost them almost nothing, where staying in the house would end up eventually costing them when a foreclosure failed to cover the money owed. A glut of houses accelerated falling prices, while failing loans tightened credit more.
And in this environment, the collapse of the subprime house of cards was inevitable. They were the least tenable of the untenable loans. The other at least had some income behind them, or houses with some inherent value. Most subprimes had houses which had been absurdly inflated and borrowers with no assets or income. It was inevitable that they would crash. In fact, had it not been for the housing bubble, they would have crashed back int he Clinton administration, instead of waiting until now.
However, I am getting away from my point.
My point is simple. Of course other banks crashed. There was a general drop in house values accompanied by a small rise in interest. Given the absurdly optimistic market surrounding housing, it was inevitable that other lenders would also go under. That does nto prove anything.
If you go back an read through my timeline, you will note that not only the subprime crisis, but all of the other crises surrounding the housing bubble and lenders related to that bubble were the fault of a combination of bad government policies. So, even if they could somehow show it was not the lax policies of the Clintons and subsequent Democrats which brought about the crisis, it still would not be hard to lay the entire fiasco at the government's door.
Which makes their entire defense a bit absurd.
POSTSCRIPT
For those interested, my essays on the early housing and subrpime "crisis" before this whole fiasco came to a head (mid June) can be read here:
Inventing a Crisis
Inventing a Crisis II
Inventing a Crisis III
You can also read my thoughts on the bailout in the following essays:
A Final Comment on the Futility of a Bailout
Clarification of My Opposition to the Bailout
Non Sequitur
Still Makes No Sense
A Bailout Proposal
Laughable Talk About the Bailout
The Excuse Making Begins
More Bad Excuses
More Bad Excuses II
Well, It Was Bound to Happen...
Repeating the Errors of FDR
There are more essays, but I think this is a good sample of them.