'How did we get here?'

"The Reckoning: White House Philosophy Stocked Mortgage Bonfire," posted Saturday on the New York Times website, is an exhaustive report that attempts to answer President Bush's own question, wondered aloud Sept. 18 when the credit markets froze up, "How did we get here?"

A big part of the answer, according to the article, is housing.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk....

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities.... But his housing policies and hands-off approach to regulation encouraged lax lending standards....

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away....

There's much, much more to the article, but among the warning signs along the way:

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas [Jason Thomas, an economic analyst for President Bush] sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. [Lawrence B.] Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard [Al Hubbard, Bush’s former chief economics adviser], adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates.

They weren't the only ones who thought the subprime problem would be contained to a small segment of the market -- I recall talking to several housing experts who assured me the same thing -- and that expanding homeownership was a fine goal. If you can put party politics aside, I think there's a lot to be gleaned here on how we got to this point.

--Lauren Beale

Thoughts? Comments?   

Comments

[SoCalJim]

The answer is quite simple really. Human nature. Look in the mirror. Greed transcends gender, race creed at various levels of private and govt sectors, which are intertwined for a common purpose: profit. This balloon is so big, it will take awhile to deflate, particularly if the govt tries to blow more hot air into it. Eventually, however, it will land. The RE market is like a descending hot air balloon. As all of the hot air spewed by realtards and govt monkeys seeps out, the ground beneath and reality once again become visble. Reality is that you cannot afford a 700k house on a 100k income. Maybe you think otherwise when you high as a kite w/lack of oxygen in your artificially inflated balloon, but the high wears off eventually. In this case, the withdrawl is the credit freeze. Amazing how historically low rates aren't making a bit of difference. Free fall in prices continues. I just looked at a place this weekend in OC. Bought a few years ago for 900k+, now listed at a 33% haircut, and still sitting. Pretty amazing when you think about it, but not surprising when you realize how dumb some people are.

[syscom3]

Too bad more wasn't written about the corrupt relationship between the congressional and senate banking committee members and the finance industry.

[srla]

It really is astounding that anyone is still asking this question. Clearly the current downturn is attributable almost wholly to the collapse of the housing bubble. The housing collapse is in turn being amplified by a stagnation in wages that was masked for several years by the propagation and nurturing of the housing bubble itself.

In very simple terms, concentration of wealth has intensified since 1990, during which time the top 1% of the population grew from being 100 times wealthier than the median worker to almost 200 times wealthier. During the bubble, this growing disparity was masked by the perception of wealth amongst homeowners (and by easy access to home equity lines of credit, which accounted for up to 7% of disposable income during this period). But now that homes are plunging in value, the average worker is feeling the full, unmasked effect of wage stagnation and upward distribution of wealth.

This situation is terrible for the economy. When wealth is more evenly distributed (as it was pre Clinton/Bush), more people have money to spend and the economy flourishes. But with housing wealth now revealed to be a mere illusion, the large majority of people have little to spend, and vast swaths of the economy are suffering as a result, most notably the auto industry.

It might seem counter-intuitive that downward distribution of wealth actually makes the rich richer, but in the end a more equitable income distribution leads to a growing economy and increased productivity, which in turn makes everyone wealthier.

So we got here in large part due to housing, but any solution must address wage disparity in order to allow the economy to start growing again. A good start would be addressing terrible trade deals made during the last two Presidencies. Another would be addressing perhaps the biggest threat to domestic jobs -- the escalation in healthcare costs driven by an unprecedented privatization and deregulation of the healthcare and health insurance industries without any attempt to actually introduce true competition into these industries.

[Brian]

I read the article yesterday. When I finished, I read it again. Amazingly enough, an article about how the push to make housing affordable, Fannie Mae and Freddie Mac, and all the trouble we've gotten into, manages to avoid the name Barney Frank throughout the whole article. Quite an accomplishment.

[k2polo]

I don't like it when people are called "dumb" because they bought into the lies that were being upsold to us all. Most of us "dumb" Americans did not purchase homes too much to handle and didn't even take out the equity, but are having to walk anyway. This article states the step by step warnings that the government had in it's arsenal, but did not believe we "dumb" American's could handle. This wasn't about intellect, it was indeed about greed. Trying to keep the elitists at the top happy. We must become more transparant so that we, the people, the working class who believe we should be able to purchase a home if we work 40 plus hours a week and pay our taxes, can actually do that. This market has to crash. It's interesting that Madoff is bringing home the fact that even the "intellectual elites" were just a bunch of scammers..taking advantage of a greed driven machine at the expense of the masses.

[SoCalJim]

K2polo: Simple fact is that some people were greedy, some were simply dumb for buying more than they could afford or not knowing that realtards simply spew BS to make a sale, some were both. "Lies"? Most of it is just sales hype - if you or someone else fell for it - too bad. You should have done your research and assessed your personal financial situation. If someone's sensitivities cannot handle those facts, they need to check into reality and look around.

Also, if you actually read the post, it referred to "some" people, not you or all people. And yes, I would say that someone making 100k and buying a 700k house is dumb, as would a majority of other people. This is pretty simple math. People who fell for realtor selling propaganda have only themselves to blame. The herd is finally figuring out that RE people are just like sales people - whether retail, car, whatever. They make money when there is a sale. They don't care about you. They only care about the commission.

I don't like to see people suffer, but sometimes it is necessary to teach people simple life lessons. This housing bubble is one painful lesson for many.

[Kee Kee]

This mess is nothing more than a real estate ponzi scheme. In fact, our whole economy has been one big ponzi scheme. Look out for businesses that sold everything on store credit to people who had no business having credit cards, to be next in all this. All this easy credit amounted to nothing but one giant check kiting scheme. There's no actual cash flow in this country. We're buying Chinese goods on credit and that cannot support an economy. We don't produce anythiing. My children have never seen a factory. American made now means expensive niche product.

As far as our false economy, I personally blame the unions and Wal-Mart. It can all be traced back to them. Unions forced the price of American goods so high they became prohibitive and as a result, we have Chinese goods and Wal-Mart as theire prime broker. We're in a mess and my feeling is that this is the beginning of the end.

[Chris]

BRIAN!

A different NYTimes article on Sen. Schumer does do a good even handed job of describing lobbyist and corruption. The NY Times doesn't use adjectives like "vicious" or "liar" when describing even politicians. That is just their style. Here is a good summary of the bizarre lack of responsibility felt by politicians immune to consequence....

"In an interview, Mr. Schumer said that until the recent market turmoil, he did not fully appreciate how much risk Wall Street had assumed and how much damage its practices could inflict on ordinary Americans. “It is a learning process, no question about it, an evolution,” he said, adding that he now believed that investors and homeowners must be better protected."

So after destroying the global financial system and ruining the lives of hundreds of millions of people Schumer and Bush now realize they were wrong and anybody who votes for the two major political parties will make sure people like them stay in positions of power and wealth for generations to come.

the rest of the Schumer article is here...

http://www.nytimes.com/2008/12/14/business/14schumer.html?_r=1&partner=rss&emc=rss

And I am sure the NYT Reckoning series will get to Barney soon. Rep. Frank, by the way, won re-election with 74% of the vote last month.

[fezco]

Of course it was the housing bubble. What is there left of anything of value here in the U.S.? We have offshored our: leveraged technology, manufacturing, entertainment, and food production. Was there anything of value that remained? The land that we're standing on, that's what. And now that it is getting cheaper, it is being scooped up by foreign investors. The housing (land), bubble was really the last bubble remaining since land is the only thing you can't offshore. We have to bring manufacturing and leveraged technologies back within our shores before this gets any better.

[Lou]

How did we get here? Easy. Greed and stupidity.

[mucker]

Kee Kee

Don't blame the unions. Unions made goods, services and homes affordable for working people in this country. They also made and make it possible for many working people to have health care. It's ironic you will put unions in the same boat as Walmart a union busting company. When unions were strongest in this country the everyman was not bashing them.

You should take note of the fact reported by srla that the top 1% has doubled it's wealth since 1990. That also means that the next tier of rich has increased their wealth. All this has been going on since the Reagan era. The working class has always struggled in this country but if you read the history of it it was unions that brought the working class out of poverty to decent living conditions.

If current trends continue America will become another Mexico.

[TrojanDLA]

Denial. Think about it: as an expert whose words can make or break your reputation, if you see signs that the economy will go into a total tailspin, do YOU want to be the one that goes out on a limb and be chicken little only to get it wrong? Heck no. It's "safer" to present a "warning" without being committed by saying, "but this is all new, and in this economy, anything can happen."

The truth is many economists harbored great feelings of dread, but feared to be the torch bearer of bad news, so after weighing the risks, they chose to stay silent. Human nature, whether it be economists or pedestrians, people would rather not rock the boat and let somebody else do the dirty work.

[syscom3]

I dont know about the rest of you, but back in 2005, did any of you wonder how people makiing $70,000 a year could afford $400,000 mortgages?

And if you did wonder, why didnt any of our exhalted brilliant politicians, regulators and Wall Street wizardskids also question it?

[tomiboy]

Greed, Do you really think your California old broke down houses are worth 6 times what they cost in Texas. Wake up people.

Tex

[sfvrealestate]

Although I'm a champion Bush hater, I'm a little tired of the 'enough blame to go around' stuff. Here's how "it" (including mortgage AND credit card meltdown) happened: lenders threw money at individuals and entities regardless of whether or not those individuals and entities could pay it back. Just plain ol' bad business practice. This is the reason there were laws against usury in the middle ages.

[Kee Kee]

Mucker,

I have family members in the UMWA. The coal mine wars were fought fifty miles from where I grew up. I understand unions and what they're for.

Why do you think people started buying foreign goods? Maybe because they were cheaper. Not only cheaper, but a family no longer had to take out a personal loan to buy a stove and refridgerator. Ever watch the old re-runs of Let's Make a Deal on game show network? You should. It's more than nostalgic. It's a glimpse back in the day of union made American products. The prices, dollar per dollar, for appliances, furniture and other consumer goods, were more - in actual dollar figure prices - in the 70s than they are now. I remember those days. I also fondly remember that those union made products would last twenty years.

But the unions got greedy. Exhibit A - the automotive industry. What's wrong when the consumer pays an average of $3,000 per vehicle to pay for retiree's health benefits? What's wrong when an uneducated, unskilled assembly line worker is making wages and benefits that ad up to $75,000 a year or more? Have you seen how unwilling the UAWA are to make concessions to save the American car industry?

I understand the purpose for unions as well, if not better, than anyone on this board. But they killed the goose my friend. As far as Wal-Mart goes. Who do you think made Wal-Mart? That would b e working class middle america - union workers.

I have never spent one thin dime in Wal-Mart. I saw their evilness long before it was fashionable. My kids used to tell me I hated success. It was because I saw Wal-Mart sucking the life out of middle america. But it was the very people whose jobs were going to ultimately be destroyed by Wal-Mart who made them what they are today.

[lalandjunkie]

I think we all have a good idea of how we got here but now the pressing question is how do we get out of this?

Even if home prices are brought back to reality, will there be enough consumers left that can afford to buy and give a boost to the economy? After this is all said and done, how many people will have lost their homes to foreclosure, lost their jobs, or both?

I also wonder how this will affect trade as srla mentioned. How will this play out with China and NAFTA?

These are certainly interesting times that we are going through and I pray that everyone makes it out ok.

[Joseph The Real Estate Guy]

I had it with the blaming game coming from Journalists!

They were instigating Greed all along. In the booming years, real estate was on top of the news almost every day.

Without knowing, I would dare to say that maybe most of us are at fault one way or another.

[willwill]

Oh yes! It's all Bush's fault! And Obama will save us all! Thankfully the readers of this blog are smart enough to see that it goes beyond one President. Can you imagine if Bush had tried to shut down all the crazy lending during the housing mania. He would have been laughed out of Washinton. And if you want to start pointing fingers at politicians, well there was a Democratic Congress that went right along with Bush, not to mention Clinton's de-regulation fo the credit default market or all of the deregulation going back to the 80's. The housing bubble was certainly the cause, but as stated in some of the comments above, the problem is that this country doesn't produce anything anymore. So we came up with a stock market/housing market ponzi scheme to float us for the last 10-15 years.

[RZ]

I hope that all of these "How did it happen?" articles, analyses, reports, etc., translate into "How can we prevent it from happening again?" Unfortunately we are not the best at learning from the past mistakes, and as we all know, history does repeat itself. Alan Greenspan may call this recession as "once in a century" but the Great Depression happened less than 100 years ago. And key factors that caused our current economic crisis - greed, overextension of credit - were also culprits of the Great Depression. Apparently enough people didn't learn that lesson and now all of us are paying.

[RZ]

BTW, I'm glad the report includes "consumers who took on mortgages they could not afford " among the parties to blame. I think consumer irresponsibility has been the most underreported story about this economic crisis.

[RZ]

"I don't like it when people are called "dumb" because they bought into the lies that were being upsold to us all."

k2polo: I feel sympathy for people who lost their jobs or a spouse/partner and therefore couldn't afford to keep paying for their homes. But there are many people who are losing their homes because they signed a contract they didn't understand and didn't even bother to ask questions or ask why the terms were too good to be true. Or they didn't have a contingency plan for the possibility that they wouldn't be able to refinance once their ARM was about to reset. Or they didn't think about what could happen in a year or two. Maybe "naive" or "wishful thinker" are better terms than "dumb," but really it comes down to the same thing: many bought homes they couldn't afford.

The fact is that this sort of behavior and decision-making by many of the people now walking away greatly helped the housing bubble to further inflate by adding to the demand for houses, which kept the prices going way up. And their share of the blame is almost always overlooked among the finger-pointing at the lenders and/or government, and the cries for help so that they can stay in their homes. All consumers need to understand how their actions can come back to haunt them, and how it could also affect many others who might suddenly find themselves out of a job because of the economic crisis.

[A Scanner Darkly]

A person making $100K can afford a $700K house if the interest rate is zero.

[MyLessThanPrimeBeef]

I agree with a couple of posters that it's greed. As for stupidity, acutally I think it's the oppoiste. People are too 'smart' in that people 'think' they are smarter than their parents and grandparents, that 'this time, it's different.'

Take, for example, the current Ivy League-centered attempt (haven't you done enough damage to American already?) to cure deleveraging caused by reckless spedning with more reckless spending.

I can already hear the Sophist argument. They will say it's like immunization: first you give a small dose of the deadly virus and if the patient doesn't die, then when the patient actually contracts the disease, she will be OK. So, if you reckless spend a little (say, a few trillions), and if you don't die and technically we are not quiet dead yet, then you are immunized forever to a lot of reckless spending (say, tens or hundreds of trillions).

[LA-renter]

Here, here, sfvrealestate!

Do not give the government too much credit both before and after the bubble burst.

No matter how much debt the US treasury takes on, it will not make the bubble losses go away...

AND

The government may have greased the wheels, but it's implausible and impossible for the government (Congress and/or executive) to cause the housing bubble.

Our government cannot force people with money to invest it foolishly.

Politicians can dream about a homeowner society, and a renter can dream about owning, but if lenders fail to lend the dreams remain just dreams.