A nice little book leads us to ponder some large questions about improving American cities.
Like much of life, the academic job market is a Keynesian beauty contestâ€”one in which the judges try to guess the contestant that other judges will find most attractive. When we academics receive a promotion, we often receive headhunter calls from rival universities. I received several such calls when I received my current professorship. One was from a school in DC. Another was a school in New York. The third was located in San Francisco. In all three cases, I took a quick glance at the various local real estate sections, pondered my current $1,000 monthly mortgage payment, and gasped at the high financial hurdles I would need to surmount in making such a move. Continue reading “The rent is too damn highâ€”unlike the price of Matt Yglesiasâ€™s new book”
Glenn Loury and I cover Newt Gingrich’s janitorial views, Mitt Romney’s misconceptions on social insurance. We also had some serious talk about the challenges facing young people in Chicago. I feel genuinely blessed to have such conversations with an old friend and mentor.
Gretchen Morgenson and Joshua Rosner just published a major book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. The book is excellent in explaining the misconduct of executives who ran Fannie Mae and Freddie Mack. Yet it goes off the rails by overstating the role of these firms (and understating the role of others) in creating the housing meltdown and the closely-linked foreclosure crisis. Indeed, our current economic crisis should prompt us to ask more far-reaching questions about the origins of the crisis.
Looking back, many of usâ€”and by â€œus,â€ I certainly include liberal Democratsâ€”were slow to recognize the general dangers posed by the housing bubble, and the specific dangers posed by the political economy of government sponsored enterprises (GSEs). Many of us were also unduly credulous about the presumed benefits of home ownership. While perhaps not as easy to address, these uncomfortable questions must be raised if we hope to guard against the possibility of something of this magnitude from happening again.
More here. And no, we don’t get to pick the titles…
Kevin Drum and Ezra Klein have pieces today on the financial industryâ€™s opposition to new mortgage regulations, in particular, opposition to provisions that would require mortgage originators to retain five percent interest in loans in which (to roughly summarize) the borrower does not make a 20 percent down-payment, or loans which amount to more than 28 percent of monthly gross income. (Added later: See this terrific Alyssa Katz piece in TAP for a different perspective from mine. She predicts a progressive split over Dodd-Frank. I think she is spot-on.)
The industry and its allies argue that these new rules will choke access to credit among low-income or minority households. Drum notes several good reasons to reject extreme industry criticisms of the proposed rule. Iâ€™m interested in two other matters: First, the tendency to conflate provision of easy credit with the actual transfer of resources to help low- and moderate-income people, second, the alliance of the NAACP and the National Council of La Raza with financial industry figures in negotiating the new rules. Continue reading “Strange bedfellows in the mortgage fight”
Housing regulation in Texas inherited from Mexico.
Paul Krugman points to this clear explanation by Alyssa Katz why Texas has escaped the worst of the housing crisis: tight regulation prohibiting cash-out mortgage refinancing and imposing a strict 80% maximum mortgage.
The reason isnÂ´t a secret Austin cabal of Keynesian technocrats, but history:
The roots of this fierce resistance to debtâ€™s temptations go deep in Texas history. Seven years before the republic joined the union in 1845, a bank panic and resulting foreclosures lost many homesteaders their property. Drawing from Mexican codes protecting landholdersâ€”much beloved by flocks of U.S. debtors who had taken refuge from creditors by relocating to Texas homesteadsâ€”the new constitution of the state of Texas forbade lenders from peddling mortgages to homesteaders.
So regulation is OK as long as itÂ´s based on paternalistic Hispanic codes to protect the landed aristocracy. (I suspect, but canÂ´t prove, a distant origin in the laws of old Castile, when borrowers would have been Old Christians and lenders conversos.) The Salamanca school of theologian-jurists produced an advanced theory of interest – time preference and all – in the 17th century, bypassing the knee-jerk Biblical ban on usury, so Spanish kings and viceroys had access to pretty good policy analysis if they wanted it.
The median price of new and resale houses and condos sold in Las Vegas in July dropped by over $9,000 relative to (gulp) the prior month. The federal tax incentive to purchase a house was worth up to $8,000, meaning there are no doubt people in Sin City who have already had that inducement’s value wiped out. In the rush to save realtors and homebuilders, the government created a program that tempted many Americans into making a lousy investment during a sucker’s rally.
Speaking as a non-expert, I wonder whether this isn’t the (possibly) right solution to the wrong problem. Â Foreclosures are terrible for families, and not great for banks. Â But it’s housing abandonment that’s the nightmare for the neighborhood. Â In some cases, abandonment happens without foreclosure: Â the owner walks, but the bank decides it would rather own a bad loan than an empty, unsaleable property, and never perfects its title.
So what we ought to be aiming for, first and foremost, is keeping the structure occupied. Â There are homeowners who can’t afford their mortgages, even with modifications, but who could afford to pay a market rent. Â But banks don’t like being in the landlord business. Were that’s not true, it’s still usually the case that someone would rent the property for more than it costs to maintain.
What’s needed, it seems to me, is a quick nuisance-abatement process that can wipe out both the equity and the debt on places that aren’t occupied and aren’t being maintained, and maybe some assistance for the owners of neighboring properties – who have the biggest stake in preventing deterioration – to buy the “empties.”
Perhaps if we made abandonment the worst outcome for the banks, they’d figure out what to do to avoid it.
And now, let us hold hands across the blogospheric divide.
My friend and colleague Steve Bainbridge is right: the President can, in fact, fire the SEC chair. What he can’t do is fire a commissioner, so he would have to choose a new chair from among the group of serving commissioners. The old chair would be just be a regular commissioner. According to the Securities Exchange Act of 1934 sec. 78(d), commissioners serve staggered five-year terms and one expires on June 5 of each year, meaning that the new President can replace one early in his term. I also wouldn’t be surprised if there was a culture of commissioners resigning (at least those of the same party) to allow the new President to put in his team.
That said, the real story is just how much of an economic moron/charlatan McCain is.
The gist of his argument is that the financial crisis is the result of the SEC allowing short selling. No one believes this. No one. There are a lot of reasons for the current crisis, and (unlike Steve) I’m not prepared without greater research to exonerate the SEC, but if McCain thinks that it’s about short selling, he even dumber than I thought.
But of course McCain doesn’t believe anything; he’s just saying anything to win. He doesn’t really know, and he doesn’t really care.
The shareholders and bondholders, not the taxpayers, ought to take the hit.
I don’t claim to be an expert on housing finance, but I really can’t make sense of the proposed Fannie/Freddie bailout. If the taxpayers are going to take the downside, why shouldn’t they get the upside to go with it? And what’s the case for “honoring” a guarantee that was never given to the bondholders?
True, if we make the bondholders take a “haircut” after they purchased securities that were backed by a wink-and-a-nod pseudo-guarantee from the government, future investors won’t trust any government guarantee that isn’t written into law. Good. This country is supposed to be run on laws, not on winks and nods.
I don’t have any problem with the Fed opening the discount window to the GSEs for a while, if that means lending to them on good security. But why should be the taxpayers and not the bondholders and shareholders who take their lumps when the overpaid managers of two for-profit enterprises allow them to get overextended in the course of profiting from, and fuelling, a catastrophic financial bubble?
Fannie Mae started out as a government agency. As a government agency, it operated prudently and made a profit. (Not hard, admittedly, when you’re borrowing at Treasury rates and lending at mortgage rates.) Then it was spun off as a private business. As a private business, it has operated imprudently and is now, on a mark-to-market basis, insolvent. That ought to suggest that the job of guaranteeing mortgages and bundling them into securities is better performed by civil servants than by overpaid executives.
To add to all that, high housing prices are social poison. Putting the taxpayers on the hook for mortgage defaults creates a perverse incentive for the government to keep those prices high. Me, I’m agin’ it.
Keep the mortgage market functioning, sure. But that can be done as well by a conservatorship (like the takeover of an insolvent bank) as by a bailout. We have better uses for $300 billion than protecting investors from the consequences of their own folly.
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