E-Mail Exchange Initiated by AnonymousOne

[johnkarls]

Editorial Note --

Less than 50% of our 140 e-mail list members attend our meetings. And even fewer of our regular and semi-regular attendees have registered to post comments on this bulletin board. And almost always, when someone has something to say, they e-mail me rather than post their comments.

The following exchange of e-mails was initiated by one of our regular attendees who is one of the 24 individuals registered to post directly on the bulletin board.

The exchange contains some pertinent points that merit the consideration of the group.

However, my e-mail partner did not post her/his comments directly, so I have registered a fictitious person called "AnonymousOne" to protect her/his anonymity.

[AnonymousOne]

---------------------------- Original Message ----------------------------
Subject: Re: Reading Liberally THIS WEDNESday Dec. 10
From: AnonymousOne
Date: Sun, December 7, 2008 7:03 pm
To: readingliberallyemaillist@johnkarls.com
--------------------------------------------------------------------------

At present I disagree with much of this, particularly the optimism
about oil prices, and the inane contention that primary blame for
financial crisis lies with
> ... who forced Fannie Mae and Freddie Mac to purchase
> sub-prime mortgages in order to foster home ownership in inner-city areas
or that
> Fannie Mae and Freddie Mac own the overwhelming majority of mortgage
or that they
> ... set the standard for the rest of the industry.
I do hope that I can make it.
Enjoy,
A.O.

[johnkarls]

---------------------------- Original Message ----------------------------
Subject: Re: Re: Reading Liberally THIS WEDNESday Dec. 10
From: readingliberallyemaillist@johnkarls.com
Date: Mon, December 8, 2008 10:15 am
To: AnonymousOne
--------------------------------------------------------------------------

Dear AnonymousOne,

Thank you for your e-mail.

Re oil prices, I think you have mis-read the materials -- the most
succinct distillation occurs in our missives to President-Elect Obama in
which we are saying that OPEC will play forever the game of setting prices
just below what it would take for America to take action, and he should
break that cycle by taking action.

Re the economic mess, I accept your opinion that I am inane.

Hoping to see/hear you Wednesday.

Your friend,

John K.

[AnonymousOne]

---------------------------- Original Message ----------------------------
Subject: Re: Re: Reading Liberally THIS WEDNESday Dec. 10
From: AnonymousOne
Date: Mon, December 8, 2008 1:12 pm
To: readingliberallyemaillist@johnkarls.com
--------------------------------------------------------------------------

You phrased concisely the OPEC pricing problem. I even think that they
deliberately jerk pricing, to bankrupt alternative energy investors.
For your amusement:
'Merrill Lynch & Co. chief John Thain has suggested to directors that
he get a 2008 bonus of as much as $10 million... Though Thain's
company was sold to Bank of America after losing a net $11.67 billion
this year, Thain argued that it could have been worse..."
http://www.huffingtonpost.com/2008/12/0 ... 49276.html
Enjoy,
A.O.

[johnkarls]

---------------------------- Original Message ----------------------------
Subject: Re: Re: Re: Reading Liberally THIS WEDNESday Dec. 10
From: readingliberallyemaillist@johnkarls.com
Date: Mon, December 8, 2008 10:47 pm
To: AnonymousOne
--------------------------------------------------------------------------

Dear AnonymousOne,

Thank you for your e-mail.

I'm glad we agree on OPEC pricing.

But you're not going to get me to defend any CEO!!! Let's stick instead
to your second issue of whether the sub-prime mortgage mess brought down
the whole house of cards -- and I could quote for you zillions of
prominent Democratic politicans who claimed during the recent Senate and
House hearings THAT IT WAS -- in the course of arguing that something
should be done to bail out homeowners directly (though not, of course, in
the course of admitting that Messrs. Dodd and Frank were primarily
responsible for the mess).

Incidentally, it seems to me that you infer that I disapprove of what Dodd
and Frank did.

I do NOT, in the sense that I approve of the goal of fostering home
ownership in inner-city conditions.

However, I DO -- in the sense that there is only a finite amount of money
that can be spent on improving our inner cities (though it may vary under
various scenarios, but still limited by (if nothing else) the gross
domestic product) -- and I believe that it could be better spent on the
regional (inter-jurisdictional) magnet schools designed to combat Chief
Justice Robert's decision last year that race could not be considered by
the school boards of Seattle WA and Louisville KY in achieving diversity.
(In this regard, please see on our bulletin board
(www.SaltLake-ReadingLiberally.org) possible topics for next month).

Still hoping to see/hear you on Wednesday.

Your friend,

John K.

[AnonymousOne]

(This space is reserved for AnonymousOne to have the last word.)

[UtahOwl]

Dear John & AnonymousOne,
I chime in here on the "Are Fannie & Freddie To Blame" ( for the mortgage crisis) question. Much as admire you, John, i think you got this one wrong in your Outline for Discussion. Fannie & Freddie undoubtedly were under severe pressure to drop lending standards, as the asset-backed securities market went wild, but the data appear to show that they did not cause the crisis - the source of the crisis was in the "shadow" banking sector & its chain of agents involved in churning out mortgage-backed securities. I include these references to support my claim:
Thoma http://economistsview.typepad.com/econo ... -it-w.html
Krugman http://krugman.blogs.nytimes.com/2008/1 ... ddie-data/

[johnkarls]

Wednesday – December 10 – 5:00 am MST (NB: times posted by the Bulletin Board software are GMT)

Dear Utah Owl and Anonymous One,

I’m sorry to have a full schedule today and, accordingly, no time available to document the pivotal role played by Fannie Mae and Freddie Mac in the economic debacle, and the pivotal role played by Messrs. Dodd and Frank in causing Fannie Mae and Freddie Mac to act as they did.

However, I have examined the two references cited by Utah Owl to support her claim –

*****
The first reference is something that appears somewhat mangled under the banner of “Economist’s View” and one Russ Roberts.

The reason why it appears somewhat mangled is that Russ Roberts appears to be quoting a blog that somebody has attributed to him, and then taking issue with it – but this is only guess work!!!

If I am correct (which is the most charitable view vis-à-vis the position of Utah Owl), it is noted that Russ Roberts does not take issue with the following portion of the blog that was attributed to him –

“Alas, Krugman has his facts wrong. As the Washington Post has reported:

“In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

“Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

“Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

“The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending.

“$434 billion isn't zero, and that's just from 2004 to 2006.”

*****
Utah Owl’s second reference is to a four-paragraph article by Paul Krugman describing a graph by one Mark Thoma.

The first nine comments provoked by Paul Krugman’s essay attest to its sloppiness –

1. If Fannie/Freddie were not overly exposed to these toxic assets, then why did Secretary Paulson chose to seize the companies one Friday night not so long ago?

One set of my grandparents never achieved the “dream” of home ownership. I never heard them once complain and I don’t think they felt disenfranchised. This notion that home ownership is a right is as bankrupt as most of these loans. Public policy did alter the nation’s collective belief that if you weren’t a homeowner that you were somehow second rate.

This impression is not dissimilar from the push in the late 60’s to ensure that everyone have a college education. The result is the same as well. A college degree is a currency devalued and now all of our property values are also fractions of what they were.

— Rob Maytag

2. Google “American Dream Commitment” or check out FNM’s filings on Edgar. (Editorial Note -- Edgar is the official web site of the U.S. Securities and Exchange Commission on which the SEC makes available to the public every filing by a public company -- annual reports, proxies, 10-K's, quarterly filings, etc.) This was a $3 trillion program started by Franklin Raines to target underserved demographics and to narrow the minority homeownership gap. This included the origination of mortgages to “credit-impaired borrowers who otherwise may not qualify for lower-cost conventional mortgage financing” (their words) with their “lending partners” Countrywide, Doral, BAC, and others. In other words, they did an end-around their charter: they were not allowed to originate non-conforming subprime loans themselves, so they agreed to buy these loans in the secondary market, hold them on their balance sheet, lever them 50:1 and create the world’s biggest mortgage hedge fund. Fannie and Freddie were indeed very involved in the creation of the subprime crisis.
— BN

3. November 17, 2008 5:13 pm Link

It’s unfortunate when the investing public ends up with bad advice from stock research analysts playing amateur economist, and equally distressing when the converse occurs.

Dr. Krugman clearly does not understand how the FNM/FRE laundry machine was operating, as he is plainly misinterpreting data and mis-stating history. He fails to differentiate between mortgage debt held (ie ON their balance sheets) and agency debt and MBS issued and held by others (along with a nice AAA stamp, “Made in the USA by Fannie Mae” to go with it). Further, the downturn in FNM and FRE’s holdings are coincident NOT with the market “really [getting] crazy” but rather with the initial detection of fraud on their books. Please go ahead and search for the requisite public-company SEC filings from FNM and FRE during that period and let Dr. Krugman know what you find.

Krugman’s an observant guy but unfortunately cannot seem to divorce objective expression of facts from his ideological agenda for longer than a day or 2 at a stretch.

— Eric Belman

4. November 17, 2008 9:54 pm Link

Does the agency backed pools include the debt which Fannie and Freddie insured? Isn’t possible that some of the debt was issued by “asset-backed securities issuers”, but insured by the agencies, effectively transferring the credit risk to Fannie and Freddie?

— Manu Thambi

5. November 17, 2008 10:24 pm Link

The linked graph by itself doesn’t support the view that Fannie and Freddie “pulled back” sharply in 2003. Instead, the graph shows that they lost market share beginning in 2003. But that is (logically) compatible with their increasing their mortgage lending in absolute terms during the same period. (What are the absolute numbers?)

Although it is wrong to single out Fannie and Freddie as “the” culprits behind the mortgage meltdown, surely they share a (significant?) portion of the blame. Isn’t the most likely story that, in response to lost market share, Fannie & Freddie began lowering their own lending standards?

— LS

6. November 18, 2008 1:17 am Link

The graph you reference above, esp of agency mbs, seems at odds with the similar graph shown in the title presentation, “Crisis on Wall Street - Panel Discussion sponsored by Department of Economics”, one of the presentations referenced in your “Princeton Saves the World” post. (prezzo with yellow background, slide 4)

In the Princeton slide, GSE/agency mortgates increase into 2008; they do not show the decrease that the graph referenced above does. Of course the units in the graph are $ in one and - it seems - % in the other, so, for that, and other reasons, I could be wrong. Securitized products increase the same way in both graphs though.

I think someone is wrong about the Agency/GSE mortgage behavior.

— Bill N

7. November 18, 2008 3:23 am Link

Dear Mr Krugman,

Thank you very much for your insights, which I have been following for years and have found really useful.

Having said that, this time I am a bit disappointed: “Share of mortgages”? To my taste this graph leaves way too many loopholes to prove much…

First, is the graph showing the accumulated share of the mortgage market, or just the share of new mortgages each year? It looks like the former, and I believe that the latter would be more meaningful. (The human mind is terrible at integrating and differentiating - so to figure out who was doing what in 2007 we really need to see the data for 2007, estimating it from the difference in the cumulative values in 2006 and 2007 won’t do for many of your readers, myself included.)

And second, the graph would have been more meaningful if instead of a “share” it showed the actual number of mortgages, or even better, their value. Expressed in percent the graph distorts reality: the large share of the S&Ls in the nineties looks impressive in the graph, but the overall market was much smaller then than now -or so I believe (I don’t know because the graph doesn’t tell me!)

Anyway, I hope that I am not nitpicking. Thanks again for a great column,

Alex

— Alex Voigt

8. November 18, 2008 3:25 am Link

Until Congress started pressuring the banking community to make loans to people with few resources, banks had very careful guidelines about issuing mortgages. Then with the Community Reinvestment Act and other pressure banks found themselves in a situation where they felt they had no choice but to make loans with 0% down or with very low rates to start. These loans were often packaged and moved on to Fannie and Freddie. The loans were hopeless from the beginning. It started the whole industry down a slippery slope to disaster. the housing bubble did not arise overnight. Of course the wild convolutions created by the financial industry did not help. However, when all those bad loans from the mid 90’s on started to default, this disaster at the margins brought everything else down with it. So I do not understand how you can let Congress and Fannie and Freddoe off the hook.

— ruth fay

9. November 18, 2008 7:43 am Link

Let me get this straight: you say that Fannie and Freddie “pulled back sharply after 2003, just when housing really got crazy.” and that asset-backed security issuers are the ones who really drove the bubble.

But the data you use shows that the asset-backed security issuers didn’t really play a significant role until after Fannie and Freddie pulled back “during the height of the housing bubble.”

There seems to be a causality issue. While you make a strong argument that asset-backed security issuers exacerbated the issue, you never really grapple with the point that Fannie and Freddie laid the foundation for the housing bubble. That’s what you were trying to prove, but your data show the opposite.

— Mattan Griffel

[AnonymousOne]

.
(This space is reserved for AnonymousOne and/or Utah Owl to have "the last word.")