The Fall of the Wall

I must admit right up front that I am anything but an economist. My fiscal sensibility was formed by the heritage of seven generations of Pennsylvania Mennonite farmers. We live within our means. We don’t buy what we can’t pay for. We don’t have debt and we don’t gamble with our money — either in fabulous Las Vegas or fabulous Wall Street. Not only does this seem like common sense, it also seems simply honest and moral.
As our world economy faces meltdown, it is sobering to remember that for centuries the Catholic Church taught that loaning money for interest was intrinsically immoral. Money lending was considered a kind of incest: Nothing positive was being created, nor was a positive service being rendered for proper gain. Instead, money (which is only a necessary fiction in any case) was being used to breed money.
The present troubles in the world markets illustrate this very problem. Proper restrictions and regulations were lifted and, in a mind-staggering glut of greed and speculation, money was loaned on money that was borrowed on securities that were based on other monies that were insured by companies that had borrowed more money that only existed as computer calculations — and if that explanation is not exactly correct, neither is the reality any simpler.
To be plain, gamblers played with money that wasn’t theirs and that didn’t represent real assets — except those owned by someone somewhere faraway or some huge financial institution, often on the other side of the planet. They played and they lost, and now everybody has to pay and everybody will lose. The people I talk to who do know far more than I do about financial markets say that the big government bailout is only a stalling tactic that has little more than a cosmetic effect. Think of it like putting on a Band-Aid to treat cancer. The crisis will continue. There will be an economic collapse, and with this collapse will be a collapse of the American system as we know it.
In the midst of all this, it is apposite to remember that Pope John Paul II prophesied just such a collapse. He said that there were two materialistic, atheistic, economic and social systems: communism and secular capitalism. Both were doomed because both were built on a system without God, and therefore without morality, without respect for human rights, without concern for others, and without real concern for either individual human beings or society as a whole.
John Paul II said that both systems would eventually collapse because it was impossible — given their philosophical presuppositions — to stand. Pope Benedict XVI has reasserted the same truth by saying that the whole monetary system is a house built on sand. Such a house cannot stand, and the fall of a splendidly, luxurious house built on sand is even more spectacular and tragic to behold.
While John Paul II is well known for his criticism of Marxism, and indeed, his part in the downfall of the Soviet system, it is easy to overlook his criticisms of unrestrained capitalism. In the encyclical Sollicitudo Rei Socialis, the pontiff stated: “The Church’s social doctrine adopts a critical attitude towards both liberal capitalism and Marxist collectivism.” The “all-consuming desire for profit and the thirst for power at any price with the intention of imposing one’s will upon others, which are opposed to the will of God and the good of neighbor.”
John Paul II was writing in the great Catholic social tradition dating back to Rerum Novarum, which constantly stood up for the rights of individuals against economic systems and governments that would trample them. In 1981’s Laborem Exercens,John Paul II defended the dignity of the worker as opposed to the overwhelming system, and in his 1991 encyclical Centesimus Annus he wrote critically about unrestrained capitalism:
Here we find a new limit on the market: there are collective and qualitative needs which cannot be satisfied by market mechanisms. There are important human needs which escape its logic. There are goods which by their very nature cannot and must not be bought or sold . . . . Certainly the mechanisms of the market offer secure advantages . . . but these mechanisms carry the risk of an “idolatry” of the market, an idolatry which ignores the existence of goods which by their nature are not and cannot be mere commodities.
John Paul’s criticisms of unrestrained capitalism and the domination of economic forces by the powerful countries of the Northern Hemisphere are present in his encyclicals, his speeches, homilies, and apostolic visits throughout his pontificate. His thought was not simply a matter of telling the rich to give more money to the poor. Instead, a consideration for the individual, the poor, the disenfranchised, and the disadvantaged is itself a simple cure for the excesses of capitalism. It’s simple: If the rich had paid more compassionate attention to the poor they would not have been so greedy, and therefore not have brought on the wanton collapse of their own system.
John Paul II said that communism collapsed on its own because of its own internal foundational weaknesses. If we are witnessing the collapse of modern capitalism, then not only will John Paul II prove to be a prophet, but his analysis for the reason for the collapse of communism will match perfectly the collapse of unrestrained capitalism: “It collapsed on it’s own because of its own internal weaknesses.”
Last week the billionaire Warren Buffet, investing heavily to bail out one of the Wall Street banks, said, “This is like an economic Pearl Harbor.” No, it isn’t. It’s like an economic fall of the Berlin Wall. When that wall fell, communism collapsed. The irony of the coincidence is bitter: The collapse of unrestrained capitalism will be remembered not by the fall of a wall, but the fall of Wall Street.

Rev. Dwight Longenecker

By

Rev. Dwight Longenecker is the parish priest of Our Lady of the Rosary parish in Greenville, South Carolina. His latest book is The Romance of Religion published by Thomas Nelson. Check out his website and blog at www.dwightlongenecker.com.

  • Todd

    Well said.

  • Hank

    For anything to be moral, it must be regulated and restricted, otherwise, it is radical (and immoral). Now, maybe Americans will finally “get” that the conservative/Republican ideology of the unregulated and unrestricted free-markets is extremist and was doomed to the failure it has met.

  • Joe H

    Much appreciated and enjoyed, Rev. Longenecker.

    Inevitably we will see here, as on other threads, a series of posters attempting to blame this entire crisis on the government, using the baseless argument that it “forced” lending institutions to make bad loans to people they knew couldn’t pay them back.

    We had the Community Reinvestment Act in place for over 20 years before the sub-prime crisis. Banks were never forced to give bad loans, anyone who tells you otherwise is misleading you. For over 20 years banks were encouraged to loan to minorities looking to buy homes, but this process WAS regulated.

    The real problem was and remains the deregulation of the banking industry, which allowed commercial banks to take our money and invest it in ways that they had been prohibited from doing since the Great Depression. The real problem has never been the poor family looking to buy a home for the first time, but the already wealthy, young, professional or semi-professional couple looking already of means, looking to live above their means to keep up with the Jones, or the speculators, the “flippers”, the Carlton Sheets types and these other hucksters who sent the price of homes skyrocketing.

    Don’t drink the kool-aid! Don’t point the finger at poor people trying to survive! And don’t blame good intentions either, because for the most part they came with regulation and oversight. Blame the philosophy that holds as its fundamental premise that private vices will always become public virtues through the invisible magic of the marketplace. Markets are not intrinsically flawed, but without regulation the intrinsic flaws of human beings bring us chaos, and not the ordered liberty that conservatives of yesteryear and the founding fathers sought.

  • Ann

    Great article.

  • nobody

    First Communism didn’t collapse. The cold war ended.

    Government sponsored corporations Fannie Mae and Freddie Mac represent two of the largest corporate entities in the world.

    Congress had no right to create these institutions—it’s unconstitutional. It’s housing welfare, its unrestrained socialism, liberal/democrat New Deal ideology.

    Uncharitable capitalism can centralize wealth but it doesn’t slowly collapse upon itself like socialism has in this case.

    From there websites:

    “Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America. We do not lend money directly to home buyers. Instead, we work with lenders to make sure they don’t run out of mortgage funds, so more people can achieve the dream of homeownership.”

    “Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. By doing so, we ultimately help homeowners and renters get lower housing costs and better access to home financing.”

    What flavor Kool-Aid would you like Joe H?

  • R.S.Newark

    When the wall fell both sides of the wall were
    (a)effected….after all a wall sepearates equally rather than protects one or the other side.

  • Joe H

    “Nobody”,

    Nothing you posted challenges anything I posted. F&F were one part of this crisis – one existed since the 1930s and the other since the 1970s! There was no sub-prime crisis until the early 2000s. These institutions were responsible for nothing but helping people achieve home ownership for decades.

    The rules were changed in 1999, both with the overturning of Glass-Stegall and yes, Bill Clinton’s rewriting of the rules for F&F starting in 1993. No one held a gun to the head of Bear Sterns, Lehman Brothers, AIG, Washington Mutual, or any of the other banks that have collapsed. No one forced anyone to buy or sell bad loans.

    They got involved in mortgage-backed securities because it was – GASP! – profitable to do so! And that is what people do in chaotic, unregulated markets; they speculate like crazy, drive up prices, reap insane profits, and leave society to clean up the messes that their greed creates. The long term effects are rarely if ever considered in the pursuit of short-term gain. To blame this on some non-existent “socialism” is simply the worst form of denial. This was naked self-interest, the unbridled pursuit of profit.

    For the vast majority of the planet, outside of red-state America, to call a society that has no universal healthcare, few if any nationalized industries, sub-standard public housing, a real unemployment rate of 12%, crumbling infrastructure, and inability to respond to natural disasters, a defeated and demoralized labor movement, no labor party – to take all of that and call it “socialist” is to have a very distorted understanding of what that word means.

    What we have is state capitalism of the worst kind, where profit and gain are private but risk and loss are now socialized. That’s not socialism – thats sociopathy on a governmental scale. IF the taxpayers actually profit from this thing, as has been promised – and I question whether or not that will ever happen – then and only then would it be appropriate to call this some form of socialism.

  • Augustine

    As much as I appreciate your article, there are a couple of corrections that I’d like to make.

    Firstly, the Church did condemn usury for centuries, but in fairness you should’ve mentioned that she hasn’t any longer for centuries too, since Capitalism started to appear in the 12th or 13th century.

    Secondly, the Holy Father did not condemn “unrestrained” Capitalism, but Capitalism devoid of moral values. Your choice of adding “unrestrained” was probably unintentional, but it misrepresents the pope’s point of view, which is not to suggest that regulations are the cure for Capitalism. If so, such a point of view wouldn’t be worth of the Holy Father, for regulations devoid of moral values are at least as bad.

    Good points overall.

  • Clare Krishan

    John Paul II promoted the family as society’s building blog not the means of fiduciary exchange we call cash. Even in the most primitive cultures, capital exists as the means chosen by members of a particular family to increase their subsistence. Even while cavemen hunted woolly mammoths, their clan “developed” enough leisure time by economizing on their efforts expended for subsistence by saving ie storing their quarry as dried jerky on wooden drying racks hung from trees. This accumulation of capital (primitive prehistoric tools) enabled them to have time to develop pigments and express their imaginations on cave walls during periods of recreation, aware of the regenerative creativity of nature they trusted in (and worhsipped in a benighted fashion) the source of all life – God. Culture is how humans who have wealth express themselves!

    Poverty-stricken underdeveloped peoples have rudimentary means, but even they will ration present desires to enable creation of future goods, such as grass mats for sleeping in their mud huts. A centrally-planned economy never materializes in marginal areas of the planet because the subjective creative spirit in a human person is more equipped (with inherent faculties endowed to him by his Creator) to find the means to support life than a collective is to establish an aggregate for distribution since the temption of corruption and greed accumulate in like fashion, rendering the likehood of vice more probable, and trust between persons less probable. This is the concept behind SUBSIDIARITY: it is prudent to reduce the realm in which the Evil One can interfere with right reason). Indeed this principle plagues many charitable relief efforts going into places like Dafur where in peacetimes the people were self-sufficient). True free trade permits markets to become established wherever civilized culture permits it, historically along rivers such as Pope Benedict’s birthplace Marktl am Inn!

    The concept of capital is not tied to money per se, but it is tied to self-renunciation (saving the best woolly mammoth meat to dry into jerky, and eating instead, liver grilled with some garlic and herbs that the tribesfolk found while foraging) and is a good thing! What has occured in the Western market economies is that the means for exchanging capital, the legal tender or money, has been subverted by national chauvinism, where the civil authorities control the means to attain a person’s intended ends. For the moral implications of government interference in the money supply, listen in to the podcast linked to at
    libertyvsleviathan.wordpress.com / 2008/10/09/ fiat-money-and-family-values/ (delete spaces)

    Note “laissez faire” simply means ‘let make’ an description of man’s liberty to create whatever best meets the needs of his intended end, for example “grilled liver” and “mammoth jerky” are good means to keep family members fed yearlong from one carcass killed. When used as an epithet it is very misleading, causing us to lose track of the real cause of the errors in our economic affairs with others: temptations to dishonesty. This raw lack of charity can be dangerous, and I encourage us all to avoid “labelling” others ideas, until we understand the intentions of those persons as expressions of their moral values. Socialism is not per se evil (monasticism was an early version) only when it is coerced!

  • R.C.

    It’s true that lending money at excessive interest is the sin of usury. And borrowing money out of proportion to one’s assets and income, merely in order to acquire more stuff that one’s own grandparents could have never imagined owning, is a worse sin: The sin of stupid self-enslavement.

    So then: How best to prevent that?

    Proposal:

    When a purchase is made with credit, the portion of the purchase which is not made with credit (if any) is the initial “equity.” As payments are made, equity increases.

    (1.) Let us tax revenue from made loan payments, prior to any taxes on the lender’s profits.
    (2.) Let the tax assessed on the profit be calculated as follows: P * R * ((A-E)/A)

    …where P is the Payment Amount, R is the interest rate of the loan (expressed as a number between 0 and 1), E is the equity the owner already has in the item purchased on credit, and A is the original loan amount.

    If a home-buyer purchases a $200,000 house with $20,000 down plus a $180,000 loan at 6%, the math would work out this way:

    P * .06 * ((180,000-20,000)/180,000))

    which works out to…

    P * 0.06 * .8889

    …which is to say, a tax of about 5.3% on each payment the lender receives until the homeowner’s equity increases enough to change the numbers. This eats into the profits the lender makes on lending.

    However, on a more conservative loan at a lower rate (say, $100,000 down on a $200,000 loan at 5%), the math works out differently:

    P * 0.05 * ((200,000-100,000)/200,000)

    is…

    P * 0.05 * 0.5

    …which is a tax paid by the lender of only 2.5% of each loan payment (until equity increases).

    And finally, if a person puts down only $5,000 on the same loan, and the rate is 10%, the numbers would work out as:

    P * 0.10 * ((200,000-5,000)/200,000)

    or…

    P * 0.10 * 0.975

    …which is a 9.75% tax paid by the lender on initial loan payments, and puts a significant dent in his profits, thereby discouraging making such loans.

    Intended Results:

    The intent is to discourage both excessive borrowing and high-rate lending by making them more immediately expensive than they would naturally be.

    I think a policy like that described above would be better than one which merely says “you’re not allowed to lend at rates above 10%”; it changes behavior smoothly instead of at an arbitrary cut-off point. And it creates little or no disincentive for the kind of safe use of debt our grandparents saw fifty years ago, while creating such a disincentive for unwise debt and predatory lending that they’d be unprofitable, and therefore probably nonexistent.

    Thoughts, anyone?

  • R.C.

    Joe:

    The C.R.A. was absolutely a large part of the problem here; when Democrat-leaning Obama-supporting economists and bankers openly admit as much, it’s time to stop denying it.

    It wasn’t as bad when first enacted under Carter, but it was strengthened at the insistence of Clinton and congressional Democrats in the 90’s and that was when it got particularly bad by threatening lenders with the loss of business if they didn’t make loans to folks who were bad loan risks.

    So, yes, it was lefty economic tinkering that caused this…in addition to the greed of acquisitive individuals buying stuff on credit…in addition to the mark-to-market mayhem of, what was the name of the law? Sarbanes-Oxley, I think it was?

    But don’t worry about it: The economic illiteracy of the government-schooled American people will almost certainly cause them to place the blame on George W. Bush, and by extension Republicans, and by further extension John McCain. You’re pretty well guaranteed your Obama presidency (courtesy of one heckuva Black Swan event!) at this point. Why spend energy trying to prevent a useful criticism of lefty economics, when the important thing now is to make sure Obama doesn’t keep following such policies after he takes office with a filibuster-proof Congress to enact his every whim?

    ‘Cause if he does enact the kind of policies for which he has previously shown affection, we’re not talking about Recession, but about Depression, and maybe me unable to keep my kids fed.

    About the best thing that could happen, in the event of an Obama presidency, would be for him to feel so hemmed-in by events as to spend all his energy trying to get businesses hiring and expanding again. Less time, one hopes, for nominating pro-choice judges and such.

  • Joe H

    RC,

    You know I love ya, but I do tire of the insinuation that anyone who disagrees with you on economics is just venting populist anger without “really understanding” economics. You’ve made this claim a couple of times, while at the same time being unable to make any sort of decisive empirical case that would put “lefty economics” (mine or otherwise) to bed once and for all. It is because no such case exists, as economists are divided on many issues.

    I have to wonder if you bothered reading my first post. When you write,

    “It wasn’t as bad when first enacted under Carter, but it was strengthened at the insistence of Clinton and congressional Democrats in the 90’s and that was when it got particularly bad…”

    Did I not acknowledge the role played by Clinton in the 90’s? You yourself confirm exactly what I said before:

    “We had the Community Reinvestment Act in place for over 20 years before the sub-prime crisis. Banks were never forced to give bad loans, anyone who tells you otherwise is misleading you. For over 20 years banks were encouraged to loan to minorities looking to buy homes, but this process WAS regulated. The rules were changed in 1999, both with the overturning of Glass-Stegall and yes, Bill Clinton’s rewriting of the rules for F&F starting in 1993.”

    So in any event, “lefty economic tinkering” worked pretty well, or at the very least, caused no harm, from 1977 to 1999. It was arguably much needed since minorities and particularly black people were systematically discriminated against.

    I think any able scientist would look for some other causes and influences of the sub-prime crisis besides a 20 year old program that had yet to do any harm. There were many more banks and lending institutions that had nothing to do with CRA, that weren’t GSEs, that got involved in mortgage backed securities and speculation on the housing market and made billions in profit. Glass-Stegall prevented them from doing it; Gramm-Leach-Blilely got them back into it. The philosophy of trickle-down and laissez-faire won out over the sensible banking regulations established in the 1930s to prevent exactly this sort of thing. Focusing everything on F&F or the CRA is like investigating a murder and checking nothing but the murder weapon – no finger prints, no DNA, no witnesses, no motive, no forensics, no autopsy, nothing.

    As for the American people, they would do well to blame the philosophy of Bush and the Republican Party, if not the specific policies of the Bush administration. You don’t need to go to a government school to understand that this philosophy is at the heart of the crisis.

    I had 13 years of private Catholic school though, and 7 years of college resulting in three diplomas in the social sciences, so does my opinion count a little more?

  • R.C.

    Joe:

    You’re right, you acknowledged the Clinton role in amplifying C.R.A.

    My emphasis of it was to counteract the impression I got from your post. It seemed to me you were saying that the Carter-era version did no harm and maybe some good, and that the Clinton-era changes caused it to, at worst, only minor harm.

    Which, if that’s what you were saying, is false. Lenders collapsed over so-called toxic assets; the toxic assets were bundled and securitized versions of myriad bad mortgages; these in turn would have never been made by a bank under normal circumstances because the bank would fear defaults by the borrowers…but they were forced (under C.R.A.) to make those loans in order to continue making the less-risky loans they preferred to make.

    Remove the bad loans, and the securitized debt instruments have (a.) a greater value and (b.) a more easily knowable value. For of course the “toxic” nature of these assets stems not so much from the fact that they contain a lot of mortgages in default, as from the fact that no-one knows what they’re worth. Consequently no-one will make an offer to purchase them. Consequently those currently holding the assets are required (by the mark-to-market rule) to value them at zero…even though not all the mortgages will go into default, and therefore the assets actually have some unknown but positive value.

    Now when a lot of assets (formerly rated AAA) you hold are suddenly valued at zero, and you’re a bank, trouble results. Banks are required to have “cash reserves” and an asset ratio of more than a certain percentage, just to do business. When a lot of your assets suddenly drop to zero, why, your ratio suddenly drops below the legal threshold, and you’re out of business and the likely target of a run.

    Thus do the results of an unexpectedly large number of bad mortgages multiply to a bank-killing level. What would have been an acceptable amount of leverage if one’s assets had value becomes a lunatic risk of collapse when one’s assets have none.

    Take away the bad mortgages, and none of this happens. And the bad mortgages happened because banks made loans they’d never-in-your-life have normally made, were it not for the effectiveness of ACORN at the local level and CRA at the federal level forcing them to do so, with Democrat Fannie Mae and Freddie Mac executives receiving bonuses as the percentage of subprime mortgages rises — and Democrat Barney Frank twice successfully blocking Republican-backed efforts to reform those entities, on behalf of his lover Herb Moses, then in charge of (what else?) subprime mortgages at (where else?) Fannie Mae.

    Now that’s a direct chain of causality. It’s entirely explained how the policy promoted the bad loans, which led to more bad loans, which led to toxic assets, which led to the credit collapse. It’s a known process.

    In its place, it seems to me you wish to substitute the notion that’s rather more vague and inexplicable, in the hopes of showing that the crisis wasn’t caused by tinkering with banks’ lending practices for “social justice” reasons.

    I gather you admit a lot of loans were made to folks who weren’t likely to repay them, but I don’t see how you can explain that happening apart from C.R.A. You could say, “Well, the banks were greedy…and that’s the fault of Republicans,” but that wouldn’t make any sense. (Why, indeed, would greed cause a bank to intentionally make an investment with high risk and low reward?!)

    …continued…

  • R.C.

    …continued…

    Re: the “government school education” thing.

    Well, for starters, I wasn’t referring to you. Though I disagree with you, you’re clearly neither incapable of structured thought nor utterly uninterested in knowing the details of economic life in the U.S. Five average paragraphs from a posting of yours are sufficient to convince the reader not only of that, but also that you probably attended a private (or home) school — or did quite well in an unusually good public school — and probably have at least one additional degree.

    But your ability to analyze an argument, and your interest in applying that skill to public issues and economic topics, are not, sadly, the norm. Many folks reason as follows:

    – The economy is falling apart, or so they hear, though they may not know in what way or why;
    – A Republican has been the president since 2001;
    – Therefore the economy is falling apart due to bad policies implemented by the Republican president, and which are such intrinsically Republican policies that any future Republican administration would do the same thing, with the same result;
    – Republican equals Conservative;
    – Therefore anyone self-identifying as “conservative” or wishing the Republican president had been more Conservative is thereby wishing for more intense versions of the same policies, which would produce more intense versions of the same bad results;
    – And, by-the-by, also hates poor people.

    …and will vote accordingly. Now in my view they’ll thereby arrive at the wrong conclusion and vote incorrectly. In your view, I suppose, they’ll thereby arrive by sheerest accident at the correct conclusion and vote correctly. But I think you’ll agree that such reasoning is faulty in myriad ways and yet, sadly, it’s the kind of shoddy thinking that informs many votes in the U.S.

    Fair enough?

    — R.C.

    P.S. I also should probably not have brought that problem up under the heading of “results of government education.” For of course those results aren’t inevitable, and many perfectly good teachers continue to labor against great odds under that education-impeding system, and some students make an effort to learn even when it’s not easy, and as a result some brilliant people emerge from that system.

  • R.C.

    Regarding my phrase “a useful criticism of lefty economics.”

    I think charity should be charity and be called charity. I think business matters should be “just business.” There should be a strict firewall between the two.

    When you’re a recipient of money you didn’t earn, you ought to know it, and you ought to know that it came from someone else’s pocket and was voluntarily given, by them, out of their own stash, to you (even if you don’t know their identity).

    Now what I mean when I use the term “lefty economics” is motivated by a (laudable) desire to help those who’re in the bottom 1/5th of income earners. (I don’t say “the poor” because that suggests a more objective, fixed threshold which far fewer Americans could be said to meet.)

    Anyway, “lefty economics” intends to help those with less. Then again, this is also one of the primary intentions of “righty economics.” So it’s not really a distinguishing mark.

    The distinguishing mark is methodology, and when it comes to methods, “lefty economics” consistently exhibits several hallmarks not seen in “righty economics.” Among them are these three:

    (1.) To make almsgiving compulsory;
    (2.) To hide the source of alms behind the mask of state-run programs so that the recipient doesn’t know that he owes what he has to a benefactor who worked to produce the wealth he received, but rather from government — and especially from particular politicians who uses the gratitude to buy votes at taxpayer expense; and,
    (3.) Disregard for the way the incentives created by government regulation and taxation impact the decisions made by individuals;

    Now the C.R.A. demonstrates all three.

    (1.) It converts lenders into almsgivers by requiring them to make loans to persons who’ll not likely repay them;
    (2.) It disguises that (compulsory) almsgiving behind GSE’s like Fannie Mae, so that the persons receiving the loans aren’t told, “You know, you really don’t qualify for this; the only reason you’re getting it is because the lender’s arm is being twisted into doing something his brain is telling him not to do.”
    (3.) It disregards the way that this (a.) drives up home prices, causing a bubble which causes homebuyers, in a vicious circle, to rely even more on credit to be able to afford a house; (b.) causes mortgage-backed securities to be dangerous for banks to hold, incentivizing their sale to other entities who’re less competent to assign them value; (c.) promotes consumerism and living beyond one’s means among the populace…et cetera, et alia, ad infinitum, ad nauseam. Ad fragosus de venalicium de facultas. (And the rest, and the others, to infinity, ’til we vomit. ‘Til the stock market crashes.)

    The best plan, in my view, is to let the government be an impartial referee which is not only aware of incentives but, in matters outside criminal law and civil liability, uses incentives alone to influence behaviors…and incentivizes charity without making it compulsory or hidden.

    This approach is wisest for the small-business owner, also. Don’t hire a man because he needs money. Hire him because he can do the job. If he can’t, don’t hire him, and give him the money anonymously. For he should neither be left to starve, nor led into a fantasy world insulated from the reality of his insufficiency.

  • R.C.

    Joe:

    There are two other things in your original post to which I wish to reply:

    The real problem was and remains the deregulation of the banking industry, which allowed commercial banks to take our money and invest it in ways that they had been prohibited from doing since the Great Depression.

    Really? Name the regulation.

    The regulation which affected this most was the mark-to-market rule; and its impact wasn’t to allow unusual kinds of investments but to require banks to declare a zero asset value for Mortgage-Backed Securities when the housing downturn made them unsaleable.

    Apart from that? The practice of securitizing assets has been around since the early 70’s. If the Carter-era C.R.A. is off the hook for time-frame reasons, then so are securitized assets.

    Or do you mean Mortgage-Backed Securities? …which were invented with the advent of FNMA in the 30’s and FHLMC in the 70’s?

    No, no. Here’s the pertinent diagram:
    http://tinyurl.com/3wxqog

    The real problem has never been the poor family looking to buy a home for the first time, but the already wealthy, young, professional or semi-professional couple looking already of means, looking to live above their means to keep up with the Jones, or the speculators, the “flippers”, the Carlton Sheets types and these other hucksters who sent the price of homes skyrocketing.

    Well it’s true that the poor folks aren’t the only ones defaulting; there are flippers defaulting, too: But there are far more of the former than the latter. The problem is “real” either way, but the quantity of the one outweighs the quantity of the other. (It’s no coincidence that FNMA and FHLMC collapsed rather early in this game, and other lenders didn’t get hit until later. Fannie and Freddie had the most exposure to the defaults of subprime mortgages among low-income earners; the other lenders are getting hit by aftershocks.)

    In fact the quantity of defaults among low-income folks is drastically understated by FNMA and FHLMC, for reasons explained in this article:
    http://tinyurl.com/4tbzmt

    And I don’t know how you justify characterizing the poor family with one tone-of-voice, and the middle-income “sweat equity” flippers with another: Either one can buy more home than they can afford, and either one risks default when the value drops. Is your argument that poor people aren’t smart enough to know better, and thus can’t be credited with the moral failure of buying too much home, but the middle-class are smarter, and should be held culpable?

    But whether it’s a poor person or a middle-class person buying more home than they can afford, the same question remain: Why would a bank make a bad loan, knowing it’s likely to lose its shirt when the loan goes bad?

    “Greed” isn’t a plausible answer…and in fact lenders were notoriously scrupulous throughout the history of lending (which, speaking only somewhat facetiously, means for the last 5,000 years, give or take!) about to whom they loaned money. Yet in recent years they were loaning to folks who couldn’t afford a house and were bad debt risks? Why?

    Because they’d be forced out of business, or denied the ability to do business at all in some neighborhoods, if they didn’t kowtow to the ACORN types. It’s not greed: No one gets rich making loans to folks who won’t repay. It’s fear.

  • R.C.

    Joe:

    I just realized that when you referred to “regulations,” previously, you were thinking of Gramm-Leach-Bliley.

    The funny thing is, I agree with you: But not, I think, in the way you expect! (I was confused why you’d bring it up; it seems to support my thesis better than your own.)

    For the Gramm-Leach-Bliley act contained one element which did more damage than all the others: It was the bill that really put the enforcement “teeth” into the C.R.A.!

    From Wikipedia:

    Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a “less than satisfactory [sic] rating at its most recent CRA exam”, essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the Community Reinvestment Act (CRA). This was an issue of hot contention, and the Clinton Administration stressed that it “would veto any legislation that would scale back minority-lending requirements.”

    Not really a very “Republican” amendment, is it? …since Clinton threatened to veto the otherwise largely Republican supported bill if it wasn’t added?

    Anyhow, I’ve just piled up reams of postings without knowing whether you have time or interest in replying to any of them! So I’ll stop now.

  • Joe H

    It’s good to see we can still talk about these issues and have some fun at the same time.

    You state,

    “…but they [lending institutions] were forced (under C.R.A.) to make those loans in order to continue making the less-risky loans they preferred to make.”

    This is what is false. No one was ever forced to make a bad or “toxic” loan. All of the evidence I have seen, and there is plenty, and I will be happy to share it with you, suggests that loans made under the CRA provisions were not toxic, were not bad, did not end up in foreclosure. Lending institutions participating in CRA was subject to strict government regulations, at least until the previous decade.

    The fact is that most sub-prime loans were made by lending institutions that had absolutely nothing to do with CRA, and there’s no way to squirm out of that reality. What did Bear Sterns or Lehman Brothers or Washington Mutual have to do with CRA?

    I don’t dispute most of what you say, I dispute your attribution of causality to the standard gallery of “leftist culprits” – CRA, Fannie and Freddie, Congressional Democrats. At best they represent one part of the cause of this crisis, and nowhere near the largest part.

    You write,

    “In its place, it seems to me you wish to substitute the notion that’s rather more vague and inexplicable, in the hopes of showing that the crisis wasn’t caused by tinkering with banks’ lending practices for “social justice” reasons.”

    I did no such thing, and you have to know that this is quite unfair given what I actually have said. I think the catalyst for this crisis was the deregulation of the banks by Phil Gramm and his allies. If you read the document put out by Congressional Research Service as the GLB act was being deliberated, the arguments FOR preserving Glass-Stegall clearly warn that overturning it would lead to exactly the problems we are seeing right now, including massive government bailouts.

    There is nothing vague or inexplicable about it. The CRS warned that:

    “Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

    Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses.”

    But there was money to be made NOW, so who cares about “could be”? There is also the fact – I repeat, once again – that a lot of these bad loans were made to people of means who wanted to live lavishly, not just poor people who wanted to own a home instead of dealing with rent and landlords. There were plenty of foreclosures in some of the wealthiest enclaves in America.

    More to come

  • Joe H

    “But I think you’ll agree that such reasoning is faulty in myriad ways and yet, sadly, it’s the kind of shoddy thinking that informs many votes in the U.S.

    Fair enough?”

    It is faulty if it isn’t based in an accurate perception of reality, I agree. But we live in a democracy, and if we lefty types had to deal with 8 years of Bush because of one kind of faulty reasoning of the majority, then you’ll have to do with 4 or 8 years of Obama for faulty reasoning of a different kind. Whoever gets elected will ultimately be lifted upon a wave of faulty reasoning. It is moot.

    Back to the CRA:

    “(1.) It converts lenders into almsgivers by requiring them to make loans to persons who’ll not likely repay them;”

    No it doesn’t. Where is the evidence? Everything I have read about the CRA explictly states that lending institutions participating in the program were subject to regulation. According to one study only “1 in 4” sub-prime loans were made by CRA regulated institutions. Studies have also shown that CRA regulated institutions were less likely to make sub-prime loans and less likely to sell sub-prime loans.

    The assumption here – the classist and yes, sometimes racist assumption (I’m not accusing you of anything here) – is that minorities and poor folks always lack the ability to pay back loans. But these people work, too, many have jobs and steady sources of income. CRA loans were made to people who could demonstrate an ability to pay them back.

    The real abuses occurred, unsurprisingly to myself, with those lending institutions that had little if any government oversight, little if any accountability or transparency. Banks participating in CRA simply couldn’t do anything they wanted and get away with it, at least until the restrictions were relaxed by Clinton AND Bush.

    There was very little “arm twisting” going on – there was a whole lot of predatory lending and selling “upstream”. Who cares if you make a bad loan if you can repackage it and sell it to someone else? No one had to twist anyone’s arm. The executives of banks that had nothing to do with CRA, who were reaping billions in profits, certainly weren’t complaining.

    You say I’m trying to cover for a failed “social justice” philosophy; I say you’re trying to cover for a system that encourages, but cannot deal with the consequences of, the pursuit of short term profit at the expense of long term health.

    more to come

  • Joe H

    You write,

    “Well it’s true that the poor folks aren’t the only ones defaulting; there are flippers defaulting, too: But there are far more of the former than the latter.”

    Really? How exactly do you know that? For the last decade there has been a frenzy of speculation on the housing market, flipping became a full-time job for a lot of people.

    When it was poor people defaulting, my bet is that 9 times out of 10 (or at least 3 times out of 4!) it was because they had predatory loans pushed on them by institutions that WEREN’T participating in CRA, that WEREN’T subject to any sort of regulation or oversight. The evidence I’ve seen seems to bear that out. Ironically the institution conservatives condemn may have been the institution actually holding this crisis at bay, until deregulation came along.

    “Is your argument that poor people aren’t smart enough to know better, and thus can’t be credited with the moral failure of buying too much home, but the middle-class are smarter, and should be held culpable?”

    I don’t think the vast majority of Americans know better, read the fine print, etc. I have seen many stories in the news of poor people accepting loans on conditions and terms that they were entirely unaware of. Is there moral culpability? Yes. But they call it predatory lending for a reason – they are selling a bad product, a toxic product, and representing it as something else. Poor people are having their hopes raised of finally getting out from under the boot of landlordism (in some states what renters have to endure is absolutely appalling).

    The only reason I would put more culpability on the middle class flippers is that they have no concrete reason to engage in this activity – they do it because they can, because they want more and they need to have more. Short term gain, regardless of the long term costs.

    Above all I blame the system that encourages this behavior, makes it both morally and legally acceptable. People who encourage others to sin and vice are themselves culpable.

    “Greed” isn’t a plausible answer…and in fact lenders were notoriously scrupulous throughout the history of lending (which, speaking only somewhat facetiously, means for the last 5,000 years, give or take!) about to whom they loaned money. Yet in recent years they were loaning to folks who couldn’t afford a house and were bad debt risks? Why?

    There was a chain of greed here, though – bad loans were made because they could be repackaged and sold, hence mortgaged back securities. It was profitable to do so. Hasn’t this been the engine of the economy for the last decade? Where have you been? 5,000 years ago they didn’t have securities, they didn’t have credit default swaps. You and I agree that lending ought to be done responsibly, but whereas you seem to think that CRA forced people to make bad loans, I see that a) CRA was regulated and not responsible for the sub-prime mess, and b) there were great profits to be made from repackaging and selling debt.

    Finally on the Clinton addition to GLBA: I don’t see how that has anything to do with the crisis, until you prove that mandating banks to achieve a certain CRA rating automatically = forcing banks to make bad loans. Again the assumption here is that loans to minorities and poor people are always risky, that a loan made to them is simply money lost; again the assumption is that CRA participating banks had no guidelines or anything in their lending practices, other than “if they’re poor, give them what they want.” This is simply not the reality.

  • nobody

    Joe H,

    Name names.

    I can’t think of one fiscal conservative democrat.

    Moral conservative democrats are like black sheep.

    Liberal Republicans are aplenty.

    Liberals own:

    Laissez faire morality…

    Big secular government solutions (socialism) to every human vice…

    Liberals own the fiscal welfare crisis we are in now!

  • R.C.

    Nope, we haven’t lost the ability to discuss while having fun!

    (Good thing, too: I need a little fun. I’m having trouble maintaining my “God is in control; don’t worry” attitude, what with the sense that the country, and with it much of the world, is teetering on the edge of a precipice, while the persons empowered to make decisions — and you can include the majority of Americans intending to vote for Obama in that category — are all predisposed toward decisions that’ll tip us over the edge instead of backing us away. Exit stage right, holding a rosary and a photocopy of the 23rd Psalm…)

    Here’s what I observe from your post and mine: We disagree about the basic facts, having heard about those basic facts from different sources. If all the facts you assert are true, and all of mine are false, then your analysis is also true, and mine is false. If all the facts I assert are true, and all of yours are false, then my analysis is also true, and yours is false. (If there’s a mix of factuality and error on both sides, then all bets are off!)

    But our respective analyses do follow logically from the things we each believe to be factual.

    Over the last three weeks I made a concerted effort to learn what the whole crisis was about. Despite that, you reference items which I either (a.) had not even previously heard of, or, (b.) had heard contradictory information about (and therefore came to opposite conclusions).

    Since (on the strength of our previous conversations) I believe you to be arguing in good faith and not just making stuff up (and I assume you think the same of me), my only conclusion is that reporters and essayists, even those belonging to financial news organizations, are contradicting one another even more than usual in their attempts to describe exactly what’s going on.

    It’d be one thing if you and I looked at the same facts and came to different conclusions. What the hey; our philosophies and instincts differ. But we’re looking at contradictory facts, which troubles me.

    And, it’d be one thing if I’d read, say, one opinion piece on the topic, and you’d read another, and we trusted the information derived therefrom, and then found that our received information was contradictory. That’d be par for the course. It’s another thing altogether for me to have read — oh, I don’t know, I wasn’t keeping count, but I’m guessing forty or fifty items maybe — on the topic, from all kinds of sources, and still have you coming to me with a slew of things that make me say, “Huh? That’s not right. At least, it’s not what I’ve read….”

    So: I hereby withdraw the certainty with which I asserted all arguments above, pending re-evaluation of what’s actually true about this whole situation. I find it hard to believe that I’ve been entirely mislead by the reading I’ve done…but then I find it hard to believe you have, either. So I’m stepping back and waiting for the fog to clear.

    I do have replies in the meantime to specific assertions in your replies; those will follow in my next post(s).

  • Joe H

    Well, it is a fair enough proposal.

    I would however like to know what it is in particular that you dispute. I would also suggest that, if you haven’t already, you take a look at the ideological slant of your sources. I admit that I have read many left-leaning sources (as well as centrist and right-leaning). The value in these sources is that they highlight facts that other sources do not, so while there is always ideological bias, there are also concrete facts that for whatever reasons don’t make their way into the “other sides” analysis.

    I look forward to your replies.

  • Joe H

    There is absolutely no question that CRA regulated banks were required to uphold “safe and sound” lending practices. This is from the government document, “Community Reinvestment Act and Interstate Deposit Production Regulations”, which you can find in several places online:

    “(d) Safe and sound operations. This part and the CRA do not require a savings association to make loans or investments or to provide services that are inconsistent with safe and sound operations. To the contrary, the OTS anticipates savings associations can meet the standards of this part with safe and sound loans, investments, and services on which the savings associations expect to make a profit. Savings associations are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals, only if consistent with safe and sound operations.”

    We are entitled to our own opinions, but not our own facts.

  • R.C.

    Agreed.

    Here’s a question for you:

    The subprime market started soaring around 1995, becoming a vastly larger proportion of home mortgages than previously. The terms in particular required less money down than ever before.

    At the same time, mortgage brokers ceased to ask applicants to verify their income levels, instead just taking their word for it on the applications.

    So: Riskier loans were being taken out than ever before with less money down and with less confirmation of ability to pay.

    This is not natural business behavior; it’s not what would normally occur in a capitalist economy. For however many thousands of years men have lent money to other men, lenders didn’t do this kind of thing. The profit motive certainly doesn’t account for it: If anything, it’s an unprofitable move on its face.

    Yet something convinced those granting the mortgages that it was worth it. In fact, those who weren’t initially convinced started losing business to those who were, and had to match terms just to keep even with the competition.

    If it wasn’t fear of discrimination lawsuits, fear of federal penalties, and fear of the Federal Government prohibiting mergers or business expansion if one’s CRA score wasn’t perfect, then: What was it?

    Because all those fears existed. Roberta Achtenberg at HUD made examples of a few lenders in the 90’s and everyone got the message. By the time CRA was strengthened in GLBA, nobody wanted to risk a lawsuit over redlining.

    When you say, “most subprime mortgages were issued by lenders that had nothing to do with CRA,” what do you mean by that? Do you mean that, though they’d seen what happened to the business plans of lenders that didn’t have a perfect CRA rating, or which got targeted by HUD for lawsuits under the Fair Housing provisions, they felt themselves immune? That they couldn’t be touched, and needn’t bother changing their behavior?

    I think that they did. They couldn’t be any more discrimination-free than they already were: But they could reduce their lending requirements, and keep the government off their backs that way.

    Another factoid I keep reading is that Asian money and European money kept “looking for places to invest,” and decided on American Mortgage-Backed Securities.

    I’m not sure I understand that, entirely. What I grasp thus far goes like this: Rich people — which is usually older people — loan poor people — which is usually young families just starting out — money, hoping to get a return on investment. Europe doesn’t have young people (see re: fertility & population decline) so its old, rich people went to America to invest. Ditto Asia…with the additional proviso that Chinese peasants are poor loan risks, but Americans usually pay back their home loans.

    But that meant too much money chasing too few borrowers. So borrowing terms got way easier as a result. Had interest rates been higher, this Asian money could have shaved off a few points of interest in pursuit of more borrowers. With interest rates already very low, all they could do was expand the number of borrowers they considered viable.

    If all that’s true (I keep seeing it stated different ways in different places, but I know so little about European and Asian currency markets that I’m taking it all with a whole canister of Morton’s Iodized Salt) then maybe this whole SNAFU has a strong element of “perfect storm” randomness to it.

  • Joe H

    RC,

    First, your premise:

    “This is not natural business behavior; it’s not what would normally occur in a capitalist economy. For however many thousands of years men have lent money to other men, lenders didn’t do this kind of thing. The profit motive certainly doesn’t account for it: If anything, it’s an unprofitable move on its face.”

    Au contraire – market bubbles have existed for well over 400 years, at least that I am aware of. Bubbles are a quite normal part of the capitalist economy, and they cannot be ignored or simply blamed on government. This is because speculation is “natural business behavior” which would quite obviously occur with or without government. I don’t subscribe to the extreme version of “rational choice” theory, which has the stones to suggest that market behavior is not only self-interested but market-interested.

    “Markets” do nothing – individual people are agents, and most people for various reasons care little for the long-term health of the economy as long as they can make off like bandits today. As consumers we are no different than children who binge on cookies and ice cream, indifferent to the horrible cramps and indigestion they may later have. Usually a parent has to tell them “no”, because, supposedly, they know better.

    Now I am no fan or supporter of a nanny state (or command economies), but when it comes to complex economic matters which affect the integrity of society, regulations are entirely appropriate. GLBA was an anti-social act that gave the banks a green light to get extremely reckless with their money. It doesn’t all begin with GLBA, of course not, but that was a critical turning point.

    Granted your point is about lending, but in this case it was the loans themselves that were facilitating speculation.

    Moving on,

    “Yet something convinced those granting the mortgages that it was worth it. In fact, those who weren’t initially convinced started losing business to those who were, and had to match terms just to keep even with the competition.

    If it wasn’t fear of discrimination lawsuits, fear of federal penalties, and fear of the Federal Government prohibiting mergers or business expansion if one’s CRA score wasn’t perfect, then: What was it?”

    Are you at all familiar with predatory lending, RC? If not it is a phrase that you need to research, because predatory lending is at the heart of this crisis. Lenders – and I repeat, lenders unaffiliated with CRA or any sort of serious government regulation – would essentially grant loans NOT on the basis of an ability to repay, but on the basis of the value of the property they would be able to acquire through foreclosure. This happened to poor and middle class alike – all are victims, but especially the poor.

    I think that most of the time this wasn’t even a case of a family, poor or middle class, that was simply striving to live beyond their means and knowingly taking on debt they couldn’t repay to do so. No, I think at this point, given the scale of the predatory lending epidemic, that most of the time these borrowers were victims in the same way that people are victims of lead poisoning or asbestos; they were sold a toxic product represented as something else. Just as it might take a degree in chemistry and one in anatomy to understand off the bat the negative effects of lead or asbestos, it probably takes a degree in finance to understand the fine print on some of these loan applications.

    There were also lending institutions, mortgage brokers, etc. who could make bad loans, repackage them as securities, and sell them “upstream”, pocket the fees, and go home richer. There was immediate gain for many individuals.

    more to come

  • Joe H

    “When you say, “most subprime mortgages were issued by lenders that had nothing to do with CRA,” what do you mean by that?”

    What I mean is, CRA was mostly applied to community banks and national banks. Some other lending institutions participated with CRA a little, others, such as the vast majority of these independent mortgage companies, not at all. There was no “safe and sound” requirement, only a “get what you can” impulse.

    “Do you mean that, though they’d seen what happened to the business plans of lenders that didn’t have a perfect CRA rating, or which got targeted by HUD for lawsuits under the Fair Housing provisions, they felt themselves immune? That they couldn’t be touched, and needn’t bother changing their behavior?”

    I would like to know where you got this idea that any bank needed a “perfect” CRA rating, or that such a rating would even be hard to acquire in a minority or low/middle income area. If the regulators are doing their job, then making unsafe, unprofitable loans would actually result in a lower score, not a higher one, if the ratings matrix is at all adhered to (a matrix which, again, you can access online). And that is at the heart of this, is it not?

    The idea, what you propose, what the right proposes, is that banks were actually forced by the government, or pressured at least, to make BAD loans, and that these bad loans are at the root of the cisis. The empirical evidence to support this? All I’ve seen so far is a reminder that these people are poor and dark-skinned, and again I don’t accuse you of racism, but your sources are a different matter.

    Still, 3 out of 4 sub prime loans were made by lending institutions that had no obligation to achieve a CRA rating at all. What was their motivation? Predatory lending.

    “I think that they did. They couldn’t be any more discrimination-free than they already were: But they could reduce their lending requirements, and keep the government off their backs that way.”

    Well, it is true that requirements were lowered, in some cases for good reasons, in others, for predatory reasons.

    But there are other factors to consider, for instance, if real wages hadn’t been declining for 30 years, perhaps people would be saving more, and borrowing less. Perhaps if America still created things of value instead of financial instruments, the banks would actually have capital. Why did it all come down to houses? Doesn’t it seem absurd?

    I will grant you this – that the CRA, and lets just say the entire philosophy of making more money available to more people – while not the immediate cause of the meltdown, is not the direction I think we should be going. We should be restoring good paying jobs, through the public sector if we have to, with wages adjusted for inflation, with full rights to form a union, with established worker-to-executive pay ratios, meaning, this 1:435 gap has to close. Frankly the idea of an economy that revolves almost entirely around credit, around lending and borrowing, is unsettling to me. As consumers we should be able to rely upon our performance as workers, as producers, to secure us the necessities of life; not on banks and easy money. Maybe that’s just me. But its going to take more than the free market to get us there.

  • Joe H

    More on “why” this is happening, what the motivation and incentive were.

    This is what the Federal Reserve Chairman Ben Bernanke said last fall, quoted by the Traiger & Hinckley study (which you can find through the wiki entry on the CRA):

    “The originate-to-distribute model seems to have contributed to the loosening of underwriting standards in 2005 and 2006. When an originator sells a mortgage and its servicing rights, depending on the terms of the sale, much or all of the
    risks are passed on to the loan purchaser. Thus, originators who sell loans may have less incentive to undertake careful underwriting than if they kept the loans. Moreover, for some originators, fees tied to loan volume made loan sales a higher
    priority than loan quality. This misalignment of incentives, together with strong investor demand for securities with high yields, contributed to the weakening of underwriting standards.”

    This is more or less what I said before – it was profitable to make bad loans because they could be sold off, while pocketing fees that were, as the report says, tied to loan volume rather than loan quality. What poor minorities or “social engineering” have to do with that is beyond me.

  • Joe H

    More on “why” this is happening, what the motivation and incentive were.

    This is what the Federal Reserve Chairman Ben Bernanke said last fall, quoted by the Traiger & Hinckley study (which you can find through the wiki entry on the CRA):

    “The originate-to-distribute model seems to have contributed to the loosening of underwriting standards in 2005 and 2006. When an originator sells a mortgage and its servicing rights, depending on the terms of the sale, much or all of the
    risks are passed on to the loan purchaser. Thus, originators who sell loans may have less incentive to undertake careful underwriting than if they kept the loans. Moreover, for some originators, fees tied to loan volume made loan sales a higher
    priority than loan quality. This misalignment of incentives, together with strong investor demand for securities with high yields, contributed to the weakening of underwriting standards.”

    This is more or less what I said before – it was profitable to make bad loans because they could be sold off, while pocketing fees that were, as the report says, tied to loan volume rather than loan quality. What poor minorities or “social engineering” have to do with that is beyond me.

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