Comments on: The Financial Crisis

By: Charles Hill

Charles Hill — Mon, 22 Sep 2008 20:10:00 +0000

Democrats in Congress and Bill Clinton relaxed lending stardards years ago so low income people with bad credit could buy houses with no downpayment, poor credit and no proof that there income was enough to afford the house.
Just Google old newspaper articles or the Congressional Record.

“A brief history of the Fannie Mae and Freddie Mac mess is in order. Back in the days when a Bank or Savings and Loan approved a home loan, they did so with lending standards that had historically led to only safe loans. They had to because they kept the loan and were responsible if it failed. These standards included 3 major parts.

First, the mortgage payments could be no greater that a set percentage of your income, usually about 40 percent.

Second, a down payment was required of about 10 percent or above so the new owner would immediately have some equity in the home.

Third, A good credit rating was required to prove you had a history of paying your bills.

Some adjustments could be made, for example people that had poor credit could get a loan with a larger down payment so if the loan failed, the bank could still resell the house and cover the loan.”

http://strategicthought-charles77.blogspot.com/2008/09/democrats-created-fannie-mae-and.html

By: Peter Klein

Peter Klein — Mon, 22 Sep 2008 01:53:26 +0000

Araglin, I know exactly what you mean! I don’t recall seeing anything on this, though I imagine it would be easy to write with a little Googling.

The book won’t be out until early or mid 2009. (For those who don’t know, Joe Salerno and I are writing an advanced textbook, “Fundamentals of Economic Analysis: A Causal-Realist Approach.”

By: Araglin

Araglin — Fri, 19 Sep 2008 22:59:27 +0000

Professor Klein,
Thanks for this post. One question I have: Have you found any good articles dealing with the infintessimal-short historical memory and heard mentality of the commentariat re: this financial crisis? That is, is there evidence that the same pundits who all (with great respectability and seriousness) denied the existence of a problem 3, 4, or 5 years ago, and dismissed dissenters as cranks, are now the same pundits being turned to explain the “root causes” of the problem now that it’s existence is no long deniable and suggesting “practical” solutions?

Thanks,
Araglin

P.S. When can we expect your new book with Professor Salerno to make it to market?

By: David Hoopes

David Hoopes — Fri, 19 Sep 2008 05:33:16 +0000

Good post Peter. I find the presidential candidates’ inclination to blame these things on greed and evil people depressing. By the way, doesn’t Obama have close friends who got rich working at Fannie Mae? Doesn’t he have close friends that worked at Lehman?

All the populism that surrounds these difficult issues makes things seem hopeless.

By: Per Bylund

Per Bylund — Wed, 17 Sep 2008 15:53:07 +0000

A great example of this is Stiglitz's commentary written for CNN (published today), where he lists six points on how to make future crises less severe. I find two things about Stiglitz's commentary interesting. One is that all the six points begin with "we need" and that all of them call for state regulation of the financial markets. The other is his ending paragraph in which he states, basically, that the problem is that there is a market:

These reforms will not guarantee that we will not have another crisis. The ingenuity of those in the financial markets is impressive. Eventually, they will figure out how to circumvent whatever regulations are imposed. But these reforms will make another crisis of this kind less likely, and, should it occur, make it less severe than it otherwise would be.

The market has a way of getting around the rules set up for their own good, so no regulations can work indefinitely or perfectly. All "we" can do is to have the state regulate as much as possible so that the market doesn't cause too much trouble. There's no such thing as "government failure," I guess.