Signs of vicodin addiction. Vicodin user message board. Vicodin….

Subprime loans in and of themselves aren't a problem, obviously. It's like a loanshark – they have some unsavory features – but some people are willing to take that risk. The problem comes when you securitize these mortgages in an environment that is rife with asymmetric information, and pass it on to people who aren't aware of the risk. That's when it goes systemic.

The Brookings Institution has a new report called "The Origins of the Financial Crisis" that put some numbers on it – and my understanding is that Fannie and Freddie, while they did both subprimes and securitization – did not mix the two as heavily as other lenders did.

I can tell by your level of discourse that you are quite an intellectual. It would help your arguments if you were able to articulate the main points of the links that you give. Instead, you seem to hold their value as self-evident argument-enders. It leaves me to believe that you don't even understand what they are arguing, but that you merely see people who seem to support your ideological beliefs and count such endorsements as "evidence." However, you have presented no coherent story as to why the GSEs were the main cause of the bubble.

I do agree with some of the points made in the two links that you presented. I believe that the political atmosphere was conducive to the bubble. I'm sure politicians were patting themselves on the back when home ownership rates were rising. However, the CRA regulations didn't cover almost all of the largest mortgage lenders in the US. And, as I've mentioned before, I do believe that Fannie and Freddie added to and participated in the bubble to some degree. The favoritism given to the ratings agencies is also implicated, which I mentioned above.

The main problem with the arguments made in those links is that they simply align factors that help make their argument, while ignoring circumstances that don't support the thesis. This is a confirmation bias. I believe you suffer from this as well. Also, neither of those links even addresses the arguments that I've presented. The Independent one is reacting to "[t]he main answer that is being given, that unscrupulous lenders were taking advantage of poorly informed borrowers," which it correctly concludes "does not fit the evidence nor does it dig deep enough." This does nothing to address my points.

There is also no attempt to put the GSEs activities into perspective. No mention of market share over time for various types of loans. As a result, while we can conclude that they participated in the bubble, we have no way of gauging the magnitude of their impact.

By the way, you still have not answered how the GSEs and US regulations caused the housing bubbles in Europe. In fact, you didn't even seem to be aware of housing bubbles in Europe which makes me think that you haven't bothered to educate yourself on the matter.

The funny thing about this argument is that we're both arguing that it's the government's fault. However, I care about magnitudes and root causality. You seem to be interested in confirming your priors and name calling.

That the Boston Fed document is signed by Richard F Syron isn't a cause-and-effect indictment that Feddie and Frannie caused the housing bubble. Syron worked for the Boston Fed at the time, and the document even says that the suggested guidelines are not regulation (see my comment that quotes it above regarding that point).

Thanks for reminding me of why I seldom comment on this blog. Russ and Don are great, but there are definitely some commenters who need to learn how express their arguments intelligently.

And no, vikingvista, pointing out that the Boston Fed is privately owned does not make me a troll. I can't believe that you would read the comments between me and Mesa Econoguy and conclude that I'm the troll in this. I present facts, figures, and graphs. Mesa Econoguy types profanities. Anyway, you certainly have argued more coherently than Mesa Econoguy, even if I disagree with you. So congrats on that, for whatever it's worth…

O cripes. He is a troll. And here I was duped into attempting a rational debate.

Yeah, Dave, there’s no evidence that Fan & Fred were the cause.

Nah.

Do try to pay better attention, Dave.

Dave, read the FRB Boston piece again. Go on.

Who signed it, Dave? Who’s signature is on p. 6, Dave? Who is that? Seen his name before, Dave?

You’re giving murgeo a serious run for the muirgeo of the year award….

I actually heard some political strategist on one of the 24hr blabfests defend Obama's budget by saying it's actually smaller next year than Bush's was last year. You gotta smoke alotta dope to get on TV and make such a stupid statement as that.

Re: the Boston Fed pdf that Mesa Econoguy linked to…

Do you two even realize that the regional branches of the Federal Reserve are privately owned?

Mesa Econoguy,

You're not making coherent cause-and-effect arguments, and you don't directly respond to my points. Notice that I present graphs, facts, and arguments, while you spit out ideological reactions, profanities, and an irrelevant link. And I think you may have anger management issues. You're likely the type of commenter that caused Russ and Don to shut down comments several months ago.

I'm not some liberal/leftist commenter trying to prop up Frannie and Freddie. I don't even think they should exist. But the evidence that they were the root cause of the bubble just isn't there. And you certainly haven't shown any evidence. Even Russ is careful and humble when he says, "I'm still not sure how important Fannie and Freddie were to the housing calamity…" My explanation even points toward the government and regulation, so I'm surprised that you choose to reject it so strongly. My guess is that you haven't bothered to read or contemplate what I'm saying (or what the links are saying).

You again are confusing cause and effect. No matter how short term the holding, you still must find a buyer. By presuming that suddenly the feedback mechanisms that maintained lending standards all disappeared, you must assume that vast numbers of self-motivated intelligent, and frankly conservative, financial professionals suddenly and all at once became self-destructive idiots. Your position is untenable.

The only reasonable explanation is that under the conditions that appeared to exist, those lowered lending standards did not impart a greater risk or lower value.

If you want to identify the cause of the current problem, you have to identify the cause of the bubble, not the effects (even the effects with positive feedback).

And to identify the cause of the bubble you have to find something that came before the bubble started, and is not explained as an effect of the bubble conditions. Here your identification of monetary and regulatory policy makes more sense, as it is easy to find examples that clearly predated and were initially independent of any changes in the housing market.

There are bad incentives with the ratings agencies, but that has been true for a long time, and the agencies rate thousands of securities, and you are not talking about a subtle drift in ratings standards, but absurdly misapplied ratings of AAA to junk. Frankly, I don't see how the bureaucracy of those companies would even have flexibility to effect such rapid change in ratings procedures. Companies that size have at least SOME momentum. It is plausible that their old ratings procedures did not apply to new market factors, but that is the same as saying that they, like everyone else, was fooled by the bubble.

Further, you don't hear many of the institutions who entered this market blaming ratings agencies, but those institutions do their own analyses and the ratings agencies are for the most part a regulatory formality.

And you often hear the claim that these securities were not understood. That is a claim that really can only be believed by someone without any analytical experience. We're talking about financial experts who deal regularly with high level statistical methods, calculus, and empirical analysis. There was nothing in CDO's beyond their ability to understand. If there were significant barriers to obtaining information, that uncertainty would have been identified, and reflected in the ratings.

Occam's razor. It just makes no sense to assume a vast conspiracy or coincidence among the many players across all the ratings agencies.

The simultaneous rapid development of many raters rating junk as AAA, many lenders dramatically lowering standards, many conservative investors overpaying for junk, many insurers grossly underestimating risk, many mid and low income individuals flipping houses, and many regulators happily and publicly cheering it along; followed by vast confusion about how it could all go so wrong. This IS a bubble, not its cause.

I don’t know how else to say these things.

It’s incredibly obvious.

Government caused this fucking mess. And now they’re “fixing” it.

Bullshit.

Some smartass had a great comment at WSJ 2 days ago. “Perhaps Obama could merge GM with Amtrack. That way, we could park the cars no one will buy next to the tracks no one rides….”

Republicans fucked up royally, and now have suddenly found fiscal responsibility/religion?

Please.

McCain (my useless Senator) is an economic muirg- er, dumbfuck, and now suddenly makes sense?

At least Dumbfuckcrats make no illusions about stealing things……

Divide your face into 2 regions: stupid and moronic. If you don’t get the obvious good intention factor that spun wildly out of control there, well, you’re dumber than fucking muirfuck.

It tells you what the regulators wanted. And this is just one example. What regulators want, regulators get. And boy did they get it.

Believe me, when Russ first started posting his government intervention in housing stories, I was posting them all over the internet, screaming from the rooftops. I thought we had found the smoking gun. But my purpose isn’t to confirm my priors, it is to understand the truth about what happened. And as I read many theories and evidence from many different authors, it became clear to me that the GSEs and CRA played a relatively minor role in the bubble. And I didn’t find the explanation that made the most sense to me in just one place. Arnold Kling doesn’t think the Fed had much to do with it. And Barry Ritholtz has only recently mentioned anything about regulatory arbitrage.

I don’t defend the existence of Fannie or Freddie or the CRA. I dislike Krugman and DeLong, as many readers of this blog do. But I hope that everyone here will consider everything that they read on this subject carefully. Remember that Europe had a housing bubble too. Their central banks largely follow the lead of our central bank, and their banking regulations fall under the Basel agreement too. They had no GSEs or CRA.

I disagree that teaser rates were strictly a result of the bubble, although I would acknowledge that there may have been some cross causality. But the bubble was caused by a degradation in lending standards, which let more buyers of worse credit into the market with more leverage. More buyers with more leverage = higher prices. This seems to have happened because home buyers were given low teaser rates, after putting little or no money down, so that they could afford that would later balloon into larger payments. It wasn’t until the very end of the bubble that people started defaulting even on their teaser rate payments.

Barry’s point is that the originators, who personally vetted the borrowers, had an incentive to make sure that the borrowers didn’t default for the first 90 days, after which they were no longer responsible for the mortgage, given that they could sell it initially. I think you’re missing the point when you react to his “by then, it was Wall Street’s problem" statement, because it is not the case that Wall Street banks simply bought the mortgages from the originators and held them. They are the ones that securitized, paid rating agencies for the AAA ratings, and resold them. They were making money off of this. And when the buyers of CDOs got them, it was no longer easy to “assess their value, with full knowledge of their underlying terms” because the mortgages had been sliced up into tranches and bundled together by the thousands.

Re: rating agencies. They had awful incentives, helped by poor regulations that relied on their ratings. If a rating agency refused to give their security a high enough rating, the bank could threaten to hire another one. So willingness to give high ratings directly resulted in more money for the rating agencies. The rating agencies used to make their money on the buy side, when they worked in the buyer’s best interest. It is a more recent development that they were paid by the sell side, which is where these dubious incentives came from. And here, I blame regulations for giving so much and protection to the rating agencies. They receive this treatment both from Basel and the SEC (who deems them as “Nationally Recognized Statistical Rating Organizations”), in an effort to increase market liquidity by having them rate everything. And by the way, I’m not arguing that more regulations could have prevented this. I’m arguing that the Fed and current regulations were the main causes.

And yes, I believe that a simple mania has something to do with the bubble, in terms of homebuyer/flipper psychology. But without the regulatory incentives and low rates from the Fed, I don’t believe that the mania would have been able to get off the ground in the way that it did.

Mesa Econoguy,

Your link to the Boston Fed’s pamphlet is not evidence that the GSEs caused the housing bubble; in fact it even states that, “These recommendations are intended as guidelines. As with any business strategy, each institution must define for itself what is appropriate, effective, and feasible.” Most of the encouragement of low income lending by the government was toothless and didn’t influence most of the major lenders. I’m interested in understanding the main causes of the bubble; magnitude of influence matters. I think you’re focused on the wrong issues.

As for “what European housing bubble” you can see here. And no, I don't think that's "our" fault, because we weren't a part of the Fed or Basel.