The Mortgage Crisis: Suddenly Everyone's an Expert

Imagine you met a rocket scientist in a bar, and after a few minutes, you began to start telling the rocket scientist what they were doing wrong. Imagine if you immediately acted as though you knew more about their profession than they did.

That's sort of the way I feel in watching and listening to every so called "expert" attempt to assign blame to the roots of the mortgage crisis. The mortgage crisis is rooted in such concepts as Mortgage Backed Securities, mortgage swaps, Federal Funds Rate, and Government Sponsored Entities. There is financial sophistication that even those involved in the business would struggle to understand. Yet, there are sorts of pundits that have turned themselves into financial experts and they are quick to assign blame. There is a sort of absurd irony in this. Most of these folks had never heard of the concept of Community Reinvestment Act until about a month ago. They'd likely never heard of either Fannie Mae or Freddie Mac until July. It's probably been no more than a couple of weeks since they were introduced to the bank deregulation act of 1999.

Now, these same folks who hadn't heard of any of these concepts until a couple of months ago are assigning blame to each and every one of them. Furthermore, and with no surprise, they are assigning blame based on ideology and political opportunism. Republicans and Conservatives have made the Community Reinvestment Act the demon because it the mortgage equivalent of affirmative action and social engineering. They have made Fannie Mae/Freddie Mac the zenith and leader of the crisis because Democrats have a much stronger relationship with them. Democrats, on the other hand, are quick to blame deregulation, and the bank deregulation bill of 1999 specifically, because deregulation is a Conservative concept.

Never mind of course that the situation is far more complicated than merely blaming one concept, let alone making such a determination after only being introduced to these concepts on months ago. The analysis is so amateurish it would be funny if they weren't dealing with something as important as it is. For instance here is a sample.

In the early 1990s I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting. One of the hottest sessions of the conference explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages. One newspaper, the Atlanta Journal-Constitution, had already won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and the Detroit Free Press, had also weighed in with their own analysis based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.

Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels, and higher loan defaults rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue—mostly because newspaper reporters and editors in this pre-talk radio, pre-blogging era were determined to make it so. Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.

Eventually, the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study which concluded that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed. This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed’s conclusions showed serious deficiencies in the original work. One economist for the Federal Deposit Insurance Corp. who looked more deeply into the data, for instance, found that the difference in denial rates on loans for whites and minorities could be accounted for by such factors as higher rates of delinquencies on prior loans for minorities, or the inability of lenders to verify information provided to them by some minority applicants.

Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards in order to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled “Closing the Gap: A Guide to Equal Opportunity Lending”.

In other words, the roots of this crisis were started in the 1990's and all financial reporters knew about its roots. Yet, this particular reporter apparently never said anything until know. I guess the absurdity of such claims just passes over the head of such reporters. If this was always a problem and that problem could be seen for more than a decade, why is it that no one raised any eyebrows in the entire field about this until after the concept. Not only is social engineering responsible, through the Community Reinvestment Act, but the information about this was available to all for more than a decade. Yet, this concept only saw the light of day after the crisis happened just in time for it to be used as an ideological bludgeon.

Here is how Ed Morrissey described the crisis.

Democrats have tried to cast blame for the credit-sector meltdown on deregulation, and point to the repeal of the Glass-Steagall Act as the linchpin. The repeal came in 1999, though, and it did nothing to cause the real cancer at the heart of the crisis: wildly overvalued mortgage-backed securities issued by Fannie Mae and Freddie Mac. If Democrats don’t believe that, they can ask one of their own:

...

In fact, the repeal made it possible to rescue depositors from the collapse of banks and protect FDIC funding, keeping taxpayers from footing the bill for the collapse. And the repeal was no partisan project, either; it passed 90-8. Thirty-eight Democrats in the Senate voted for the repeal, including Barack Obama’s running mate, Joe Biden, as well as Chuck Schumer, John Edwards, Chris Dodd, John Kerry, Joe Lieberman, and others. In other words, a Democratic President signed it, and it had the support of members of every Democratic ticket since then — including Obama’s.Obama wants to blame

Republicans for transparent political purposes. Phill Gramm wrote the bill, and Gramm has been an adviser to John McCain. That makes this a convenient target for the Democrats, but Clinton won’t play along with it. He insists that the repeal of Glass-Steagall was something he supported on his own, and that it had nothing to do with the financial crisis we see now.

Democrats don’t want to talk about the real problems at the heart of this crisis. Fannie Mae and Freddie Mac created an artificial demand for loans by buying up bad paper and turning them into overvalued MBSs. When regulators tried to report accounting irregularities, Democrats like Barney Frank, Lacy Gray, and Gregory Meeks accused them of racism. Some Republicans, such as Chuck Hagel, McCain, John Sununu, and Elizabeth Dole, tried bolstering the regulation of Fannie and Freddie, but Democrats succeeded in blocking those attempts.

The only problem with pinning all the blame on Fannie Mae/Freddie Mac is that this crisis started as a sub prime mortgage crisis. Fannie Mae/Feddie Mac, as anyone in the business would know, don't do sub prime mortgages. Inside the business, most consider sub prime mortgages as anything not done by Fannie Mae and Freddie Mac. In fact, none of the troubled mortgages that started this crisis were underwritten and securitized by either. They were done by private Wall Street bond traders and bankers. Whatever troubles Fannie/Freddie got themselves into, it was in response to the trouble started by the sub prime industry. Of course, I guess we should all give Mr. Morrissey a break since he probably hadn't heard of either Fannie Mae or Freddie Mac until it was time for him to assign blame for the crisis. It seems he, like most of the new so called experts on this crisis, took their quick crash course in complex financial concepts and now they are ready to make judgments and assign blame.

It's always dangerous to talk about something that you know nothing about. You always run the risk of sounding like you really do know nothing. It is of course even more dangerous to print something about which you don't know because your ignorance will then filter to the rest of the public. Then, the rest of the public begins to tell everyone they know and suddenly the absurd becomes the going narrative. That's what happens when ignorant folks act as experts, and unfortunately, in this crisis, that's exactly what is happening.

Here is the roots and development of the crisis as I saw it.