chfaunce wrote:Taggure wrote:The collapse of the real estate market and Wall Street was by and large a result of unregulated (or at least very poorly regulated) capitalism.
Was it really?
And I ask this question because I think it might need an answer. Yes I know that the Wall Street folks went a bit (Ok a lot) wild in the selling of the derivatives markets on Real Estate, but look back at how the real estate market got to the point in which they WS Folks could take advantage of it.
Remember the big push that everyone that wanted to be a home owner could because that was the American Dream and our government was going to help make that Dream come true, Well our Government made regulations as well as relaxed or removed regulations that made housing available to those that really could not afford it. See what the problem was is they made the artificial housing boom by their own actions and when the market starting doing what it should to correct itself they were surprised and did not like the outcome.
Sure, the Government had a part. Still does (like the last tax incentive - they completely ignored the flaw that led to the first collapse). You also left out greed. Uncle may have sparked the boom, but the Government didn't 'make' it. Lots of people and entities 'made' it. Lenders, real estate agents, buyers, and sellers.
Things were being bought and sold (and I'm talking more than real estate) on what they were thought to be worth, or what they might be worth, rather than any real value. It was a big gamble! Regulation is really worthless if the regulations aren't going to be minded and enforced. If this is the case, I personally consider something to effectively be without regulation.
That is the point of government manipulation. By definition, you manipulate things to change the outcome because you are unhappy with the status quo.
The government determined they wanted more people in homes, so they did several things. One of the most important is they made cheap money (well below market rates) available for anyone who qualified for their special groups. Banks can't lend money they don't have. They either have it from deposits or they barrow it at a lower rate before lending it to you. Banks previously were not lending to those people because of the risk involved. If you have $1B to lend in the housing market this year, you generally compete for the least risky people to lend you money too. At some point the risk gets so high, even if you have money left over, you will refuse to lend it. In order for the government to meet their objectives, they had to fix this "problem."
They fixed it by first providing cheap money. Let's assume the market rate was 7% interest for a normal, good risk loan. If bank determined that they needed a 5% return on your loan before you were a good risk to take (i.e. they likely will make money on you), the bank would need to acquire the money for you loan (deposits or barrow) at a rate of no more than 2% or else they would refuse the loan (7% - 5% = 2%). If the bank could barrow money at 4%, they would only be making 3% and your loan would be considered to risky to take. The government decided to provide special lower rates to anyone making a loan to these special groups. E.g. they will loan the bank the money at 1.5%, so that the bank would make 5.5% considering the market rates were 7%. The actual situation is more complex, but this is a rough overview of how the government provided incentives for banks to take risks they wouldn't otherwise.
They also required the banks to make a certain number of these special loans if they wanted access to government money in general. I.e. the government was always doing the cheap money policy, but just not to the extent they needed to in order to accomplish their goals.
At first, the banks just made the loans. However, they soon realized there was further money to be made if they resold the loans as derivative products. Since these were government backed loans (assumption which turned out to be true depending on how much money you gave to certain political candidates), they could be sold and marketed at very low risk investments. I.e. this is similar to how insurance companies work...lots of peoples participating in the program spread the risk out. However, unlike insurance companies, the banks had an incentive to look the other way and insurance companies tightly control who they give policies too. Because of the mechanisms the government had put in place, the banks could make any loan that qualified, regardless of the banks belief you could actually afford the loan, repackage it and sell it as a government approved loan.
This is when the bubble really took off. The government had lowered the bar so low that you could buy "investment" homes even if you had nothing to offer, but willingness to sign a contract. Banks marketed these because they could make a % of you loan simply by brokering it. After resale as a derivative or outright, it wasn't their risk anymore. Prices were driven up in bidding wars since "anyone" could get access to the money. There were way more buyers than sellers on the market, so prices skyrocketed. People started buying homes with the idea that they couldn't lose money. This brought even more money to the game as people started treating these homes like the stock or commodity markets. I.e. something to be played and make money at.
Getting back to the point. The manipulation caused a distortion in the price of money first, in housing second and finally in derivatives. The intention of the market distortion and manipulation by the government was to get more people to buy housing than would otherwise. This distorts the price and it isn't long before even the experts don't know how to price anything anymore. That has been the problem for some time...you know there is bad debt on the balance sheets, but you have no idea how to evaluate it or even price that debt.
This is exactly why the Fed trashed the idea of buying bad debt back and bought shares in companies. They couldn't figure out what the debt was actually worth!
You blame people for "misreading" the market signals about the value of money and housing, buy you are ignoring the fact that the government had manipulated those to the point no one could possibly have known. Even the government couldn't figure out what the debt was worth post crash.
The government has changed our system to a centrally controlled market economy. People still buy and sell based on market principles, but the markets are not free from manipulation. I.e. they can' find the correct prices for various objects. The whole point of government playing with interest rates, discount windows, etc., etc. is to change the market signals so that people will behave a particular way. Of course, this manipulation is for sale to the highest bidder due to the political process. As I pointed out before, that control loop or decision process seems to be a self-feeding/contained neo-merchantilist system. We want the US to produce everything locally, but also to consume it locally. Additionally, we are happy to manipulate the system to your liking for a price.
Everyone complains about regulations not being followed.
Please point me to a single government regulation of the housing market that was not followed during the housing boom/bust. You won't find it because the markets did exactly what the government told them to do.
The housing crises was the natural outcome of the regulations being followed!
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