http://www.telegraph.co.uk/finance/comment/6001161/Dont-look-for-the-irrational-in-the-credit-crisis-we-do-stuff-for-a-reason.html

By the way, why was my previous post in this thread eliminated?

I am a comparative political economy guy – not totally Rat. Choice Institutionalist but sympathetic. To me it is strange for all those on the left to say that institutions can solve so many of these problems, and then for them to deny that those same institutions can cause problems. I makes my head spin.

Could Neoclassical myopia to institutions reinforce the myopia of behavioral economics? This is the key question for me. Both ignore institutions and it doesn’t serve them well.

Hope to read the new book.

Cheers,

“Off budget” literally means not in the accounting of the US. People can make their own estimates, but it remains an outside opinion, not the official determination of the government.

For example, an estimate for the unfunded liability of the Medicare program for treating our ageing population is $30 to $40 trillion (US Debt Clock). The government doesn’t take that seriously because it is not in the budget. The Medicare program is not a legal promise, but merely a policy, so the government doesn’t include this as an offical obligation of the US.

The current national debt is $11.6 trillion, and GDP is $13 trillion.

Fannie Mae and Freddie Mac borrowed $5.4 trillion on the private bond market at a time when the official US debt was $5.5 trillion. This was off-budget, not included in the US debt, because FanFred were officially private companies, despite being sponsored, controlled, privileged, and regulated by Congress. The bond markets and ratings agencies rated FanFred debt almost the same as US debt, recognizing the reality that Congress was implicitly guaranteeing that debt. Congress would never let FanFred default on its debt because the story would get out about Congress’s involvement, in a very public way.

I speculate that many of the bailouts were motivated by paying off the lenders to the bailees, debt that was implicitly guaranteed by Congressional handshake.

Guarantees by Congress are always considered “costless”, because regulation is supposed to keep the guaranteed banks and institutions from doing anything risky. Then, Congress pushes or allows those organizations to do risky things. The 1980′s Savings and Loan crisis was a direct result of guaranteeing the depositors to the S&L’s while allowing the S&L’s to expand their lending beyond residential housing. This is parallel to our current situation.

Have you seen the special issue of Critical Review just out on the causes of the financial crisis? Jeff Friedman has an interesting introductory essay entitled “A Crisis of Politics, Not Economics.”

Most were just people who intended to live in the house they bought. These are the ones I don’t understand, the ones who knew full well that there would come a time in the probable near future when they would have to default unless they won a mega millions lottery, and they still did it. That, in MHO makes them moral degenerates, like any common thief.

Also, until this happened, many with home loans and non-ARM mortgages were using their home price’s appreciation to suck equity out for their additional spending money. However, that seemigly perpetual party ended after the ARMs folks walked away from their obligations, leaving many forclosures on the market and causing price depreciation for the first time in a long time. Without the home price appreciation — and the additional spending money — the party ended!

Where all this is irrational is the thinking by my a great many people that the party was never going to end. With the benefit of hindsight, it seemed like a no-brainer; that more people should have seen this coming. In fact, Greenspan warned of the asset bubble in housing and even made threats that it had to be popped. Sometimes ‘the crowd’ does unwise long-term things even as they are rationally responding to the incentives they face. Naturally, though, in today’s society here in the USA, the government feels somewhat guilty for the boom/bust incentives they laid out so they chose unburden two groups for the natural consequences that played out: those that walked away from their obligations and those ‘market players’ that over-leveraged themselves believing that the housing prices would always keep appreciating.

For the banks, there was the CRA stick, the Fannie/Freddie carrot, and the mountains of cash from the Fed. I don’t know if bankers bought into the idea that home prices would always rise, but with those other factors, they didn’t really have to.

The threshold for approval has everything to do with risk of loan nonrepayment. Economic and political conditions made the risk either seem low, or irrelevant.

I haven’t read your link yet, but what do you think the specific repurcussions of being off-budget are?