Barney Frank: Housing Bubble Nostradamus

April 24, 2009

Comments

When I saw Glenn Reynolds‘ snarky post, “BARNEY FRANK IN 2005: Bubble? What bubble?” my instinct was a snarky rejoinder about what a stupid SOB Frank was with a link to my own archives, subtly alluding to the fact that a lot of us got that one wrong.

The link, though, goes to an Ed Morrissey post noting that Frank is now taking credit for having warned about this all along when it turns out “Frank has long been one of the loudest voices supporting the CRA and Fannie/Freddie policies that encouraged irresponsible lending.”

Okay, now that’s funny.

Frank, 22 April 2009:

Frank, 27 June 2005:

45 responses to “Barney Frank: Housing Bubble Nostradamus”

Bithead

April 24, 2009 at 1:18 pm

Loudest voices, I can well believe. (And I might add, the most projected spttle in the process)

What he was actually saying, however, remains at issue.

Here again we see the well noted trick amog Democrats who opn notincing the lynch mob headed their way, leap out in front and make out it’s actually a parade that they’re leading.
Joey Buzz

April 24, 2009 at 1:30 pm

Nothing to see here. Move along…or should I type “on”?
Hoodlumman

April 24, 2009 at 1:30 pm

Spot on, Bithead. Pelosi’s doing this too w/r/t enhanced interrogation.
Bystander

April 24, 2009 at 1:50 pm

This is trick. Anyone can see that the ’05 guy has wire frames and the ’09 guy has black frames. They’re also wearing different color ties. The real question is which one is really Barney Frank, and which one is Bizarro Barney Frank?
Drew

April 24, 2009 at 2:19 pm

Barney Frank is a flat out lying fork.

I have posted numerous times on this site, and others, that readers should go view the CSPAN tapes of Congressional hearings on housing and its regulation. Its not like this isn’t in the public domain, people.

You will see, with your own eyes, Barney Frank, Maxine Walters and other Dems ruthlessly berating regulators (basically calling them fear mongering racists) for having the temerity to say that subsidized/fancy financed housing purchases were out of control, and disaster was looming. You really, really should view the testimony as these Democrats one by one praised the housing effort, and almost physically spat on the poor regulator sent up to give Congress the bad news that their cherished social programs were bankrupting the country.

Its truly disgusting in light of the empirical evidence.

But will the press, or the left, acknowledge Barney’s obvious lies?

Probably not in the current century.
Michael

April 24, 2009 at 2:24 pm

I’ve never bought into Bithead’s “It’s all the Democrat’s fault” line of reasoning. But I have to admit, even I’d be happier if Barney Frank would just keep his damn mouth shut.
Bithead

April 24, 2009 at 2:33 pm

As opposed to being arrested?
Michael

April 24, 2009 at 2:36 pm

As opposed to being arrested?

Being wrong, no matter how loudly and arrogantly wrong, still isn’t a crime. I like the rule of law more than I dislike the sound of Barney Frank.
odograph

April 24, 2009 at 2:38 pm

James, the bad loan binge did not come out of “CRA and Fannie/Freddie policies” that is simply factually false.

To repeat the claim know it is false, would of course make it a lie.

The bubble came out of securitized loans from “innovative” financial institutions like CountryWide, IndyMac, Wachovia, MaMU, … not Freddie or Fannie, and not with any kind of identifiable legal requirement to make crap loans.

No law ever required crap (“NINJA”) loans, period.
odograph

April 24, 2009 at 2:43 pm

Drew, everybody in Washington, including the recent President Bush, congratulated themselves on increasing home ownership. That they did it while reducing oversight and allowing greater financial leverage is, in retrospect, quite tragic.
Steve Plunk

April 24, 2009 at 3:36 pm

Odo has a point about there being others to blame. The trend of making risky loans, however, did originate with congressional hearing concerning “redlining” and the CRA. If Congress is going to create a mood of wild west lending it’s up to corporate management or the Board of Directors to resist and play it smart. They both failed in that responsibility.

Congress still bears a majority of the responsibility though and rather than accept that and learn from it people like Frank deflect blame and bluster on even worse than before. The guy is a menace to the country. A narcissistic socialist who is so drunk on power he can’t see his own failings. With Dems in control and Obama in the White House the bar is open for him to get more drunk.

The housing bubble was a known bubble for many years before popping. Sure Frank was instrumental in starting it but couldn’t the grown ups have done something in the meantime to lessen it? Boards of Directors across the country failed their stockholders by not taking the appropriate steps.
odograph

April 24, 2009 at 3:50 pm

Steve, I encourage you to get more sleep, eat better, and exercise.

Do you feel better already? (Or is perhaps my “encouragment” not legally binding?)

Or conversely, CRA has not been repealed, but all the bad loans stopped. What happened? Surely if the law made it happen, it would still be going until someone made a new law to stop it?

No. The encouragement was always non-binding. It never ever ever ever (enough?) forced a loan to someone with no job or no docs. It never said that crazy LTVs (loan to values) had to be offered or approved.

Government (including Frank) liked a lot of dangerous things, but then so did (do!) their voters. Those voters are not ready to give up their bubble-making home mortgage interest deduction. They are not ready to give up their bubble-making capital gains exceptions. They LIKE a government that makes buying easier, which OF COURSE drives prices higher.
odograph

April 24, 2009 at 3:53 pm

Actually, it is kind of a bottom line that the government now wants more loans and the banks just refuse to do them. Lending in all categories is falling.

How can that happen, you believers in government control of banks and lending?
Steve Verdon

April 24, 2009 at 4:26 pm

James, the bad loan binge did not come out of “CRA and Fannie/Freddie policies” that is simply factually false.

While this maybe be technically correct, I believe it was the case the modifications to CRA was one of the vehicles that allowed some of the abuses to take place. IIRC, I believe that CRA was modified during Clinton’s second term that incorporated some of these types of changes (the repeal of Glass-Steagall).

For the record, there has been CRA related legislation/regulatory changes in 1977, 1989, 1992, 1994, 1995, 1999, 2005, and 2008.

Also, while Fannie/Freddie may not have been a source of the problem they certainly “aided and abbetted” with their operations. There is a reason why both entities went into government recievership.
Drew

April 24, 2009 at 4:26 pm

odo –

I must respectively disagree. And your strident dismissal of CRA/Freddie as a component being “factually false” is well, factually false.

Having been a lender for about 7 years, and a user of credit to acquire companies for 12 years, I’ve seen a credit cycle or two in my day and how sloppy underwriting occurs. I’ve watched it first hand. I should probably more correctly say, how traditional underwriting standards are deliberately compromised because of “special circumstances.” “This time is different” the originators say. Indeed. But bad underwriting is bad underwriting, and always the root cause.

You have chosen to enter the debate, and focus as the culprit, the point where the badly underwritten loans are removed from the balance sheet. This is a natural second step in a sloppy credit cycle. But a step too late in understanding root causes.

To be sure. There were a number of factors in this easy credit cycle: CRA/Freddie and then widespread loan syndication, later, easy Fed credit policies,greedy buyers/greedy mortgage originators, mania in the sense of inflated price appreciation expectations, poor regulatory response, wealth effects from the equity markets and a capital gains policy change………..I could go on. And after all, the real estate boom was a worldwide phenomena, so it can’t just be CRA etc by definition.

But any good analyst – or engineer – would look for root causes before grasping for subsequent events that turned into global mania.

As I’ve pointed out in posts over at Schuler’s GEye if you care to look, the Case Schiller index has a very curious data point. In Q3 of 1996 housing prices (and therefore housing demand/purchases), after a several year period of flatness, distinctly take off like a rocket. I mean like a rocket. Any reasonable person would have to ask what the hell was going on plus or minus 3-6 months to make that happen. Hint: it wasn’t coincident with Countrywide etc syndication of bad loans.

It was closer temporally to a tax policy change, and goings on at HUD.

Choose to blame other, subsequent events if you like. But the data suggest otherwise.
Floyd

April 24, 2009 at 4:37 pm

WHAA??? Isn’t the real Barney Frank….well, frankly… Bizaro?
Still, while TOTALLY unacceptable, he may still be the best Democrat in the house!
steve

April 24, 2009 at 5:40 pm

Drew-Could you link your Case Schiller? I have looked at Case Schiller many times and see no such inflection in 1996. I see a gradual rise with maybe an inflection a bit later. Are you looking at a regional graph? Maybe your rockets do not fly like my rockets? The sharpest inflection looks to be in 2002. Looking at the raw numbers, using Q1 to Q1 (easiest for me to find), the change from 93 to 94 is essentially identical to 96 to 97.

Steve
markm

April 24, 2009 at 5:44 pm

Drew, everybody in Washington, including the recent President Bush, congratulated themselves on increasing home ownership.

And that same admin tried many many times to reform the practices of Fannie/Freddie only to be met by more classic Youtube vids from the above clown, Maxine Watters and some other Bag of Douche…
Steve Verdon

April 24, 2009 at 6:33 pm

Here is a graph of the Case-Shiller Index via Wikipedia.

In looking at the graph, I see an inflection point really in the early 1990s. Now, I’m using the term inflection point as defined here. In layman’s terms a switch in the graph’s curvature from concave (“open downwards”) to convex (“open upwards”), or to be mathematicall precise a point where the second derivative is switches sign around the inflection point).

Now, I do think Drew is right in that the slop of the graph increases after 1996 at an increasig rate up through the peak in 2006. It seems reasonable to conclude that something change around 1996/1997 (possibly a bit later) to cause this phenomenon. What it was I don’t know. To try to determine what it was would require more work than can be done quickly in excel and posted in the comments section of a blog.
odograph

April 24, 2009 at 7:14 pm

I know you guys at the Tea Party (real or virtual) like to repeat CRA to each other, but it is actually irrational.

I’ve shown you graphs before that show the poison loans, especially in the worst years (2004-2006) going into securitized products. They did not go into the Freddy-Fannie portfolio until after the bust, when congress sent them in to be buyers of last resort.

Come on, you should remember that the classic (and true) story is that American lenders (not really banks, but bank-like and bank-associated entities) wrote loans, securatized them, and sold them around the world, to places like that small village in Scandinavia who thought they were buying AAA.

The reason loans don’t go now is not because laws changed, but because those buyers around the world have had a rude awakening about what AAA bonds may be hiding.

I get that this is a market failure, and therefore leads to some cognitive dissonance in some circles.
odograph

April 24, 2009 at 7:22 pm

BTW, I’m willing to talk about the start of the housing bubble, but that isn’t really the same question as who wrote the bad loans.

And I think the bad loans, the 2004-2006 spike, are really what is costing us here.

(Speaking from Southern California, it has almost been a question of when are we *not* in a bubble, and how bad is it?)
odograph

April 24, 2009 at 7:26 pm

BTW2, as you consider 1996 as a bubble start, remember that it was pretty synchronized world-wide. NPR puts it down to the “giant pool of money” coming out of Asian markets.
steve

April 24, 2009 at 8:46 pm

Steve-I think this may be the graph they want to use.

http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html

More interesting graph. Does anyone have data on the growth of the shadow banking system? Have not seen a good chart on that, even at CR.

Steve
Adriane

April 25, 2009 at 2:01 am

How exactly is making loans to people who can not pay them back, good business practice?

How exactly is making lending institution make loans to people who can not pay them back, good governance?
Rick DeMent

April 25, 2009 at 7:53 am

Well the government never mandated NINA loans private lenders did that all on their own. so the idea that it was the government forcing banks to make the riskiest loans is horefeathers.
odograph

April 25, 2009 at 8:20 am

How exactly is making loans to people who can not pay them back, good business practice?

It was good business practice for the loan writers, because they could pass the hot potato before they got burned They sold the loan to someone else.

A business partner told me “I should have known, when I saw all those 20 year old mortgage brokers showing up in our building with hundred thousand dollar Mercedes that it was about to crash.”
Janis Gore

April 25, 2009 at 8:33 am

Wasn’t 2002 or thereabouts the year that dividends had a one-time capital gains tax of 0% or somesuch?

Those chunks of cash might show in an upward inflection around that time.
Ottovbvs

April 25, 2009 at 10:46 am

The mantra that it was all Barney Frank’s, CRA’s, Acorn’s fault that a housing bubble was created and caused the financial system to collapse was alway something of a stretch. It’s never gained any traction outside of movement conservatives who blog at places like this basically because it’s patently absurd. Assigning huge consequences to relatively trivial events usually makes those making these claims look more ridiculous than the target. It’s a behavioral trait that Republicans and conservatives have adopted for almost every situation. In a country that has become increasingly weary of this sort of game show nonsense it just doesn’t work any longer. For example, the Chavez handshake which has been the source of constant right wing comment over the past week with various hyberbolic claims by people like Rove and Gingrich that it meant the collapse of US prestige in the Western Hemisphere. Guess what? Fox, they of fair and balanced put out a poll taken over the past three days and Obama’s approval had risen five points. The point being if you keep saying stupid things people tend to think you are stupid. There’s no sign conservative are going to end the practice so the results are predictable.
Grewgills

April 25, 2009 at 11:33 am

As I’ve pointed out in posts over at Schuler’s GEye if you care to look, the Case Schiller index has a very curious data point. In Q3 of 1996 housing prices (and therefore housing demand/purchases), after a several year period of flatness, distinctly take off like a rocket…
It was closer temporally to a tax policy change, and goings on at HUD.

Which particular tax changes and HUD manipulations are you referring to?

Hint: it wasn’t coincident with Countrywide etc syndication of bad loans.

Many more bad loans there than at Fanny and Freddy though and those are the result of bad deregulation rather than bad regulation. The changes to allowable leveraging in 2004 (if memory serves) upped this all by a factor of ~3. When was it most of this bad debt was racked up?

It seems reasonable to conclude that something change around 1996/1997 (possibly a bit later) to cause this phenomenon.

The graph steve linked to shows the inflection in ’97 as well. Which would make it coincident with Countrywide et al. (I’m not saying it’s the only cause of the mess, just imo the biggest.)

An analogy here would be a child playing with fireworks. Seeing how much fun the child is having some drunken frat boys (redundant I know) decide it would be even more fun with dynamite.
Who do we blame for the resultant destruction?
To carry it on to 2004 and beyond, parents see how much fun the boys are having with the dynamite and so give them some C4.
Now who do we blame? What is the nature of that blame?
Adriane

April 25, 2009 at 1:07 pm

Rick – the CRA mandates loan applicants by racial per centages, whether the individual borrower is credit worthy or not. Therefore, the government mandated risky loans, which is not good governance.

Whether the Fed mandated the riskiest of loans was not my question.
odograph

April 25, 2009 at 2:31 pm

False, Adriane:

“The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation.”

Wikipedia

Not only that:

“The Federal Reserve and the FDIC holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis.”

and:

“Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA.”
Tjent

April 25, 2009 at 5:36 pm

Odograph, Fanny Mae asked for and got permission to alter conforming loan requirements to allow them to enter the subprime market. They were in fact part of the problem. Also, if you listen to Frank (who is a misnomer since “frank” means honest and candid) in the first excerpt, HE is the one who makes the argument that this crisis largely arose because people who shouldn’t be buying homes at all were “pushed into it.” Then goes on to blame Republicans. Low-income buyers – who are disproportionately subprime – almost always buy with the aid of the GSEs or FHA. The liberal democrats were zealous cheerleaders for these entities. There’s lots of blame to go around, including, Republican anti-regulation of securitization as you noted. But Frank and his ilk need own up.
JAB

April 25, 2009 at 5:45 pm

But the MOST important point was not mentioned here…there won’t be a Barney Frank, jr.
Dracovert

April 25, 2009 at 7:01 pm

Any talk of CRA 1977 is incomplete, because CRA was amended, interpreted, and supplemented. During the Clinton years, there were multiple studies, hearings, proposals and laws refining CRA, from a prescient proposal for the outright abolishment of the CRA to many laws and rulings that refined and expanded the application of CRA.

In 1998, the Boston Federal Reserve Bank issued a summarizing paper called, “Closing the Gap: A Guide to Equal Opportunity Lending.â€ The Appendix of this paper contains a (then current) list of the various laws and regulations pertaining to CRA and related ordinances. This paper from the Boston Fed was adopted throughout the federal system, and explicitly stated that “equal opportunityâ€ (sub-prime) lending was safe, and reinforced the requirement of lending institutions to make such loans under penalty of law. The Boston FRB paper further relaxed standards for loans by reducing the down payment and the borrower’s income requirements in applying for a mortgage loan, giving specific instructions on how to make an otherwise “unqualified” borrower to appear qualified. The relaxed standards applied to everyone equally. There was an implicit assumption by the government that the value of housing would never go down, the only possible rationale for mandating mortgages for people who did not have the income to repay their note; even if the note could not be repaid the ever-increasing value of the property would cover any losses.

In summary, at the end of the Clinton Administration the government required that:

* Banks and lending institutions give mortgages to people who were previously ineligible for such mortgages due to insufficient assets (down payment) or insufficient income, or both;

* The relaxed standards for mortgage lending were extended to all;

* Mortgages were bundled and securitized without regard to quality, that is, good mortgages were bundled with bad mortgages and sold worldwide; and

* Refusal to give mortgages to unqualified borrowers could result in legal action and financial penalties.

So, were the banks “greedy”? Well, after the federal government explicitly approved loans to unqualified borrowers and required, under penalty of law, that such loans loans be issued, one cannot identify greed as a primary cause of the mortgage fiasco. The banks did exactly what the federal government mandated for them, issue loans to unqualified borrowers.

All of the subsequent trillions of dollars of mortgage problems thus hinged on government, primarily Democratic Party, actions/incompetence. Republican actions to reform the mortgage system and Fannie and Freddie were met with resistance and blocking actions by Democrats in congress, primarily Dodd and Frank.

If you want to understand how we got in this mess, the very best summary is contained in the Boston FRB paper, “Closing the Gap: A Guide to Equal Opportunity Lending.â€
odograph

April 26, 2009 at 9:03 am

Tjent, check out the chart here (“holdings of mortgage debt outstanding by type of institution”):

Again … It Wasn’t Fannie and Freddie

“And starting in 2002, Fannie Freddie (pink line, click on chart to enlarge) lost market share to ABS (light blue line)”

Dracovert, I think that these things keep boiling down to “ecouragement” that people want to paint as “mandate.” If they were mandated, they’d show up in the loan percentages, in the gross data, which they don’t. See my previous link and chart.
Black Saint

April 26, 2009 at 9:24 am

Barney Frank, Dobb and a whole supporting cast of Politicians caused this world wide meltdown and are now pointing fingers every way but at their own corrupt stupid faces.
odograph

April 26, 2009 at 10:24 am

You know, I am reading a new blog called NeuroWorld. I’m interested in the human mind, and try to battle my own biases.

That blog ran an essay a little while back about the torture memos. IIRC Ryan’s cynical/scientific view was that they’d change nothing, because we’ve had long enough to become settled in our beliefs. New data would not be strong enough to overcome that. We aren’t that rational.

That’s something to be aware of, in ourselves, and be on watch for.

We wouldn’t want to say “Barney Frank, Dobb and a whole supporting cast of Politicians caused this world wide meltdown” when the data has just shown otherwise. It’s very human to do that, but it’s wrong, irrational, biased.
Bithead

April 26, 2009 at 12:23 pm

Being wrong, no matter how loudly and arrogantly wrong, still isn’t a crime.

Really? Does that mean we shouldn’t see prosecutions of the people who acted on legal advice as regards interrogation procedures?

While this maybe be technically correct, I believe it was the case the modifications to CRA was one of the vehicles that allowed some of the abuses to take place. IIRC, I believe that CRA was modified during Clinton’s second term that incorporated some of these types of changes (the repeal of Glass-Steagall).

I’d say it was the primary cause, myself.

Or conversely, CRA has not been repealed, but all the bad loans stopped. What happened?

THey ran outta money?
Michael

April 26, 2009 at 5:41 pm

Really? Does that mean we shouldn’t see prosecutions of the people who acted on legal advice as regards interrogation procedures?

I certainly hope not. The fact that we, as a society, can’t agree on whether or not water boarding is torture, then there is no reason to expect that those following the orders should have recognized them as illegal orders. Under those circumstances, “just following orders” is a valid excuse.

Likewise if DOJ and OLC lawyers were giving good-faith advice based on their understanding of the law, I don’t believe they should be prosecuted. However, if the ABA wants to punish them for their decisions, that’s their prerogative.

The only reason I’d want to see prosecutions is if somebody gave advice they knew was bad in order to enable someone else’s personal or political ambitions, or after the fact in order to protect cover up or protect those who broke the law.
An Interested Party

April 26, 2009 at 7:15 pm

The fact that we, as a society, can’t agree on whether or not water boarding is torture…

How, exactly, is waterboarding not torture…
Michael

April 26, 2009 at 7:48 pm

How, exactly, is waterboarding not torture…

I believe it is torture. What I was saying is that our society isn’t close to a unanimous, or even significant majority agreement on this.
An Interested Party

April 27, 2009 at 6:24 am

re: Michael | April 26, 2009 | 07:48 pm

I understand…I wasn’t so much directing my question towards you, but rather, towards anyone who doesn’t think it’s torture…
Bithead

April 27, 2009 at 2:27 pm

Well, let’s try reversing this;
By what masure IS it torture?

See, here’s the thing; by some of the definitions I’ve seen, being forced to listen to Barry Manilow is torture.
An Interested Party

April 27, 2009 at 7:49 pm

re: Bithead | April 27, 2009 | 02:27 pm

Barry Manilow, eh? If you don’t think it’s torture and want to make such an idiotic, asinine statement…well, to echo what someone wrote on another thread…I wonder how much you would have to be waterboarded to admit that it was torture…