September 19, 2008

Channeling Carl Sagan (x 100′s); Cramer’s About-Face; The Fred-Fan Specifics; Other Blame

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 1:08 pm

There may be “billions upon billions” of stars out there in the universe, but there are apparently “hundreds and hundreds of billions” available to bail out the banks who made unwise mortgage loans and the “Barney’s Rubble” government-sponsored enterprises that facilitated them.

Moderate Mainstream, who predicted this, take a bow.

As to Cramer, he was literally screaming for Ben Bernanke to open up the discount window at the Fed some months ago. Now he talks (not without basis) about how our government is more socialist than China, and complains.

Earth to Jim: You, and a large element of Wall Street, have mostly supported the Democrats who built up this mess all these years.

They’re already spinning this as a private-sector failure. Horse manure: It’s yet another in a long list of government-intervention failures.

It’s going to be hard to convince me that FDR isn’t raising a champagne glass in his grave. I believe he and his party have wanted to take over the economy piece by piece for many, many years. Now the government has de facto ownership of mortgage lending, and in essence controls the fate of a large portion of the nation’s housing stock. Free-marketeers are going to have to dig in for the long haul to try to get it back. As the Rubblemaker himself said: Lots of luck with that.

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Refresh: For those who missed it, what follows is more than likely the biggest factor that brought on the financial mess. It’s a reprise of the final portion of my Pajamas Media column of September 9 (mirrored here at BizzyBlog on the 11th), accompanied by a graphic that I couldn’t post at the time because of my computer-challenged situation.

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How the two GSEs acted to keep their perpetual motion machines running probably did more than anything else anyone did to bring on the explosive increase in foreclosures.

During the heyday of the home price run-up several years ago, I had a conversation with a mortgage broker I have known for many years. I questioned how aggressive mortgage lending practices were and how ridiculously easy it had become to get approved.

His response was that Fan and Fred had significantly lowered the standards built into the loan-approval programs lenders used to ensure that their mortgages would be bought by the two GSEs. Specifically:

  • The credit score threshold for conventional mortgages, which had generally been 670 or more, dropped to about 630. In the real world, a score of 630 indicates that you’re having trouble with your debt load, paying your bills on time, or a little of both.
  • More ominously, the credit score threshold for subprime mortgages, which had generally been 630 or more, fell to about 590. A score of 590 is the credit scoring equivalent of barely having a pulse.

A quick primer on credit scores is here.

You can see the huge impact of those moves by looking at a graphic that comes from this myfico.com page:

FICOscoreDistribution2008

  • About 10%-12% of the population, people who formerly would have only qualified for subprime mortgage consideration, suddenly became eligible for conventional treatment.
  • Far worse, another roughly 7%-9% of the population with awful credit records, most of whom had no business taking on a mortgage, now received subprime treatment.

No wonder loan activity boomed, followed by unprecedented defaults. In hindsight, the results we’re seeing today were an almost foregone conclusion. The way out will be a long, hard slog.

When will Washington ever learn that governments and their “clever” offshoots only make things much worse?

Newly added today: Repeat — Fred and Fan did this on their own, and I would argue in direct violation of their corporate and congressional charters.

This is even before considering the impact of lower required down payments, variable rate and interest-only mortgages, option ARMs, and other exotic products that were out there during the lending heyday — and still haunt the industry.

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UPDATE: Since I might be seen as making it look like the President and his party are blameless, let me elaborate. I don’t think Paulson and Bush had to do what they did, even in an election year. Very few Americans outside of the affected industries supported this bailout nonsense. And besides, this is supposedly what we have bankruptcy courts for. Oh the howls would have been loud, but leadership is doing the right thing despite the howls.

Also, Bush did not push hard enough for reform during his tenure, including getting behind John McCain’s 2005 effort.

That said, I believe the Fan-Fred credit-score threshold game-playing described above was done outside of official purview, and perhaps illegally. But that’s what you supposedly have audits and quarterly financial statements for.

Oh wait, Fan and Fred had accounting fiascos that made the books unauditable for several years.

How convenient.

If we don’t watch out and face the music, we’ll be facing 15 year’s of malaise, as the Japanese have since the early 1990s.
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UPDATE 2: I’m not quite down with Michelle Malkin’s RIP to fiscal conservatism just yet. But I have to concede that it’s on life support — and Jack Kevorkian has entered the building.

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3 Comments

  1. The bottom line is this meltdown was totally avoidable and Barack Obama along with many Democrats had a hand in creating the situation due to their refusal to impliment reform when it was pleaded for repeatedly. http://conservablogs.com/publiusforum/2008/09/20/birds-of-a-feather-flock-together/

    The truly scary part is the other shoe is still to drop – 2017 when SS expenditures exceed receipts. The same claims regarding the FMs were made by idiot Dems when Bush raised the issue of SS reform, their claim was NOTHING was wrong. The budget deficit has ballooned to $800 billion, so how much more fiddling will Reid and Pelosi do before the whole government melts down around them?

    Comment by dscott — September 20, 2008 @ 5:05 pm

  2. Apparently, the Dems at this point aren’t going to oppose any bailout since they are afraid to go down with the economy and thus lose everything themselves. Ah, good old fashioned self preservation even makes a Dem step back from the abyss of their own making. http://www.newser.com/story/37921/bernanke-paulson-put-fear-of-god-into-pols.html

    Comment by dscott — September 20, 2008 @ 6:53 pm

  3. [...] BizzyBlog » Channeling Carl Sagan (x 100’s); Cramer’s About-Face; The Fred-Fan Specifics; Other… [...]

    Pingback by United Socialist States Of America? | Right Voices — September 20, 2008 @ 10:38 pm

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