Trickle Up Misery

Whatever happened to the theory that the “subprime” mortgage crisis came about because Barack Obama-trained ACORN thugs pressured banks into lending money to undeserving brown people? Well, it seems the misery has trickled up.

It’s a pattern you can find over and over again in U.S. (and other) history. A problem with the economy hits the poor first, and the poor are blamed for it, but if nothing is done eventually it hits the not-poor, and then it becomes a problem. Most history books will tell you the Great Depression began after the stock market crash of 1929, but the fact is that parts of the U.S. — the poorer parts — had been in an economic hole for a couple of years by then. The Depression didn’t become official until the misery finally hit the upper classes.

In light of our recent arguments in the “Heartless, Clueless” post with Popgun, who refuses to see that allowing the economy to go down the toilet might eventually affect him, I thought this was interesting. I don’t rejoice in their misfortune, but I do wish some people would pay attention to reality instead of keeping their heads wrapped in a gauze of myth and ideology.

24 thoughts on “Trickle Up Misery

  1. Maybe you are not a good writer, but indeed, the subprime mortgage crisis was caused by the overextension of credit to folks that had little or fudged documentation. Brown people is your words anyway.

    • the subprime mortgage crisis was caused by the overextension of credit to folks that had little or fudged documentation. Brown people is your words anyway.

      Thank you for volunteering to be Exhibit A. For another view of the cause of the subprime mortgage crisis, see John Atlas and Peter Dreier; and also Econobrowser.

  2. dissident,
    In the words of either an economist or an economic pundit, and I’m paraphrasing here, ‘Those who didn’t know better signed the mortgages, and those who did know better were the ones giving them out.’ The pox, in my opinion, is on those who knew better, but did the destructive thing for their own short term gain.

    As for these homes in the article, a lot of them were 2nd (or vacation) homes, or bought for investment purposes (I’m sorry about those who are losing their primary home – regardless of income level).
    So, now it’s the rich who are the ones walking away from their obligations, something that the poor and middle class had to be lectured endlessly about over the past few years about never doing – you can’t do that: responsibility, think of your family’s reputation, think of your neighbors and their investment, blah, blah, blah…
    Now, MSM, cue in the “For shame on the Rich, FOR SHAME!!!” 3…2…1…
    I said, 3….2… 1… One more time – 3… 2… 1…
    Ok, that’s what I thought would happen.

  3. Of course, the official conservative explanation will be that the not-rich infected the virtuous, holy rich people with their moral rot. I expect we’ll be seeing links to this by the end of today.

    P.S. to dissident: How do you explain the collapse of the non-subprime mortgage market? Or did you know that such a collapse existed?

  4. The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

    So, the rich don’t care about America and what they are doing to it; they’ve got theirs and the hell with you. What. A. Shock.

    One nice feature of this is the fact that the default won’t really hurt them. If I walk away from my mortgage, I’ll pay he’ll getting my next one. But if you have enough money, you don’t have trouble getting a loan.

  5. I’m going to give dissident the benefit of the doubt, and assume that he or she didn’t understand maha’s reference. (Hint: click the links; otherwise one is just “not a good reader.”)

    It’s the Right who characterized the cause of the subprime crash as enforced lending to minority neighborhoods; thus, it’s their description. I’ve heard their professional provocateurs come right out and say as much, repeatedly, even though it’s simply not true.

    In fact, subprimes had nothing to do with 1970s legislation eliminating the “redlining” of minority neighborhoods by lenders, as the Right wants us to believe. Subprimes were the result of unscrupulous lending/investment schemes, concocted after the divisions between lending and investment were eliminated by (the GOP-controlled) Congress in 1999, via the Gramm-Leach-Bliley Act. When caught on this point, the Right sometimes tries to say G-L-B was Bill Clinton’s fault, even though its creators are named for all to see. (Sooner or later you have to ask, how stupid do they think we are? Anyone who falls for this nonsense has nobody to blame but themselves.)

    Now, this is not arcane knowledge. I know these essential facts because I read the news, remember history, understand linear time and cause-and-effect, and for nearly 30 years have worked in industries devastated by these practices. I know the facts directly. Another instance of reality having that pesky “liberal” bias.

  6. “the misery has trickled up” “I don’t rejoice in their misfortune”

    You and I see this differently, Maha. Most of these people are simply looking at the cost of an asset, and if it’s too high they are dumping it. They will turn around and buy another place at a cheaper price when they think home prices have bottomed out. For most of them there is no misery and misfortune. It’s just business.

  7. Indeed, “it’s just business”. Which is what has driven this crisis since the beginning.

    First: The basic problem was across the board, the majority of “no-doc” liar loan recipients were white suburban dwellers, not inner city minorities. Secondly, the New York Times article is about LOS GATOS, which does *NOT* have second homes or vacation homes, this is the yuppy section of the Silicon Valley. The folks who live there are mid-level executives and up with salaries well into the six figures. The reality is that sub-prime loans were just a canary in the coal mine, not the cause of the housing market’s current problems. The cause of the housing market’s current problems were a pricing bubble that resulted in homes being priced above what was affordable by the people who were purchasing them, pure and simple — a pricing bubble which affected *all* homes, not just homes purchased with sub-prime loans. Singling out one group that is primarily made up of minorities (the sub-prime market) for the problems of the entire housing market is either stupidity, racism, spite, or all of the above. ‘Nuff said on that.

    – Badtux the Economics Penguin

  8. Thank you for volunteering to be Exhibit A.

    LOL! Don’t you love it when they are tripping over their feet to showcase their stupidity.

  9. One of the key factors is the belief that real estate can be a bad investment, that one can just walk away from. It is more like tossing a bolder into a mill pond, the “ripple effect” causes much pain and suffering, which is now quite evident.

    My town built an economy around our local theme parks and construction, along with several “defense” contractors. The County decided to award grant money to people for down payments on new homes in order to spur new construction, they thought (incorrectly) that home prices would continue to trend upward, that the tax base would grow, and the County would be transformed into an up scale enclave rather than “Cow Town”.Nearby Counties; Orange, and Seminole, had pricey real estate compared to Osceola.
    Way too many up-scale gated communities were built in an economy that is mostly dependent on service labor, building contractors, and real estate sales people. Many people simply wanted to get into the market before it became totally unaffordable, and they stretched to the max to do so
    , thinking they could re finance later, or just sell at a higher price and buy something less expensive. They were not evil or greedy, just wrong on their bet that things would continue.
    If I was to lay blame on someone(for where I live), it would be shared between the County and the big building contractors, they have overbuilt to the extent that the supply far exceeds the demand, and there are many vacant properties.Many people have gone back to where they came from, mostly the North East and the Caribbean.

  10. A lot of good ground has been covered on the GOP narrative and why it’s pure myth.

    I have been trying to understand how we got into this mess and I have a few opinions for consideration.

    When the Bush administration was trying to stimulate the economy, they found it adventagous to loosen credit restrictions so that in a time of frozen (or falling) real wages, consumers would consume at an pace in excess of their income by tapping the equity in their homes.

    Somebody in the banking/real estate industry realized that the kind of property inflation that California experienced in the 80s – if it occurred nationally – would ‘create’ billions of dollars of wealth – and the banking/real estate industries could get a big slice of it.

    In the early time of the housing boom legitimate healthy profits were realized, but as the pool of qualified buyers dried up, the industry was uunwilling to scale back on construction because everyone in the banking/ real estate business was getting filthy rich. Someone saw that the structure of the mortgage market allowed huge profits to be realized by originating loans even to unqualified buyers because the RISK was transferred to Fannie/Freddy Mac when they bought the paper from the smaller banks. Huge profits – norisk. You would have to have integrity to pass it up.

    Anybody and everybody in the scheme could see that it HAD to blow up sooner or later, but they were making so much money without actually breaking any laws – no one would report that the Emperor was stark naked. Think about this a moment – if you were a PhD in banking who realized what a dangerous scheme this was – you could object, and wind up with a job at McDonalds – or ride the 6-figure job til the bubble burst. Because 4 years ago – no one was going to listen if you said the sky is going to fall. No one was going to listen!

    There are lessons to be learned – I hope some of them showed up in the Wall Street bill. I don’t know.

  11. Doug – As far back as 2006, thirty-percent of sub-prime mortgagees couldn’t even make their first house payment. It’s patently false to pretend that the bubble-burst happened without warning. Burst, it wasn’t, more like a slow leak.

  12. True, the rate of defaults was like a slow leak that grew steadily. The effect on the banking industry was much more sudden. The ‘bubble’ burst for the salesmen and executives of those phonly loans was quite sudden.

  13. Indeed c u n d, the banks were too liberal in giving away credit, that includes people from all walks of life. A lot of it has to do with pointy heads pushing the economy a certain way rather than letting the market work naturally. When you have entities like Fannie/Freddie practically subsidizing the entire market for homes, with more focus on salaries rather than the entities long term health (when was the last time government ran anything efficiently), you’re bound to have imbalances in the economy, and in the GSE’s case, to the tune of trillions.

    • dissident, you are only seeing the surface of the issue. Read links in the post and in many of these comments to educate yourself.

      The curious thing about your comment is — what makes you think markets “work naturally”? “Markets” are nothing but projections of enterprise and desire. They have no intrinsic existence, nor do they “do” anything that is not directed by human behavior. The romantic libertarian notion that markets obey some kind of natural law that keeps them balanced has been disproved by history countless times, yet it won’t die. Very curious.

  14. I am not sure what you think I am unclear about. I’m also not sure why you question that markets work naturally, when I already addressed in my comment. And just because you hear someone giving deference to efficient business rather than bureaucratic governments doesn’t mean they’re all for legalizing drugs, hookers, slot machines, and anarchy.

    Here’s a good article in WaPo. Canada also has a housing middle man like Fannie, but Government agencies such as the Canada Mortgage and Housing Corp. hewed closely to policies in which they supported the housing market by offering mortgage insurance, but “unlike Fannie Mae and Freddie Mac in the United States, they were never expected to encourage homeownership as a social or economic end. ”

    Or this one, “In the United States, these poorly regulated securities grew to nearly 40 percent of mortgage originations in the past 10 years. Canada’s private securitization market remained constant at less than 5 percent of mortgage lending” But no, there’s nothing wrong with Franklin Raines and his fat paycheck, as he sat there and did nothing, as his “company” without any real skin, as it was government sponsored, devoured ridiculous loans.

    Some folks think throwing money at the problem will help our deflated economy, yet at the same time, ironically advocate for higher taxes and lower military spending. I don’t see the problem with less military spending, but you should at least be consistent. And take a look here. They have too many titles, being paid way too much. If we flatten their salaries, the transit could probably hire at least twice as many people, and they would still be paid well. The problem isn’t a lack of spending, it’s an inefficiency of spending.

    As-salamu alaykum.

    • I am not sure what you think I am unclear about.

      Yes, I can see that you don’t see, because you think you already understand it all, but you don’t. Certainly extending mortgage credit to people who weren’t qualified is part of the picture, but only a little part. You aren’t seeing the rest of it, and I fear your mind is too closed to see the rest of it.

      Where you are going wrong is that you believe the bad credit was handed out because of some “liberal” program that wanted to provide homes for poor people. But the crisis really came about because some hotshots in the finance sector figured out they could make a killing by re-selling “high risk” loans. This is explained in one of the articles I linked to that you didn’t read. I will give you a snip of one of them:

      With interest rates low, housing prices on a steady rise, and practically no government regulation, mortgage finance companies devised high-interest, high-fee schemes to entice families to take out loans that traditional savings banks would not make. Many of the lenders were legitimate operations providing a market for credit-risky people. But there also were huge corporations, such as Household Finance, that sought extraordinary profits through unsavory means, called predatory loans. Not subject to government regulation, they bent the rules, lowering normal banking standards.

      Mortgage brokers, the street hustlers of the lending world, often used mail solicitations and ads that shouted, “Bad Credit? No Problem!” “Zero Percent Down Payment!” to find people who were closed out of homeownership, or homeowners who could be talked into refinancing. They seduced millions of people into signing on the dotted line. Although sub-prime lending has been concentrated in minority and low-income urban areas, it has spread to the middle-class suburbs.

      The sub-prime lenders didn’t hold on to these loans. Instead, they sold them — and the risk — to investment banks and investors who considered these high interest rate, sub-prime loans a goldmine. By 2007, the sub-prime business had become a $1.5 trillion global market for investors seeking high returns.

      It was really something like a Ponzi scheme, and lots of money was made by some people before it all crashed, as Ponzi schemes will. Fannie Mae and Freddie Mac worked very efficiently for many decades to provide mortgages to low-income people. The pressure put on them to make riskier loans did not come from bleeding-heart liberals or ACORN, but from shareholders and other elements in the private financial sector. For a while the FMs were restrained by anti-predatory regulations, but the Bush Administration dropped these rules in 2004, probably because they were being pressured by the financial sector to do so. And thus the stage was set for disaster.

      I’m also not sure why you question that markets work naturally, when I already addressed in my comment.

      No, you didn’t “address” it. You just said they did. And I’m saying this is a dearly beloved religious belief of libertarians that does not hold up to the scrutiny of real-world experience. You’ve probably been told that free markets self-regulate and naturally balance themselves so many times you just assume it must be true, but the actual history of real-world business enterprise says it isn’t.

      And just because you hear someone giving deference to efficient business rather than bureaucratic governments doesn’t mean they’re all for legalizing drugs, hookers, slot machines, and anarchy.

      I’m not sure where you think hookers and slot machines come into this, but as someone who spent years working in production/manufacturing departments of large corporations, I assure you that business is often not at all “efficient.” Sometimes business can be insanely inefficient. I have seen this with my own tired eyes. Nor is government bureaucracy always inefficient.

      Your problem is that you are clinging to a simple “private sector good/government bad” dichotomy that also doesn’t stand up to real-world experience. There are some things private enterprise can deliver much better than government. But that doesn’t mean private enterprise is ALWAYS better than government, at EVERYTHING. Some things private enterprise does not do well at all that government can manage far more efficiently.

      Right now I don’t have time to discuss the situation in Canada, which I don’t think illustrates quite what you think it illustrates, but maybe someone else here can go into that.

  15. I should have also included this chart showing how an economy that didn’t artificially divert huge sums of money to a certain sector is doing (Iceland banking, US housing, Spain housing/”greenconomy”).

  16. the banks were too liberal in giving away credit,

    No, they were too liberal in giving away risk. Credit means nothing when you resell a loan before the ink on the paper dries. You get the origination fees and the risk free money generating loan servicing contract while some other sap ( taxpayer -fanny, freddie) gets left holding the bag when the loan turns to shit. It’s all good , it’s all gravy.

    Sorta like a filter that filters out profits but allows risk to pass through.

  17. It would do you well to read into substantive articles on the issue. It is quite tiring to write, only for you to gloss what is in front of your face.

    • It would do you well to read into substantive articles on the issue. It is quite tiring to write, only for you to gloss what is in front of your face.

      A non-admission of defeat; a parting “Nyah nyah nyah” in the face of overwhelmingly superior arguments that he is not intellectually equipped to refute. But what do you expect from some one who admires Jim Cramer?

  18. Bwah-ha-ha-ha! That was the funniest thing I’ve read in days! Dissident telling maha that she needed to read into substantive articles on the issue! I’m glad I’d swallowed my coffee or it would have been all over my computer.

    Who knew this was a comedy blog?!

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