Posts Tagged ‘Mortgage crisis’
Probably the last thing anyone wants to read is yet another book that attempts to explain why the financial crisis happened. Most of the territory, from the plausible to the incomprehensible, has been covered and recovered ad nauseam. That said, there is a strong case that Atif Mian and Amir Sufi have actually contributed a new and worthwhile line of thinking in their House of Debt.
The most interesting thing I took away from my reading of their book was that the mortgage crisis hit lower wealth households the hardest, by a substantial margin. In most cases, the wealth of lower income groups is mostly tied up in their homes and their equity was completely wiped out as home prices fell. As these lower income groups have a “higher propensity to spend” income, this severe negative wealth effect had – and continues to have – a dramatic dampening effect on economic growth. As a byproduct, this consequence of the financial crisis also exacerbated the already growing wealth disparities in the country.
If Mian and Sufi are correct, then many of the public policies to shore up the financial system in response to the crisis – decried by both conservatives and liberals – were off target. Most notably in their view, the greatest error of both the Bush and Obama Administrations was failing to enact true mortgage relief for underwater homeowners. Failing to do this created a self-reinforcing cycle of default, falling home prices, lower consumer spending, slower growth and job loss that continues to depress the economy to this day.
A bank is a place that will lend you money if you can prove that you don’t need it.
I thought of this quote as my wife and I slog through the seemingly endless process of obtaining a mortgage to purchase a new home. A realtor commented that the experience was akin to the maximum treatment afforded by the TSA, body cavity searches and all. As if we were all terrorism suspects. I guess this is just the payback for the prior years of excess.
“You could safely say that Iceland holds the world record in household debt relief,” said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen. “Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”
Note the words I bolded in the above: household debt relief, and not too-big-to-fail bank or insurance company or GSE (Fannie Mae etc) debt relief. And Iceland’s results?
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium.
Everyone from Treasury Secretary Geithner to the IMF’s Christine Lagarde should read the Bloomberg article on the country’s success from which the passages above were excerpted.
Oh, and, Attorney General Eric Holder and the SEC’s Mary Schapiro might just want to read this paragraph:
Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.
Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial.
That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown.
Reuters dissects the failure of the Federal judiciary to prosecute cases against the players in the mortgage meltdown. The documented record of law-breaking that the article exposes is damning, as is the lack of effort by the US Attorney’s Office to take any significant action.
“Why there hasn’t been more robust prosecution is a mystery,” said Raymond Brescia, a visiting professor at Yale Law School