TCS Daily


The Think Tank Bubble

By Max Borders - January 30, 2009 12:00 AM

Everyone knows what a bubble is these days. It's hard to miss once you've been in it and then had it deflate. Housing is an obvious example. I recall considerable groaning in 2000 when tech-heavy 401Ks suffered after a similar bubble went flat for IT. But what if I told you there's such a thing as a think tank bubble?

Gentle readers may recall F.A. Hayek of spontaneous order fame. He had some other good ideas, too—like the so-called "structure of production." Imagine a triangle—"'The Structure" with one side down and an angle up like the letter A. Divide it horizontally into thirds with two parallel lines. Now the Structure has three basic sections. At the top of this Structure, let's put "Capital Goods." These are things that are raw and need to be transformed if anybody is to use them. Below, label the second section "Production Goods." Now we have a transformative layer, a place where certain kinds of goods (technology, manufacturing equipment, skilled labor) can transform capital goods. But transform them into what? In the third section, let's put "Consumer Goods," like iPods, clothing, pizzas, and so on. The basic idea is that goods must pass through these layers before they get to store shelves and homes. Nothing earth-shattering here, but helpful when pointing out how value can be created at each stage.

A lot of people working in the Freedom Movement see ideas as going through a similar production process. Wonky types call this the "Structure of Social Change." Imagine a similar triangle, except this time with ideas; policy ideas. Academics start out with abstract theories in, for example, economics. Think tanks take these ideas and run them through the policy sausage grinder. Eventually, they either a) become talking points that people start to believe in, and/or b) get implemented by government, resulting in social change. Good ideas and bad ideas get sent through this process with equal gusto. Indeed, all too often, bad ideas make it to implementation because unlike consumer goods, policy ideas don't face an army of consumers who vote with their dollars. Policy ideas, instead, must face only a phalanx of horse-trading politicians and an occasional flock of rationally ignorant sheep hopped up on vagaries like "hope" and "change". But I digress. The jist is: idea > policy shop > implementation.

Now, what if I told you that the people with the bad ideas are doing a better job of getting their ideas through the Structure? And what if I told you that the reason the good ideas are failing to reach implementation is because they're trapped at the policy-wonk stage? Hence, the think tank bubble.

What if Apple had invested all of their resources into making even more types of iPods with even more features than they have now, but failed to market, advertise and — in the immortal words of Guy Kawasaki — evangelize them? Apple might be roughly synonymous with AMC or Polaroid. Of course, with think tanks, there's a different dynamic—particularly with free market think tanks. The big ones are still producing 40 page white papers that only 40 people will read. Funders are spending millions to let them continue to do so. But in the process of doing so, they have neglected implementation—that is, investment at the bottom of the Structure of Social Change, where everything counts. The people with the really bad ideas and the great marketing have put the bulk of their investments into implementation; activism, networking, messaging, and marketing. (Read: "Yes We Can." They can and, Lord help us, they will.)

So what is to be done? There are a number of things that can, indeed, must happen—if individual liberty and prosperity is to survive.

  1. Freedom Investors are going to have to diversify their freedom portfolios to include media, new media, and activism (which means diverting some resources away from the think tank bubble). Currently, think tanks are resource hogs.

  2. Think tanks are going to have to transform themselves into persuasion factories—with improved channels, compelling content and messages that both capture the imagination and travel far. (Ask the question: "Where should we spend our next dollar? On massaging some obscure policy idea even more, or distilling our principles and getting them to the public and the power players?")

  3. Major and minor players in the Freedom Movement are going to have to cross-collaborate and get out of their silos. Even the think tanks are starting to understand this. Treat each other as both trading partners and collaborators with a shared vision—notwithstanding the competition for donor resources.

  4. We may need to stop thinking of ideas and principles as being the only "goods" of social change, but include messages that resonate emotionally and activism that gets people involved in the defense of liberty. These things complement good ideas.

These three changes would go very far to making the ideas of freedom viable again. The institutions of freedom are crumbling due to neglect. People are buying cheap nostra and feel-goodism like Kool-Aid at a Jim Jones gathering. And who's selling them? The people with the bad ideas. But remember: one of the advantages of having good ideas is that, if you can get them out, they can form a mental latticework that is difficult to replace. Feel-goodism is ephemeral.

It is perhaps ironic that those who have learned to use distributed systems, local knowledge, networking, and voluntarism effectively in political activism haven't learned to apply these concepts to understanding the market economy. Likewise, those who understand the fundamentals of a market economy haven't learned to apply these concepts to engage successfully in political activism. That's a dangerous asymmetry. After all, the ones who are successful at political activism end up with the power. Government grows. Power corrupts. Markets languish. We all become poorer and less free. So, if the Freedom Movement is going to gain any ground back, we are going to have to learn to play the game better. We're going to have to change our freedom portfolio and let the think tank bubble deflate.


Max Borders is executive editor at Free To Choose Network. He blogs here
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68 Comments

Think Tank Bubble - Hell Yes!
You are wrong about the bad ideas not facing a phalanx of consumers. The problem is the idea market place has not been a free market for nearly a hundred years.


At first in the nineteenth century, the market became distorted by technology. The Web press followed by a wide variety of technologies lead to economics in consolidation. This long-term trend left nearly all of media consolidated into a few companies, mostly corporations. That peaked around 1964.


Government employees’ efforts to shape the surviving media to their favor were dominant. In the new industries that the new technologies produced Government favor was critical. Radio and television broadcasting were regulated from their beginnings. Government regulation of sound recordings and movies followed demands of corporate studios. The news conference and government regulation of communication technology gave great advantage to the media firms favored by the Government. In WWI the undersea cable allowed media favored by the British and American Governments to publish news from the front a week earlier than their competitors. The news conference always gave access to the politically favored news media with transport of newsreel footage by plane the advantage extended all the way to the front. Regardless of motives, the studios, networks and wire services did get reduced competition limited opportunities for sponsors outside of established firms. Government pressure and licensing had limited the market place of ideas to a few.


Think Tanks like the RAND Corporation or Heritage Foundation generally reflect the interests of the clients paying the bills. Because of media consolidation the media wonks faced no competition, there were no opportunities for an advertising sponsor to select program that would appeal to the consumers’ better nature. Add the cultural forces of the New York media buyers’ community and the country has two market places of ideas.


One centered around population centers on the east and west coast, old and rich, who have controlled the product that sponsoring clients were allowed to buy for the last hundred years. The second market place not yet established with origins only in the last twenty years. Given the financial health of the old newspaper publishers competition will probably allow the second to supplant the first in the next twenty years.

the liberal media conspiracy runs amok
Jeez, this is so far from reality it isn't even funny. I have worked in the newspaper and news media for more than 20 years and I have been trying to let the liberals who visit this site understand the true depth of that bias.

But this is rediculous!

A few years ago, while working for a small weekly, I was able to get White House Press Credendials. There is no favoritism in this, pass the background check and work for a legitimate media outlet and BINGO you are there.

Newspapers only began to truly consolidate in the past 35 years or so; before that most were fiercely independent. The problem has always been the comparative few "Networks" in broadcast. They had a big advantage in both immediacy and reach. The consolidation of all the media over the past 20 years or so has made things worse by far.

The only newspapers in realy trouble are the top 100 or so big metro daily papers. Although this recession may create problems down the the large weekly level, most will survive. Don't assume the financial demise of the NY Times is some sign of doom for the newspaper industry; nothing could be further from the truth. Print media have come and gone throughout the ages. From newspapers to magazines, the market has changed drastically over just the last 20 years, but it continues to expand overall.

20 to 50 years from now print media may become obsolete, but It is highly unlikely it will happen in the next few years. Also, most of the failing dailies have brought it on themselves through bad policies too numerous to mention.

The word is being spread.
Web sites and radio talk shows ARE spreading the products of think tanks that promote liberty and are making profit.
Unlike the other media outlets that spread the socialist dogma of the liberals.

Government doesn't control all the media.
Gutenberg's press destroyed the Catholic Church's monopoly on religion and allowed all who could read the opportunity to read the Bible for themselves.

Now with the internet, satellite radio and TV, governments around the world have little real control of content.

The truly limiting factor is peer pressure.

Have you seen the McDonald's Cafe commercials slamming the snobbery of coffee shops? Rush Limbaugh and those who have followed him have proven that a significant majority of Americans still support the Constitution. But since we all must 'get along' in the world to make a living, most keep quiet and let the 'elite' few control the idea market.

What is needed are fewer sheeple and more individuals.

Actually it doesn't control any of it
It's amazing how you can operate on such a tiny amount of information.

There are no government controlled media. No government newspaper, no government TV channel, no government presence anywhere, other than on a few official web sites.

True, they still run Radio Free Europe. But I think you have to have shortwave capability to bring it in. And the GPO still prints a few tomes, like the Official Budget of the United States. But that's hardly dominating the media.

If you use your search engine you can find out who really does own the media. It's a handful of major corporations, like Time-Warner, Disney, GE and Rupert Murdoch.

Oh, wait. I know you won't do that. Here's a crib sheet:

http://la.indymedia.org/news/2003/04/47530.php

Quietism amid the storm
Is there really a market for articles like this? Huge, momentous things are happening all around us, out there in the outside world. And this guy's got his head up his thought bubble so far he's forgotten to relate his thought to anything real. Surely, a waste of our time.

There are a hundred subjects he could have chosen from. Everyone on earth (outside TCS, that is) is trying to figure out the Great Conundrum of our time, how it could be that those in whom we placed our confidence to be in charge of wealth creation (well, they DID talk a very good game) could have failed us all, and even themselves, so miserably, in the potlatch of wealth destruction we see all around us.

All these momentous events make timely food for thought. Instead, on a web site that presumably addresses the great issues of the day, we get stuff like this:

"It is perhaps ironic that those who have learned to use distributed systems, local knowledge, networking, and voluntarism effectively in political activism haven't learned to apply these concepts to understanding the market economy. Likewise, those who understand the fundamentals of a market economy haven't learned to apply these concepts to engage successfully in political activism. That's a dangerous asymmetry."

Everyone else is currently well anchored in the real world. Maybe certain authors should get back in touch with it.

80/20 rule
"By the numbers it means that 80 percent of your outcomes come from 20 percent of your inputs. As Pareto demonstrated with his research this “rule” holds true, in a very rough sense, to an 80/20 ratio, however in many cases the ratio can be a lot higher - 99/1 may be closer to reality."

http://www.entrepreneurs-journey.com/397/80-20-rule-pareto-principle/

If all those who are opposed to the present socialist trend in the US government would agree to focus 80% of their time and energy on the 20% issue that causes 80% of the socialism, significant progress can be made which would liberate those groups to then concentrate on the 20% that separates them.

The issue all should focus upon is the right to private property. This encompasses taxes, government spending and all regulations that interfere with the free market.

FDR perfected the divide and conquer political strategy and those who love individual liberty need to unite to obtain the political power needed to defeat socialism.

Government controls the airwaves. Analog TVs will soon be dark because of government control.
And their is always talk of reimposing the 'fairness' doctrine.

I hope the socialists are stupid enough to try to impose the 'fairness' doctrine again.

Media outlets are now so diverse it will do nothing but rally more to the cause of liberty.

If the news media is under corporate control, why are they cutting their business throats by promoting their socialist bias? What this tell me is that many corporations do not support free markets and prefer a big government to control competition.

And you, who criticize corporate control want an even stronger government to control the corporations. I support a weaker government that exposes corporations to free market forces, you and me. Fascism developed from your model.

More bubbles from the tank
This is my absolute favorite quote from Murray Rothbard:

"... I make no pretense of using the historical facts to "test" the theory. On the contrary, I contend that economic theories cannot be 'tested' by historical or statistical fact. ... The only test of a theory is the correctness of the premises and the logical chain of reasoning."

It's from the introduction to his "America's Great Depression". And I've never seen the Austrian School position more explicitly stated.

Theory is everything. Reality is nothing.

You mean content doesn't matter?
Here's your best shot: "If the news media is under corporate control, why are they cutting their business throats by promoting their socialist bias?"

I have a news flash for you. The news media are just doing their favorite thing. They find an expert from the investment world and just let him talk. All that socialist talk we're hearig now? It's coming from capitalists who want to be rescued from the consequences of their own failed get-rich schemes.

Check out what they're saying over at Davos this week. Those are the world's pre-eminent capitalists. And while there are still a few in deep denial, who think things will get better somehow, most are convinced that action along the lines of what the Obama team is cooking up is essential to the recovery of the global economy.

Nobody's interviewing the actual socialists now. They're with you guys.. they just think nothing should be done, so capitalism can wither away to nothing. Just like you believe that nothing should be done and the corpse will miraculously spring back to life.

All the actual, practising capitalists are hoping that swift and sufficient government action (and the application of quintillions of well directed pennies from heaven) can bail them out. Do some reading.

What corpse? More collectivist crap!
An economy is comprised of Billions of INDIVIDUALS making decisions in their best interest.

When those individuals decide they can trust the government won't screw them again, they might begin to start buying more products and services.

How can anyone in the US government economy be trusted? The treasury secretary committed tax fraud as has Daschle. The House 'stimulus' package is full of socialist pork. The first $350,000,000,000 has not been accounted for.

Trust must be earned.

Rothbard's theory on reality is spot on.
Rothbard has his history just right.

"Rather it is a sociological generalization grounded on a creative blend of thymological experience and economic theory. At the core of this generalization is the insight that the State throughout history has been essentially an organization of a segment of the population that forsakes peaceful economic activity to constitute itself as a ruling class. This class makes its living parasitically by establishing a permanent hegemonic or "political" relationship between itself and the productive members of the population. This political relationship permits the rulers to subsist on the tribute or taxes routinely and "legally" expropriated from the income and wealth of the producing class. The latter class is composed of the "subjects" or, in the case of democratic states, the "taxpayers," who earn their living through the peaceful "economic means" of production and voluntary exchange. In contrast, constituents of the ruling class may be thought of as "tax-consumers" who earn their living through the coercive "political means" of taxation and the sale of monopoly privileges.42"

"The foregoing analysis leads Rothbard to conclude that the exercise of political power is inherently an oligarchic enterprise. The small minority that excels in wielding political power will tend to coalesce and devote an extraordinary amount of mental energy and other resources to establishing and maintaining a permanent and lucrative hegemonic bond over the productive majority. Accordingly, since politics is the main source of their income, the policies and actions of the members of this oligarchic ruling class will be driven primarily by economic motives. The exploited producing class, in contrast, will not expend nearly as many resources on politics, and their actions in the political arena will not be motivated by economic gain to the same degree, precisely because they are absorbed in earning their livelihoods in their own chosen areas of specialization on the market. As Rothbard explains:

the ruling class, being small and largely specialized, is motivated to think about its economic interests twenty-four hours a day. The steel manufacturers seeking a tariff, the bankers seeking taxes to repay their government bonds, the rulers seeking a strong state from which to obtain subsidies, the bureaucrats wishing to expand their empire, are all professionals in statism. They are constantly at work trying to preserve and expand their privileges.45 "

"The ruling class, however, confronts one serious and ongoing problem: how to persuade the productive majority, whose tribute or taxes it consumes, that its laws, regulations, and policies are beneficial; that is, that they coincide with "the public interest" or are designed to promote "the common good" or to optimize "social welfare."

http://mises.org/rothbard/salernointro.asp

{You have certainly been suckered.}

Rothbard seems to have gotten this right.
"Needless to say, for Rothbard, history can never serve even as an imperfect laboratory for testing theory, because of his agreement with Mises that "the subject matter of history . . . is value judgments and their projection into the reality of change."68 In seeking to explain the origins of the Federal Reserve System, therefore, Rothbard focuses on the question of who would reasonably have expected to benefit from and valued such a radical change in the monetary system. Here is where Rothbard?s scientific worldview comes into play. As an Austrian monetary theorist, he recognizes that the limits on bank credit inflation confronted by a fractional reserve banking system based on gold are likely to be much less confining under a central bank than under the quasi-decentralized National Banking System put in place immediately prior to the passage of the Federal Reserve Act in 1913. The praxeological reasoning of Austrian monetary theory also leads to the conclusion that those who stand to reap the lion?s share of the economic benefits from a bank credit inflation tend to be the lenders and first recipients of the newly created notes and deposits, namely, commercial and investment bankers and their clients. Guided by the implications of this praxeological knowledge and of his thymological rule about the motives of those who lobby for State laws and regulations, Rothbard is led to scrutinize the goals and actions of the large Wall Street commercial and investment bankers, their industrial clientele, and their relatives and allies in the political arena."

"Rothbard?s analysis of the concrete evidence demonstrates that, beginning in the late 1890s, a full decade before the panic of 1907, this Wall Street banking axis and allied special interests began to surreptitiously orchestrate and finance an intellectual and political movement agitating for the imposition of a central bank. This movement included academic economists who covered up its narrow and venal economic interests by appealing to the allegedly universal economic benefits that would be forthcoming from a central bank operating as a benevolent and disinterested provider of an "elastic" currency and "lender of last resort." In fact, what the banking and business elites dearly desired was a central bank that would provide an elastic supply of paper reserves to supplement existing gold reserves. Banks? access to additional reserves would facilitate a larger and more lucrative bank credit inflation and, more important, would provide the means to ward off or mitigate the recurrent financial crises that had brought past inflationary booms to an abrupt and disastrous end in bank failures and industrial depression."

http://mises.org/rothbard/salernointro.asp



Getting tense and shrill now
Hmm, let's see.. the credit markets are frozen solid, businesses are laying off employees by the millions, the stores around the world are closing up for lack of business.. but the economy's doing fine without anyone's help. Do I have that right?

Funny how billions of individuals acting in their own best interest can get together in an arena with virtually no rules and what results is.. a jungle. Anarchy. Who'd have guessed?

"When those individuals decide they can trust the government won't screw them again, they might begin to start buying more products and services."

Right. The government made them do it. It's all the fault of some act passed early in the Clinton Era, that was never a problem until the past couple of years.

Idiot. It's the natural greed of those "billions" of capitalist ripoff artists who all thought they could make some fast money at someone else's expense. And it worked, too.. for a few years.

Now it doesn't work any more. So Daddy Government has to step in, separate the dancers and give them some more money so they can start over.

It's at times like this that a normal person would understand how much they really need government. To protect themselves from the consequences of their own acitivities.

It's even worse than I thought
"Rather it is a sociological generalization grounded on a creative blend of thymological experience and economic theory..."

That's as far as I could get. Do you mean you actually enjoy reading this stuff? Thymological, indeed!

It was government that guaranteed bad mortages.
How many times must that be repeated before you get it.

Banks that secularized those mortgages bragged to the public they did so to meat a government mandate to make more risky loans to poor neighborhoods.

Government made the rules and political entrepreneurs capitalized on the new government rules.

What happened is just as Rothbard predicted.

Since it was a government that did not have my best interests when they made so many stupid rules, why would they have my best interests in mind now?

I think more people are beginning to understand we need government to stop trying to 'fix' it.

You claimed to understand this.
No wonder you don't like to read Mises, you can't understand it.

Madoff did what the government is doing. ( But they don't like the competition.)

Madoff was just doing what the government is trying to do, take from some and give to others and skim some of the top.



The government helps those who support those in power (or payola)
"Close to half goes to entities that sponsor or employ (or both) members of the Service Employees International Union, federal, state, and municipal employee unions or other Democrat-controlled unions."

"This has been a punch in the solar plexus to the kind of responsible, far-seeing, mature government processes that are needed to protect America. This is more than pork-barrel - this is a coup for the constituencies of the party in power and against the idea of a responsible government itself. A bleak day."

http://www.nypost.com/seven/01312009/postopinion/opedcolumnists/politics_of_payoff_152831.htm

More government screwing
"Of the $550 billion in new spending, only $30 billion goes to highway construction. Another $13.1 billion goes to other Department of Transportation spending and $20 billion to renovating public schools."

"The Wall Street Journal calculated that only 12 percent of the bill's provisions can accurately be called stimulative. The rest is simply being thrown at favored constituencies by Congress. The bill even includes a provision forbidding the use of foreign steel in the construction projects it funds. Does no one in Congress remember Smoot-Hawley?"

"President Barack Obama can call this recession a national emergency all he wants, but that doesn't make this bill any better. By pushing an irresponsibly gargantuan bill that spends too much and stimulates too little, he squandered his first opportunity to show real bipartisan leadership. What a waste -- of money and goodwill."

http://unionleader.com/article.aspx?headline=Bad+medicine%3a+Stimulus+bill+is+sickening&articleId=2a505eff-803e-40d6-a1cc-4a5976b88449

Way to go BHO!

YOU may need government, The rest of us do not.
" let free people sort it out for themselves.

Let contractual arrangements remain in force, let good lenders prosper and bad ones suffer (similarly with borrowers) and let the taxpayers' pockets go unpicked. Legislative interference with market processes is likely only to prolong and deepen the downturn."
"Would we be talking about a "crisis" today if the Federal Reserve had not embarked on unprecedented monetary and credit expansion, in the process inflating a housing bubble of epic proportions similar to the late '90s Internet bubble? Isn't the entire housing edifice built on shaky foundations since Freddie and Fannie enjoy a protected lending status with all sorts of moral hazard implications? Wasn't it former Federal Reserve Chairman Greenspan who not long ago urged borrowers to shift to variable rate debt, most of which is now resetting at a perilously higher level? Is entrusting a solution to Washington putting a fox in charge of the chicken coop?"

"A bailout is nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers."

{Just like a Madoff scheme.}

"We are not asserting that the market is perfect; as long as men aren't angels, perfection is not the measuring rod. However, the market at least is based on the voluntary, consensual decisions of thousands of individuals rather than on the arbitrary dictates of politicians. Mistakes ex post are surely and quickly redressed. While painful, it is normal that businesses and individuals make errors, that unsound investments are liquidated, that new covenants for lending are set by the interplay of supply and demand."

"One's ardent support of the free-market process does not mean that one is an apologist for big corporations or turns a blind idea to subprime lending fraud or malfeasance. If anything, big corporations often have a far-too-cozy relationship with Washington. Grandiose pronouncements about a public/private partnership are often thinly disguised means to create regulatory barriers of entry for smaller competitors. The free-market system can only thrive if private property rights are honored and enforced. If loan contracts were entered into via force or fraud, the court system is the appropriate forum for redress and restitution."

http://mises.org/story/2600

But if the politicians do nothing, when the market fixes the distortions caused by the politicians, some may begin to see the emperor has no clothes and those damn peasants may want more liberty from government control.

Predictions from 2004
"Modern central banks function as the prime instigators for the emergence of unsustainable booms, then they show up as the saviours of the bust. While imposing as the navigators, they act as the prime instigators of the very instability they are called to fight. Greenspan has played this game in all its virtuosity. With a masterful hand, the current chairman has wielded the levers of monetary stimuli. He has given the financial markets what they want: a lender of the last resort that could be banked on. When one debt-driven boom had turned into bust, he managed to make sure that another one would begin."

"The key to the power of a central bank is maintaining the illusion that fiduciary money is wealth.

[You've bought into this, hook, line and sinker.]

It is a con game, and in this respect there can be few doubts that Alan Greenspan has been a master at this game. Under his rule, the arcane machinery of the central bank has turned into a fountain of cheap money, which has inundated the globe. This policy of repeated bailouts and the provision of unlimited funding for government expansion in the face of a decreasing savings rate and a shrinking productive sector is the way toward an economic Armageddon. By functioning as bailout agents central banks use the power to create money as a power to destroy. "

http://mises.org/story/1627

Myth of FDR, from 1949
"He (FDR) did not restore
{414 The Roosevelt Myth}
our economic system to vitality. He changed it. The system he blundered us into is more like the managed and bureaucratized, statesupported system of Germany before World War I than our own traditional order. Before his regime we lived in a system which depended
for its expansion upon private investment in private enterprise. Today we live in a system which depends for its expansion and vitality upon the government.'

"In this substituted system the government confiscates by
taxes or borrowings the savings of all the citizens and invests them
in non-wealth-producing enterprises in order to create work."

"Security for whom? For the aged? An old-age security bill was
passed during his first administration which provides for workers
who reach the age of 65 a pension of $8 a week at most. And even
this meager and still very badly constructed plan had to be pushed
through against a strange inertness on his part. Roosevelt's mind
ran in curious circles. People have forgotten his procrastination
about putting through the social security bill until in the 1934 congressional
elections the Republicans denounced him for his tardiness.
It is difficult to believe this now after all the propaganda that
has washed over people's minds. And when he did finally consent
to a bill, like so many good ideas that went into his mind, it came
out badly twisted. It contained a plan for building a huge reserve
fund that would have amounted to nothing more than a scheme
to extract billions from the workers' payrolls without any adequate
return."

"Roosevelt's star was waning sadly in 1938 when he had 11 million
unemployed and when Hitler made his first war moves in Europe.
All his promises had been defaulted on. The cities were filling with
418 The Roosevelt Myth
idle workers. Taxes were rising. The debt was soaring. The war
rescued him and he seized upon it like a drowning man."

http://mises.org/books/rooseveltmyth.pdf

And it has only gotten worse. This was from the 12th printing in 1949.

Let me translate for you
Marjon, the passage you offered was the perfect example of the kind of idiocy the man is peddling. This crap is ridiculous. Just compare it to the kind of analysis everyone else is using.

Again, he begins by thinking that theory just has to be logically consistent within itself; it doesn't have to comport with observations in the real world. We have his actual words on that. So whatever follows from that assumption is deeply, deeply flawed. But of course, you can't see that.

Ah yes, John T Flynn
As it happens, I've got that book. And the same 12th edition, September, 1949. I like his 'As We Go Marching' a lot better.

Glancing back through the book from our present predicament, my first impression is how different the crisis then was than the one we're having now. Nearly every last specific is different.

Otherwise it does seem obvious that the man has an axe to grind.

Life is full of value judgments
As economics relates to the welfare of human beings-- and to their differential welfare at that-- the subject necessarily is one defined by value judgments. Opinions differ because we are each well qualified to offer our own judgment.

History thus offers the best laboratory for the testing of theories. This is one subject in which the past is a supremely well qualified teacher.

Here's a good example, and one well in keeping with the spirit of Rothbard's reasoning: Current loan origination practises are defective due to an absence of perfect knowledge, from which to construct a rational investment decision. The instruments being peddled were too abstruse and opaque to be assigned any realistic evaluation; yet they found buyers aplenty, anyway.

This illustrates that the markets are composed of irrational creatures acting irrationally. I can't quite see how pure rationality is going to be a qualified method of analyzing their behavior.

We are in the horns of a dilemma that rationality won't help us out of. We do know that unaccptable market distortions follow from bailing out failed investment methodologies. The players are gambling in a casino where the upside gains are unlimited, while the downside risks are minimal. This offers ground for the inception and perpetuation of failed strategies.

But at the same time we have a subjective dimension. Allow those credit markets to fail and the whole shotting match collapses. Not just millions but dozens of millions of families, thrown out of work. Evicted from their homes, every real estate valuation in the entire country fails. And starved of operating funds, most businesses large and small fail for the two great lacks: credit and customers.

So you have an "on the one hand" and an "on the other hand". And you must choose one. The decision is a subjective one.. and one taking place entirely within the world that's all too real.

Abstract theory has little place in this realm. One maximises gain for the greatest number and minizes pain for the greatest number. That's the best course to chart.

History has proven Keynsian policies did not work for FDR.
What HAS been proven to work is tax cuts. Proven by JFK, Reagan and GWB.

Still can't challenge Wachovia's press release?
Wachovia bragged about their implied government backed, AAA rating securitized mortgages to meet their government CRA obligations in 1997 and the government is not at fault?

What?
Is this some challenge Wachovia has issued to me? I don't recall having heard about it.

But if Wachovia bragged about issuing government backed mortgages, and that they "met government obligations", the first question I would ask would be what was the nature of those obligations. And the second would be, how many of those mortgages went south.

If any in excess of the typical ratio of bad mortgages failed, I would look to the ratings agency to explain how they deserved a AAA rating. Wouldn't you?

I would need more information on this bundle of loans before I could form an opinion. Is it in some of the many posts you've sent above? I confess I haven't looked at all seven, only the last one.

If responding, please explain how the government is to blame.

You have a great opportunity
For you, economic principles are things that can be "proven".. just like you think scientific theories can be proven. It's usually not that easy. Most theories of how money flows have a grain of truth in them. NONE are applicable in all cases.

But you have an opportunity. We have been trying tax cuts for the past eight years. And they got us to this point. Prove to me how we are now in a very good place.

Just like with AGW, correlation is NOT causation.
By what theory has letting people keep their own money caused our current situation?

What can be demonstrated to have caused this situation is CRA, the FED and government guarantee of bad mortgages.

Nothing to do with tax cuts.

Read it this time.
CHARLOTTE - First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a $384.6 million offering of securities backed by Community Reinvestment Act (CRA) loans - marking the industry's first public securitization of CRA loans.

{CRA LOANS!}

The affordable mortgages were originated or acquired by First Union Corporation and subsidiaries. Customers will experience no impact - they will continue to make payments to and be serviced by First Union Mortgage Corp. CRA loans are loans targeted to low and moderate income borrowers and neighborhoods under the Community Reinvestment Act of 1977.

"The securitization of these affordable mortgages allows us to redeploy capital back into our communities and to expand our ability to provide credit to low and moderate income individuals," said Jane Henderson, managing director of First Union's Community Reinvestment and Fair Lending Programs. "First Union is committed to promoting home ownership in traditionally underserved markets through a comprehensive line of competitive and flexible affordable mortgage products. This transaction enables us to continue to aggressively serve those markets."

The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. First Union Capital Markets Corp. is the investment banking subsidiary of First Union Corporation.

{GUARANTEED BY FREDDIE MAC AND HAVE AN 'IMPLIED' 'AAA' RATING!}

"We are extremely pleased by how well this transaction was received by investors as many of the tranches were significantly oversubscribed," said Owen Williams, managing director of fixed income sales and trading at First Union Capital Markets Corp. "This offering is further proof of investors' b desire for a diverse range of collateral."

Brian Simpson, managing director of First Union Corporation's Structured Products and Real Estate Group, said the transaction exemplifies First Union's effective use of asset securitization in managing its own balance sheet. Last July, First Union Capital Markets Corp. completed a $405.6 million securities offering backed by student loans originated by a First Union Corporation subsidiary.

"Securitizing assets enables First Union to continue to grow its loan portfolio, while at the same time generate additional fee income," Simpson said. "We also have been very successful in providing innovative asset finance services to clients. We believe there is opportunity to expand our CRA loan securitization capabilities to other companies in the market."

{EXPAND TO OTHER COMPANIES!}

First Union has completed 20 asset-backed transactions for clients in 1997 totaling $4.3 billion, including a $268 million public offering backed by equipment leases for Heller Financial Inc. and a $67 million public offering for National Auto Finance Company secured by retail auto loans.

First Union Capital Markets Corp. provides a full range of investment banking products and services, including asset-backed finance, public finance, syndicated loans, merger and acquisition advisory, private finance, equity underwriting and investment grade and high-yield debt finance.

First Union has grown its capital markets business substantially over the last three years. First Union's Capital Markets Group reported 1997 fee income through Sept. 30 of $531 million, up from $464 million for the full year of 1996 and $265 million in 1995.

First Union's community reinvestment activity averages $3.5 billion per year. First Union offers a broad range of financial products and services to low and moderate income communities, including affordable housing mortgages, home improvement loans, consumer loans, secured credit cards, small business loans, small farm loans, micro-lending and Low Income Housing Tax Credits.

Charlotte-based First Union Corporation is the nation's sixth-largest bank holding company with assets of $144 billion as of Sept. 30, 1997. The company serves approximately 12 million customers throughout the East Coast and nation.


http://www.wachovia.com/inside/page/textonly/0,,134_307%5E306,00.html

Oct 1997

Doing some detective work
Are you under the impression I've seen this material somewhere before? Why say "read it THIS time"? Why say I "STILL can't challenge" it? That's just being snippy.

Now that you've seen fit to give me your source, I do have a few thoughts. One, it's certainly true that if the loans in question are FRMC backed, there is an implied AAA rating. And that in turn means that if the FRMC has done its job, default rates should be low.

Now what you're implying is that this particular batch of securitized mortages went bad. And there's nothing in the source that says they did. And in fact before the last couple of years, CRA mortgages have performed very well as an investment. I offer as my evidence that prior to late 2007, their performance weakness as a class of debt instruments was never mentioned by anyone that I can recall.

However if that does not suffice, I can certainly provide more concrete evidence.

The 1997 batch, if they had gone bad, would have done so by 2000 or so. The VRMs would have reset and the borrowers would have fallen into default. That didn't happen. So I think this particular batch of Wachovia issues has very likely done okay. And is very likely still okay today.

Which brings us to the question: why is it that this program went well for so many years, then abruptly took a turn for the worse? I think we can find the suggestions of an answer in the many revisions and alterations CRA has undergone. Like the 2005 rule changes, which appear to have precipitated a sudden increase in NINJA loans (No Income, No Job, no Assets).

And in particular, those looking into the sudden failure of so many newly originated low-income mortgages can trace the problem back to the 1999 passage of Gramm-Leach-Bliley, which broke down the firewall between commercial and investment banks.

Fannie and Freddie's job is to police these loans, earning their reputation as being presumptively AAA investment grade debt. It looks a little bit like they (Fannie and Freddie) were on the job up until the past two years or so, when things began coming apart.

It would no doubt be fascinating to find out exactly what DID happen back around 2005, for the loans to start self destructing in about 2007.

Even for you, this is bad workmanship
I'm sorry, marjon.. you show with answers like this that you're really a horribly thought out person, and not able to think about the issues we're discussing. Do you actually think what you've written constitutes a refutation of Keynes? For starters, it doesn't even refer to Keynes. Or anything he's ever said.

You've named three different entities: the Federal Reserve, the CRA (a piece of legislation, not an agency) and the loan guarantors FNMA and FRMC. Now if you want to convince us you have a dime's worth of intelligence, I want you to link THOSE THREE THINGS together into some sort of coherent thesis, in explanation of anything. As to what this might explain, that is your choice.

A link between CRA and subprime loans?
"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. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton,[66][34] stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made "perhaps one in four" sub-prime loans, and that "the worst and most widespread abuses occurred in the institutions with the least federal oversight".[67] According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco , independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.[68] A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.[69] Emre Ergungor of the Federal Reserve Bank of Cleveland found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.[70]"

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

If you can find good statistical information linking low-doc loans, subprime loans or fraudulent loans to banking institutions bound by CRA rules, I'd like to see your evidence. I'm thinking most of the bad paper came from outfits like Countrywide Home Loans. Check it out and show me what you find.

Value of securitized mortages is the problem, no?
Isn't that the problem banks around the world have now? They don't know the value of those government backed securitized loans?

And why were they securitized? To satisfy government regulations and create another bubble as the .com bubble was about to burst.

Unless there is another Roy Bean..
I have posted this press release to you for weeks.

I suspected you ignore it because it doesn't fit your fantasies.

Tax cuts improve the economy.
To imply otherwise is specious.

Just the one
A. "I have posted this press release to you for weeks."

You posit that I read everything you write. Did I respond to that prior poosting? What did I say about it?

B. "I suspected you ignore it because it doesn't fit your fantasies."

No. If you've read my response, it doesn't fit YOUR fantasies. It proves only that Wachovia made CRA loans back in 1997. It does not say any of them ever went bad.

Not really
Marjon, your mind operates the same way as that of a paranoiac. Everything anyone says becomes a perfectly logical validation of the great plot he sees around him.

"Isn't that the problem banks around the world have now? They don't know the value of those government backed securitized loans?"

No, they know all right. The problem is that the banks got caught holding insane amounts of bad debt before they could offload it. They know the value, and the market knows the value.

The problem is that now, if they sell it for what it's worth, they become insolvent. They're holding onto it precisely so it will still appear on their books at face value. Have you heard anything about "mark to market"? The holders of this bad debt can't afford to mark it to its market price, because it will put their balance sheets under water.

That's why Bernanke's bestowing $350 billion on them was a lifeline they didn't deserve.

"And why were they securitized? To satisfy government regulations and create another bubble as the .com bubble was about to burst."

It would appear that here you haven't read my own many posts on the subject. Fraud was in the plan from the start.

No federal plot to bury the economy was required to set this one in motion. The scheme was concocted by the original lenders, who were able to use the screen of CRA to knowingly originate thousands of mortgages that were bound to fail.. and that they knew were bound to fail.

Naturally they didn't hold onto them. These hot potatos were sold on the market immediately, thanks to the help of ratings agencies that were either in connivance, or somehow forgot how to evaluate home mortgages.

I'm less and less gullible now. I doubt it was a sudden fit of stupidity and incompetence that came over them (the ratings agencies). I think they had a hand in the deal. And I'd love to see hearings on this issue.. which no one is talking about.

There is also a chance that your side of the argument has a valid point to make.. for once. And now that your ears are perked up, why don't you do some research, and see how many of those low-doc loans came away backed by FMNA or FRMC? It may be for once you can show me something I'll agree with and thank you for uncovering. It would prove that the scam extended into those two mammoth loan guarantors, if we found people who'd been approving loans with inadequate documentation.

Try to look at the specifics. There is a right way to qualify someone for a loan. Fail to do it that way and you're complict in fostering a shoddy product when you sell it.

If the loans are defective at the point of origination that's one thing. The other thing is that a certain percentage of perfectly sound loans will go south just due to bad luck: job loss, a death, some circumstance. Don't confuse the two.

On that basis...
...the economy has never been as good as it is now. Because we've had more tax cuts over the past eight years than we've ever had in history. Is the economy today doing the best it's ever done?

Look at that other period when we had tax cuts galore: Ron Reagan's regime. Remember what happened after eight years of Reagan tax cuts? Another bad recession. So bad that even Bush 41 had to raise taxes to get us out of it.

Or, look at job creation. Our greatest periods of job creation coincide with periods of increasing taxes. Clinton, for instance, far, FAR outpaced Reagan and both Bushes in terms of job creation.

Look at the 1950s. Highest taxes ever in our history. And that was the decade in which the middle class was born.

You're going to have to do a little more to shore up your thesis than just assert it.

How could they have purchased 'bad' debt?
Could it be it had and implied AAA rating because it was backed by the US government?

Fraud at Fannie Mae
"Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules. "

"...let itself be dominated and left uninformed by chief executive Franklin Raines."

"The result was a company whose managers engaged in one questionable maneuver after another, including two transactions with investment banking firm Goldman Sachs Group Inc. that improperly pushed $107 million of Fannie Mae earnings into future years. The aim, OFHEO said, was always the same: To shape the company's books, not in response to accepted accounting rules but in a way that made it appear that the company had reached earnings targets, thus triggering the maximum possible payout for executives including Raines, Howard and others"

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/23/AR2006052300184.html

"On December 21, 2004 Raines accepted what he called "early retirement" [4] from his position as CEO while U.S. Securities and Exchange Commission investigators continued to investigate alleged accounting irregularities. He is accused by The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of abetting widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses [5]."

"In accordance with the mission of Fannie Mae to enable home ownership by a greater proportion of the population, Franklin Raines, while Chairman and CEO, began a pilot program in 1999 to issue bank loans to individuals with low to moderate income, and to ease credit requirements on loans that Fannie Mae purchased from banks. Raines promoted the program saying that it would allow consumers who were "a notch below what our current underwriting has required" to get home loans. The move was intended in part to increase the number of minority and low income home owners.[15] Some observers have noted that the expansion of easy credit to home buyers with a lesser ability to pay them back was one of the major contributing factors to the subprime mortgage crisis.[16] Although under Raines, Fannie Mae invested in some securities backed by subprime loans, it didn't start buying subprime and Alt-A loans directly (and bundling them into securities) until late 2004 after the accounting scandal. Purchasing of subprime and alt-A mortgages expanded exponentially under the guidance of Raines's successor Daniel H. Mudd.[17][18]"

http://en.wikipedia.org/wiki/Franklin_Raines

Fannie Mae increases CRA options: The CRA -securitized mortgage connection
"Franklin Raines, CEO of Fannie Mae, took the opportunity of his speech before the 125th ABA Annual Convention to introduce a new initiative designed to help banks, as well as Fannie Mae itself, meet their Community Reinvestment Act requirements. "

"HUD will soon require us to dedicate 50% of our business
to low- and moderate-income families," said Raines. He noted that since 1997 Fannie Mae has done nearly $7 billion in specially targeted CRA business with depository institutions, but its goal is to push this to $20 billion by 2010. Specially targeted CRA loans are those in which additional flexibility is applied to underwriting and pricing terms. In addition, the stockholder-owned government sponsored enterprise has committed to purchase or securitize over the next decade $530 billion in CRA eligible low- and moderate-income loans that meet Fannie's traditional standards.

As part of its affordable housing effort, Fannie Mae has launched an initiative specifically to help ABA members achieve their CRA goals.

The initiative has three primary components, described below.

" 1. Purchase CRA-qualified mortgage investments. To assist banks to meet the CRA investment test, Fannie Mae's Investor Trading Desk will create customized mortgage-backed securities for ABA members from pools of CRA-qualified loans originated in the banks' market areas (by other lenders). The bank would specify what geographic area(s) are covered.

For more information, call Mary Beth Preuss or Rob Schaefer at the Fannie Mae Investor Trading Desk at 888-752-6663.

2. Generate and sell CRA-eligible/affordable mortgage products.

To help meet the CRA lending test, ABA members that are not currently approved Fannie Mae seller/servicers can originate CRA-eligible mortgage loans and sell them to Fannie Mae through a mortgage outsourcer.

Fannie has a suite of mortgage products available with flexible underwriting guidelines from which ABA member banks can choose. They include a 100% loan-to-value mortgage called Community 100 targeted to low-and-moderate income home buyers, and the Fannie 97 mortgage, which features a 3% down payment for buyers with enough income to handle monthly payments, but not enough cash for a 5% down payment. For more information on this origination program, please call 877-461-2441.

3. Analyze your market.

Customized demographic and housing market data analysis from Fannie Mae's Market Research/Geographic Information Systems Group will be available to ABA members for a special rate. Three data packages offer varying levels of customized analysis and supporting material including detailed maps. The basic package provides broad demographic, economic, and housing market data, and an overview of the geographic area(s) selected by the bank. "

http://www.allbusiness.com/legal/laws/674793-1.html

Try to pay closer attention
I did start by saying that the bundled mortgages enjoyed an implied AAA rating because they were insured by Fannie and Freddie.

So yes, you are correct in agreeing with me.

Now to your question. How can the government purchase bad debt?

Very easily. Identify failed mortgages in the existing portfolios, assign a value to them and buy them. As in, take them off the hands of the banks holding them and the hedges holding the risk. That will make the bindled securities more viable and assist those investrs holding the bag.

The sticking point is that if the government pays what these turkeys are worth, the banks have to declare and write off billions in bad debts, uncollectible outstanding "assets" on their books. And they dont want to do that because it will cause them to fail. So long as they pretend these assets are still worth something, they don't have to publish a bottom line that puts them below the mark for survival.

They want the government to buy the bum loans at face value. Which would be a very stupid investment decision for anyone to take. Some give and take will be needed for this deal to come to pass.

Makes Raines and Mudd sound like Ken Lay's twin brothers
That's some pretty damning stuff. It would be worth looking into to see what kind of fix is being implemented. Raines, and more especially Mudd, were clearly disastrous for the industry.

Thanks for finding the "money shot" here, in Wikipedia:

"In accordance with the mission of Fannie Mae to enable home ownership by a greater proportion of the population, Franklin Raines, while Chairman and CEO, began a pilot program in 1999 to issue bank loans to individuals with low to moderate income, and to ease credit requirements on loans that Fannie Mae purchased from banks. Raines promoted the program saying that it would allow consumers who were "a notch below what our current underwriting has required" to get home loans. The move was intended in part to increase the number of minority and low income home owners.[15] Some observers have noted that the expansion of easy credit to home buyers with a lesser ability to pay them back was one of the major contributing factors to the subprime mortgage crisis.[16] Although under Raines, Fannie Mae invested in some securities backed by subprime loans, it didn't start buying subprime and Alt-A loans directly (and bundling them into securities) until late 2004 after the accounting scandal. Purchasing of subprime and alt-A mortgages expanded exponentially under the guidance of Raines's successor Daniel H. Mudd.[17][18]"

Note that there's a right way and a wrong way to do this. There is NOTHING WRONG with broadening the range of home ownership by extending greater backing to low income borrowers. That's a good thing. Good for the country, because more families become vested in our way of life, and good for the industry, because it gets to build and sell more houses. Lots of good things flow from that decision.

But it does have to be done right. Incomes, employment and credit history have to be well verified and adequate to qualify for the loan. Some amount down is absolutely necessary, even if it's just five percent (ten would be in the "solid" range). And most importantly, the Thirty Percent Rule must be adhered to.

That is, no more than thirty percent of gross income may go toward PITI.. principle, interest, taxes and insurance. Below that line, loans are generally pretty safe. Above that line they start to go off the tracks. There's a mountain of actuarial data illustrating this.

But greed got to people. So they crossed the line, selling more homes to more people who couldnt afford them. And to mask the fact they gave their marks teaser loans, absurdly affordable for the first couple of years, then suddenly with far more expensive monthly payments.

Why did they do that? So the loans would look good on paper, and they could sell them to investment banks as though they were actually worth something.

Fannie and Freddie were certainly complicit in backing loans they should have looked more closely at. This is the kind of financial chicanery that would earn you a death sentence if you'd tried it in China. Look at what's happening to the guys who put melamine in the baby formula. They're probably all dead by now. In China, justice is swift and certain.

Good source
By now we should be able to see that if there are still flaws in the way the CRA is written, despite its many revisions, it's that not enough strictures have been put into it. The concept would be even worse if more constraints were taken out. Do you see that?

Primary fault lies with the decisions you point to here, within FNMA's operating guidelines:

"To help meet the CRA lending test, ABA members that are not currently approved Fannie Mae seller/servicers can originate CRA-eligible mortgage loans and sell them to Fannie Mae through a mortgage outsourcer."

Accepting loans from middlemen just puts another layer of fog between the initial paperwork and the guarantor (FNMA). They should demand all original docs and study them closely before putting their seal of approval on them.

"Fannie has a suite of mortgage products available with flexible underwriting guidelines from which ABA member banks can choose. They include a 100% loan-to-value mortgage called Community 100 targeted to low-and-moderate income home buyers, and the Fannie 97 mortgage, which features a 3% down payment for buyers with enough income to handle monthly payments, but not enough cash for a 5% down payment."

100% loan to value just means zero down. And that's a big red flag. People can and do walk away from homes they don't have any stake in. The people who get these loans just have a renter's mentality, and they think of it as a rental with no lease or security deposit.

5% down is a rule you should never go below. I'm not even all that happy with five.

What greed?
"But greed got to people. So they crossed the line, selling more homes to more people who couldnt afford them. And to mask the fact they gave their marks teaser loans, absurdly affordable for the first couple of years, then suddenly with far more expensive monthly payments.

Why did they do that? So the loans would look good on paper, and they could sell them to investment banks as though they were actually worth something."


The government opened the floodgates of money to buy houses so more money was chasing fewer houses driving up the price.
The government also encourage refinancing to turn houses into piggy banks.

Only if you stop defending the government in this mess.
But I suspect you still believe that only government can fix the mess it created by granting them more power.

You really don't understand the housing bubble
"The government opened the floodgates of money to buy houses so more money was chasing fewer houses driving up the price."

No. The government doesn't give loans. The government has authorized Fannie and Freddie to guarantee loans made by others. The money itself comes from banks, lending institutions like savings and loans, and investors on the private market.

Also, and this is VERY important, "more money" did not drive up any markets. The housing market is relatively unique in one respect, that it is largely dependent on financing rather than outright purchase. So when the interest rate goes DOWN, and the limit of one's monthly payment stays the same, the total purchase price one can afford goes UP. It's a matter of simple math.

The Fed is certainly culpable, in a sense, in lowering the interest rates to the point where appraised values could go up to such dizzying heights and still find ready buyers. But in retrospect, these numbers were very vulnerable to a downturn in money availability (or as well, to any potential increase in interest rates).

"The government also encourage refinancing to turn houses into piggy banks."

No. Again, this was a function of there being such a vast market for securitized loan instruments. The pull of an insatiable market for such investments made suckers of a great many large institutional investors that should have chosen more wisely than they did.

And since any loan could be securitized and resold, lenders made even more by topping off their home loans every few months.. by encouraging people to live off their presumptive equity and continually refinancing.

That way they could be selling new loans on the same old houses. They didn't lose when the old loan got paid off, and they got paid again when they sold the new loan. One house could be resold many times that way.

It was really slick. Congress was unwitting, being unable to change the rules fast enough to keep pace with the sharpies. And as you point out, some of the biggest sharpies operated from inside Fannie and Freddie. Which, as I suppose you know, is only quasi-governmental and semiprivate.

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