Monday, June 29, 2015

Foreclose on government control of the economy

The Thursday and Friday, 6/25,26 print editions of the Detroit News carried a series titled "Foreclosures fuel Detroit blight, cost city millions" by reporters Christine MacDonald and Joel Kurth. The on line version is here. It is a very well written article going in depth describing the devastation not only in terms of property but in terms of human misery and suffering.

But I'm afraid it doesn't go deep enough. It seems to confine its focus on appearances, empty and burnt out hulks, some demolished, and the testimony of those survivors relating the depressing experiences they suffered. There are many references to the fact that sub-prime mortgages and loans were the main culprit. And if you confine your vision to the immediately visible, you'd be right.

But nowhere in the report is the question asked; what caused banks and mortgage companies who had been for decades been loaning only to those whom they thought had a decent chance of repaying the loan, suddenly go irrational and start lending to people they knew unlikely to pay it back? One answer proffered is:

     ""The stage was set with gross irresponsibility by the banking industry, and I still think that they ought to be made to pay cities that are left to clean up the mess," said Frank Ford, a senior policy adviser for the Thriving Communities Institute, a nonprofit land protection group based in Cleveland that has studied vacant land and foreclosures in northern Ohio. "This was done by people making bad decisions, repeatedly, in some cases knowingly.""

Again, why did people who seemingly made rational decisions in the past start making irrational ones from 2005 (the report's timeline start) on up?  No answer given. The existence of Fannie Mae and Freddie Mac are mentioned as foreclosures of homes and as buyers of mortgages but not much more about their role in creating the housing bubble. In fact, the concept housing bubble was not even mentioned. This is why I think the article's timeline should go back even farther than 2005 to when other Federal agency players came into existence. But the authors only covered the era of foreclosures.

Also there is no mention of the Community Reinvestment Act (CRA) which was modified to a ratings agency under Clinton so that any bank or mortgage company that wanted to expand its business had to show it loaned a certain amount to low income people thus encouraging risky loans by those banks. For a more detailed look at the CRA see this article.

There was no one single cause of the 2008 mortgage crises. It was a combination of the Fed keeping interest rates way too low, the CRA encouraging risky loans, Fannie Mae and Freddie Mac being encouraged to buy up those risky loans and mortgages, bundle and resell them in the market spreading the risk in ever widening circles. There was also this notion of "too big to fail" which I think was the promise to the banking industry that Fannie and Freddie will take care of them and their sub prime loans. There were other smaller contributors to the meltdown but these were the major players.

Although well written regarding the extent of damage to life and property, this report misinforms the public as to the real causes. Thus the public will continue to believe that the mortgage crisis was caused by the bankers who did it all on their own with no incentives from government. The public will continue to call for more regulations despite the fact that the banking and finance industries are the most heavily regulated industries in the nation and that such regulation did not protect the citizens from harm but rather increased its likely hood.