Most experts I talk to, including the Realtors' own economist, believe we may see another dip in sales and prices before we are really on the road to recovery.
1. It isn't "too big to fail" that's the problem, it's the rescue of creditors going back to 1984, encouraged imprudent lending and allowed large financial institutions to become highly leveraged.Skimming the paper, it looks like it may have interesting points, but I worry that it's a case of a researcher finding what he wanted to find.
2. Shareholder losses do not reduce the problem even when shareholders are the executives making the decisions
3. These incentives allowed execs to justify and fund enormous bonuses until they blew up their firms. Whether they planned on that or not doesn't matter. The incentives remain as long as creditors get bailed out.
4. Changes in regulations encouraged risk-taking by artificially encouraging the attractiveness of AAA-rated securities.
5. Changes in US housing policy helped inflate the housing bubble, particularly the expansion of Fannie and Freddie into low downpayment loans.
6. The increased demand for housing resulting from Fanne and Freddie's expansion pushed up the price of housing and helped make subprime attractive to banks. But the ultimate driver of destruction was leverage. Either lenders were irrationally exuberant or were lulled into that exuberance by the persistent rescues of the previous three decades.
Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general. ...Some Bubble Meter readers may think that I oppose financial regulation. Quite the opposite, I support it. But, there's a difference between effective regulation and ineffective regulation. I believe some parts of the proposed financial reform bills—such as a Consumer Financial Protection Agency—are an improvement on the current system, but I fear the bill may be mostly ineffective. Democrats are too prone to believing in the ability of government bureaucrats to spot trouble before it occurs. At the same time, some simple and important policies—such as requiring banks to issue contingent convertible bonds, banning teaser rates, and requiring home buyers to make sizable down payments—are missing.
The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.
Kevin Drum writes,For the record, I think a regulation requiring larger down payments would be the most effective way of preventing future housing bubbles, but of course none of the politicians want to go down that route. Quite the opposite, they're actively encouraging 3.5% down payments and $8,000 tax credits (which can be used toward the down payment).From a systemic point of view, the real issue is that predatory lending on a large scale helped to massively inflate the housing/credit bubble of the aughts. If the home loan market had been regulated stringently enough to keep mortgage lending relatively sober, the bubble most likely would have been half the size it ended up at...Well, yes, if a regulator had stepped in and required 10 percent down payments, the bubble would have been much smaller. That is excellent hindsight. But in the real world, with real politicians, there is no way that a regulator would have done that. The result would have been to drive first-time homebuyers, particularly minorities, out of the market. That was an inconceivable policy decision in 2004 or 2005.
One of the assumptions about the "markets fail, use government" folks is that government always knows what it's doing. I guarantee you that the next financial bubble will be something that the regulators miss, just as they missed the last one.
New-home sales rose 26.9% to a seasonally adjusted annual rate of 411,000 last month, compared to a upwardly revised annual rate of 324,000 in February, the Census Bureau said. ...I usually don't like month-over-month numbers, but these are at least seasonally adjusted.
New-home sales spiked in every region of the United States. The South saw the biggest jump in new home sales, up a stunning 43.5%, while the Northeast region saw sales climb 35.7%. The West and Midwest regions both saw single-digit growth.
The Census Bureau data followed a report from the National Association of Realtors on Thursday that showed existing home sales soared nearly 7% in March, as new homebuyers raced to buy up properties before a tax credit expires on April 30.
Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. ...His point is correct and well-documented, but I get a chuckle out of the fact that the author appears to be an example of what he criticizes. According to his short bio, he "has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas."
Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.
In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.For the record, I don't agree with the author's conclusion in the final paragraph of the WSJ article. The author opposes government regulation. I favor regulation, but believe it should be based primarily on proactive and consistent automatic rules, rather than reactive and fickle human judgment.
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.
When I was asked what was missing from the proposed financial reform legislation, I should have mentioned the lack of effective reform measures for ratings agencies, particularly the incentive to provide high ratings to encourage future business. As noted below, part of the reform legislation is directed at the ratings agencies, but it doesn't get at the main problem, which is the incentive to tell its customers what they want to hear, i.e. the incentive to deliver higher ratings than deserved. For some reason ($$$???), the ratings agencies seem to be escaping the legislative and regulatory attention they ought to be receiving.
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