Really interesting Don! I was curious about your thoughts on #3 and #5 specifically. #3 seems to fudge it a little – I’m sure falling home values weren’t necessarily what “lit the fuse” – but they certainly “caused” the crisis insofar as there was a feedback loop. She mentions that subprime quality was declining every year – so clearly rates were going to go up, defaults would go up, and banks would move out of the sub-prime market regardless. But that doesn’t mean that falling home values didn’t cause the sharp rise in defaults. If she doesn’t want to call that a true “cause” that’s fine, but I would guess that helped to make the difference between a smooth market adjustment spread out over time and a crisis.
#5 bothers me more though. That explanation seems to be subject to the same sort of selection bias that Yuliya herself points out in #6. Of course mortgages that were originated for refinancing performed better – if you’re going to choose to refinance and be approved, you’re going to be more creditworthy on average than the pool of people who are simply buying a home. That doesn’t mean that the creditworthiness of refinancers didn’t decline over time, or that conditional on creditworthiness, refinancing rates increased. She seems to be paying attention to selection issues in one instance, but ignoring them in others.
Very illuminating, though!
AnonymousAugust 13, 2009 at 2:37 pm
found reading it a waste of time. You have a housing boom and bust. Why? greed & stupidity. No myth busting required to understand that.
the article can be filed under “academics keeping themselves busy for the sake of it.”
AnonymousAugust 13, 2009 at 3:33 pm
Basically I have to agree with you.
My thought is that the “myths” were created by disinformation spread by the very people that caused the problem, and were so created to confuse people as to where the real responsibility lay.
The same greed and stupidity can be seen playing out right now once again in the cash for clunkers program. Give people an opportunity to reach into their neighbor’s pocket and help themselves and they will not hesitate for a moment.
Anyone who can convince themselves that those who participated in the cash for clunkers program did so out of motivation to help the environment is indeed eligible for mental upgrade.
AnonymousAugust 14, 2009 at 5:04 am
How do you explain a sudden coordinated increase in human stupidity and greed?
AnonymousAugust 14, 2009 at 1:03 pm
The “greed and stupidity” conclusion needs more explanation. There is always greed and stupidity, but it doesn’t just all start focusing on real estate and mortgages by random chance. You might as well start quoting Keynes.
AnonymousAugust 14, 2009 at 5:31 pm
Exactly. Greed and stupidity are no more an explanation for a financial crisis than atmospheric oxygen is an explanation for your house burning down.
AnonymousAugust 19, 2009 at 2:54 pm
I don’t care what exactly pointed the attention to real estate.
But once the asset price rose abnormally and your taxi driver and hairdresser startet explaining the virtues of owning real estate, you should have known it was time to get out.
J CortezAugust 13, 2009 at 10:34 am
I lived in Southern California and worked in real estate from 2005-2008 and completely disagree with pretty much all of her points. What I saw does not match up with what she is talking about.
Out of all her points, only Myth 1 is sound. I chuckled on Myth 8 because totally conflicts with what Bernanke was saying for years previous to the crash. Was this unexpected? Well, it must have been since pretty much everyone including the wise Bernanke didn’t see it. And for years during the boom, the Fed economists had said everything was just fine in the housing market. The only people that had issues were the Austrians and a few financial people that saw the problems with quants and risk levels like Nassim Taleb.
I’m sorry but this article was garbage. But then again, she’s a Fed economist, so I didn’t expect much anyway. I mean, what do expect a central banker to say? Yes, our stupid policies helped screw everything up? The people at the Fed will never take responsibility for their mistakes. Just look at Greenspan covering himself during his congressional grilling this past year.
Now, don’t misunderstand me, I’m not trying to imply that the Fed alone is the problem, but they are a large piece and Demyanyk doesn’t want to admit that. She’ll write about sub-prime instead.
J CortezAugust 13, 2009 at 5:35 pm
I lived in Southern California and worked in real estate from 2005-2008 and completely disagree with pretty much all of her points. What I saw does not match up with what she is talking about.
Out of all her points, only Myth 1 is sound. I chuckled on Myth 8 because totally conflicts with what Bernanke was saying for years previous to the crash. Was this unexpected? Well, it must have been since pretty much everyone including the wise Bernanke didn’t see it. And for years during the boom, the Fed economists had said everything was just fine in the housing market. The only people that had issues were the Austrians and a few financial people that saw the problems with quants and risk levels like Nassim Taleb.
I’m sorry but this article was garbage. But then again, she’s a Fed economist, so I didn’t expect much anyway. I mean, what do expect a central banker to say? Yes, our stupid policies helped screw everything up? The people at the Fed will never take responsibility for their mistakes. Just look at Greenspan covering himself during his congressional grilling this past year.
Now, don’t misunderstand me, I’m not trying to imply that the Fed alone is the problem, but they are a large piece and Demyanyk doesn’t want to admit that. She’ll write about sub-prime instead.
There were _two_ cases of mortgage fraud on my block of about 24 houses — the mortgage originator paid people to sign the load papers, and then defaulted on their loan, after the loan was resold and “securitized”. Both houses were then occupied — and trashed — by criminals for a period of months. New homes. Trashed. Crime run out of the homes.
Not enough has been written about all of the mortgage origination fraud that took place — people in the industry here in Orange County know what was happening, loans made that could never be repayed, then packaged and resold.
Everyone know what was going on on the ground here. Almost no one has written about it.
I have read several stories, however, about the fact that the FBI was allocating almost no resources to this problem. They simply refused to investigate this sort of crime.
incuhedAugust 13, 2009 at 9:08 pm
On Myth #2:
“Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership.”
So she limits her idea of home ownership increases to first-time buyers? Is that the classical and final definition of home ownership at the margin? I’m not convinced.
I would like to see data that trace subprime loans to second homes, as well as individuals and families that decided they could afford a larger and more ornate living space for the one they were living in due to the distortions in the market. And what about those who dropped out of the home ownership game only to come back when the conditions seemed more attractive? Those wouldn’t be first-timers.
She may be correct, but I think her argument there is a red herring and does not look at the full spectrum of what constitutes increased home ownership, at least not in that blurb.
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Really interesting Don! I was curious about your thoughts on #3 and #5 specifically. #3 seems to fudge it a little – I’m sure falling home values weren’t necessarily what “lit the fuse” – but they certainly “caused” the crisis insofar as there was a feedback loop. She mentions that subprime quality was declining every year – so clearly rates were going to go up, defaults would go up, and banks would move out of the sub-prime market regardless. But that doesn’t mean that falling home values didn’t cause the sharp rise in defaults. If she doesn’t want to call that a true “cause” that’s fine, but I would guess that helped to make the difference between a smooth market adjustment spread out over time and a crisis.
#5 bothers me more though. That explanation seems to be subject to the same sort of selection bias that Yuliya herself points out in #6. Of course mortgages that were originated for refinancing performed better – if you’re going to choose to refinance and be approved, you’re going to be more creditworthy on average than the pool of people who are simply buying a home. That doesn’t mean that the creditworthiness of refinancers didn’t decline over time, or that conditional on creditworthiness, refinancing rates increased. She seems to be paying attention to selection issues in one instance, but ignoring them in others.
Very illuminating, though!
found reading it a waste of time. You have a housing boom and bust. Why? greed & stupidity. No myth busting required to understand that.
the article can be filed under “academics keeping themselves busy for the sake of it.”
Basically I have to agree with you.
My thought is that the “myths” were created by disinformation spread by the very people that caused the problem, and were so created to confuse people as to where the real responsibility lay.
The same greed and stupidity can be seen playing out right now once again in the cash for clunkers program. Give people an opportunity to reach into their neighbor’s pocket and help themselves and they will not hesitate for a moment.
Anyone who can convince themselves that those who participated in the cash for clunkers program did so out of motivation to help the environment is indeed eligible for mental upgrade.
How do you explain a sudden coordinated increase in human stupidity and greed?
The “greed and stupidity” conclusion needs more explanation. There is always greed and stupidity, but it doesn’t just all start focusing on real estate and mortgages by random chance. You might as well start quoting Keynes.
Exactly. Greed and stupidity are no more an explanation for a financial crisis than atmospheric oxygen is an explanation for your house burning down.
I don’t care what exactly pointed the attention to real estate.
But once the asset price rose abnormally and your taxi driver and hairdresser startet explaining the virtues of owning real estate, you should have known it was time to get out.
I lived in Southern California and worked in real estate from 2005-2008 and completely disagree with pretty much all of her points. What I saw does not match up with what she is talking about.
Out of all her points, only Myth 1 is sound. I chuckled on Myth 8 because totally conflicts with what Bernanke was saying for years previous to the crash. Was this unexpected? Well, it must have been since pretty much everyone including the wise Bernanke didn’t see it. And for years during the boom, the Fed economists had said everything was just fine in the housing market. The only people that had issues were the Austrians and a few financial people that saw the problems with quants and risk levels like Nassim Taleb.
I’m sorry but this article was garbage. But then again, she’s a Fed economist, so I didn’t expect much anyway. I mean, what do expect a central banker to say? Yes, our stupid policies helped screw everything up? The people at the Fed will never take responsibility for their mistakes. Just look at Greenspan covering himself during his congressional grilling this past year.
Now, don’t misunderstand me, I’m not trying to imply that the Fed alone is the problem, but they are a large piece and Demyanyk doesn’t want to admit that. She’ll write about sub-prime instead.
I lived in Southern California and worked in real estate from 2005-2008 and completely disagree with pretty much all of her points. What I saw does not match up with what she is talking about.
Out of all her points, only Myth 1 is sound. I chuckled on Myth 8 because totally conflicts with what Bernanke was saying for years previous to the crash. Was this unexpected? Well, it must have been since pretty much everyone including the wise Bernanke didn’t see it. And for years during the boom, the Fed economists had said everything was just fine in the housing market. The only people that had issues were the Austrians and a few financial people that saw the problems with quants and risk levels like Nassim Taleb.
I’m sorry but this article was garbage. But then again, she’s a Fed economist, so I didn’t expect much anyway. I mean, what do expect a central banker to say? Yes, our stupid policies helped screw everything up? The people at the Fed will never take responsibility for their mistakes. Just look at Greenspan covering himself during his congressional grilling this past year.
Now, don’t misunderstand me, I’m not trying to imply that the Fed alone is the problem, but they are a large piece and Demyanyk doesn’t want to admit that. She’ll write about sub-prime instead.
There were _two_ cases of mortgage fraud on my block of about 24 houses — the mortgage originator paid people to sign the load papers, and then defaulted on their loan, after the loan was resold and “securitized”. Both houses were then occupied — and trashed — by criminals for a period of months. New homes. Trashed. Crime run out of the homes.
Not enough has been written about all of the mortgage origination fraud that took place — people in the industry here in Orange County know what was happening, loans made that could never be repayed, then packaged and resold.
Everyone know what was going on on the ground here. Almost no one has written about it.
I have read several stories, however, about the fact that the FBI was allocating almost no resources to this problem. They simply refused to investigate this sort of crime.
On Myth #2:
“Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership.”
So she limits her idea of home ownership increases to first-time buyers? Is that the classical and final definition of home ownership at the margin? I’m not convinced.
I would like to see data that trace subprime loans to second homes, as well as individuals and families that decided they could afford a larger and more ornate living space for the one they were living in due to the distortions in the market. And what about those who dropped out of the home ownership game only to come back when the conditions seemed more attractive? Those wouldn’t be first-timers.
She may be correct, but I think her argument there is a red herring and does not look at the full spectrum of what constitutes increased home ownership, at least not in that blurb.