June 15, 2008

Selective History

The Washington Post has the first of a three part series on the Housing Bubble. They place the beginning of the bubble in 1986 with the invention of the collateralized mortgage obligations.

In 1970, when demand for mortgage money threatened to outstrip supply, the government hit on a new idea for getting more money to borrowers: Buy the 30-year, fixed-rate mortgages from the thrifts, guarantee them against defaults, and pool thousands of the mortgages to be sold as a bond to investors, who would get a stream of payments from the homeowners. In turn, the thrifts would get immediate cash to lend to more home buyers.

Wall Street, which would broker the deals and collect fees, saw the pools of mortgages as a new opportunity for profit. But the business did not get big until the 1980s. That was when the mortgage finance chief at the Salomon Brothers investment bank, Lewis Ranieri -- a Brooklyn-born college dropout who started in the company's mailroom -- and his competitor, Laurence Fink of First Boston, came up with a new idea with a mouthful of a name: the collateralized mortgage obligation, or CMO. The CMO sliced a pool of mortgages into sections, called "tranches," that would be sold separately to investors. Each tranche paid a different interest rate and had a different maturity date.

The reporters noted that as Fed Chief Alan Greenspan helped by lowering interest rates.

The average rate on a 30-year-fixed mortgage fell to 5.8 percent in 2003, the lowest since at least the 1960s. Greenspan boasted to Congress that "the Federal Reserve's commitment to foster sustainable growth" was helping to fuel the economy, and he noted that homeownership was growing.

But they completely missed discussing the part that Alan Greenspan played in inflating the bubble. After all, in a major speech given in February 2004, Greenspan made it clear he was a fan of the innovative financial offerings and he urged people to buy homes using adjustable rate loans.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

It was then that the really sleazy lending policies took off and the Option ARM came to the fore. Greenspan certainly should take credit for the fact that the bubble became so big and the results are so awful for our country because he was the traffic cop on the beat when the big boys decided to game the system and he played cheerleader.

Posted by Mary at June 15, 2008 02:36 PM | Economy | Technorati links |

And to think, the same conservative nuts who gave our country this mortgage crisis want to do exactly the same thing to Social Security with their "privatized" account scheme...and no doubt with the same result.

In this mortgage debacle, the brokers and mortgage companies get bailed out, while the homeowners sucked into this right-wing scheme get stiffed.

In the Social Security conservative-generated catastrophe that would be caused by this "privatization" scheme, no doubt the broker and investment houses would get bailed out while a whole lot of retirees would end up out on the streets, digging through garbage cans for sustenance.

I'm not fooled.



Posted by: The Oracle at June 15, 2008 07:49 PM

Lenders pulled this same crap back in the 1980's -- with ARMs and huge "bubble payments" that almost no one could meet. I wondered if Greenspan had lost his mind when he started pushing ARMs. The obvious answer is "yes".

"Privatize" is code language for "make some Republican donor happy" -- can you imagine how many people would be injured if their retirement money were in a tanking market? I suppose that, to a degree, that describes most 401(k) investments right now.

Posted by: Scorpio at June 16, 2008 08:18 AM

A stunning part of this is the paragraph touting socialism by the government but only to and for the finacial sector. Done in the trickle down mode, the great benefit that sells it is more cash for home buyers.

"the government hit on a new idea .. Buy the 30-year, fixed-rate mortgages from the thrifts....

In turn, the thrifts would get immediate cash to lend to more home buyers.

The most stunning part of that line is the idea was conceived by "the government".

A vast unaccountable entity very similar to a corporation
only not for profit.

Posted by: Tim Shea at June 16, 2008 09:08 AM

The pattern of government providing a subsidy to the wealthy is in fact the basic story of the US economy, going back to the canal system of the early 1800s. The US government has always used the rhetoric of expanding the economy for all as a cover for the latest scheme. Whether or not it ends in disaster for the common folk is irrelevant, compared to the joy to be had in looting the treasury while the scheme still sounds credible enough to be politically viable.

There is a good old American word that those in power use for those who do their jobs and follow the rules, including old-line businesses that make and sell a product that people actually use. It's "sucker."

The long battle between the Jeffersonians and the Hamiltonians is not between liberty and authority, but between liberty and authority vs. rip-off and run. Between people who actually believe the USA can work as conceived, and those who see it as a great facade behind which they can rob us with a pen. (The Wizard of Oz was invented by a populist.)

Fundamental changes in government -- especially those that empower the poor and people of color -- are needed to end this racket. Call it democratic socialism, reparations, economic democracy, participatory democracy, an end to corporate personhood, honoring native treaties -- we need a major change in the pattern -- in the 220 year old scam.

Posted by: Larry Yates at June 16, 2008 09:32 AM

You are absolutely correct. Rather a major omission.

Posted by: Batocchio at June 16, 2008 09:33 AM

I remember folks in my office telling me to grab an ARM, put my down from my pension, 401K or where ever I could grab the cash and run with it. Trouble was, I remembered the late 70's and questioned why anyone would get suckered into watching the balloon go up. Yet history is fleeting and we watched people get burned again and unfortunately, this scam will burn people, again (even after recent events).

Posted by: Ron Russell at June 16, 2008 07:22 PM

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Posted by: Best History Websites Guide at June 16, 2008 10:21 PM

Greenspan had to lower rates to stimulate the economy,which stunk at the time.

Posted by: brian at June 17, 2008 01:45 PM