UPDATE: I'm placing this at the top for emphasis. In Detroit's rapidly collapsing housing market, homes are selling for less than new cars: "At least 16 Detroit houses up for sale on Sunday sold for $30,000 or less. A boarded-up bungalow on the city's west side brought $1,300. A four-bedroom house near the original Motown recording studio sold for $7,000."
Granted, Michigan has its own very unique issues. But still....
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More depressing news from the home mortgage front. Robert Kuttner:
Why is the market so nervous? Mainly thanks to the latest bitter fruit of financial deregulation: the collapsing $1.3 trillion "subprime" mortgage business, which now accounts for one mortgage in three. Here is a textbook case of why financial institutions need to be regulated, to protect both consumers and the solvency of the larger economy.In the past decade, as regulators discarded rules, shady mortgage banking companies, financed by the bluest-chip outfits on Wall Street, calculated that they could make a lot of money offering bait-and-switch mortgages to poor credit risks. Default and foreclosure rates would be greater, but higher profits would more than compensate for the risks. So the subprime mortgage industry, enabled by the big banks, invented amazing gimmicks. These included not just variable-rate mortgages, but mortgages that were initially interest-only, mortgages with introductory teaser rates, mortgages with no down payment. No income verification required! No credit check! Subprime operators targeted people with horrific credit histories and families desperate for housing who could not afford the debt they were taking on. Last year, 60 percent of subprime loans required no meaningful documentation.
Then came the morning-after: As higher payments kicked in, people couldn't meet them. Defaults skyrocketed, to an estimated 13 percent of all such loans. At least 25 subprime lenders have gone out of business. The big dogs on Wall Street, who had invested in the subprime operators, took a big hit, too.
It's not clear where this will end. Many low-income families will lose their homes. Innocent investors will suffer the spillover effects on the stock market, and general mortgage rates may have to go up to compensate for these losses of reckless speculation.
Not scared yet? Try again. Nouriel Roubini:
The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change. We are only at the beginning of this fallout but, already, several proposals and bills in Congress have been submitted to help millions of sub-prime homeowners on the verge of bankruptcy and foreclosure. The prospect of millions of homeowners thrown homeless on the street is already shaking politicians of every stripe. The relatively modest bailout envisaged by the first bills currently proposed in Congress will mushroom into a much bigger fiscal bailout of homeowners, borrowers and lenders once the garbage of sub-prime, near-prime and pseudo-prime toxic waste spreads around the economy and likely leads to a hard landing recession that will cause a much bigger financial and banking crisis....
Since a lot of nonsense and financially self-interested ideological spin will be written and said in the months and years to come it is important – from the beginning – to be clear about who is at fault for this utter housing and financial disaster. The answer is clear: the blame lies with free market zealot and fanatics and voodoo economics ideologues who captured US economic policy in the last six years in the same way in which a bunch of neo-cons high-jacked US foreign policy to bring “democracy” to the Middle East while instead leading the country into the Iraq and Mid-East quagmire and now disaster.
According to these ideologues – listen for example Larry Kudlow extolling every evening on CNBC the virtue of unregulated wild-west cowboy capitalism - government is always utter evil and the economy could never have a financial or economic crisis if taxes are low, government spending is minimal and government intervention and regulation of the economy and of financial systems is inexistent. This nonsense about bubbles, financial crises and recessions being impossible unless the government over-regulates the economy and/or makes monetary policy mistakes is the main religious dogma of this cabal, an axis of ideological zealotry that goes from the WSJ editorial page to a gang of voodoo economic hacks and to some segments of the financial television.
The truth is the contrary: unregulated free market capitalism that has no sensible rules, regulation and supervision and sensible countercyclical monetary and fiscal policies of financial markets leads to credit and asset bubbles, financial excesses and economic and financial crashes. Economic and financial booms and busts were much more severe in the US in the 19th when there was no central bank and no welfare state fiscal actor trying to fine tune the economic business cycle. And business cycle swings have become less frequent since Keynesian countercyclical use of monetary and fiscal policy has been introduced from the Great Depression on.
The reality of the last three US recessions – the 1990 recession, the 2001 recession and the coming 2007-2007 – is that each of these recessions started when the government stopped regulating and supervising in moderate and sensible ways financial institutions and allowed credit and financial and investment bubbles to rise and fester until they ended up in bursting bubbles and leading to recessions.
Study the economic history of this nation and the above becomes painfully clear. The era of wild-west style laissez faire capitalism was one filled with chaotic booms and busts. What moderated that tendency was the careful regulation of the market by the state.
More from Roubini. Here's the short version:
Market economies are the best economic system but they work properly when private greed, manias, panics, stupidity and recklessness is tempered by sensible supervision and regulation.
And here's the longer one:
Booms and busts are regular features of market economies that do not have sensible government supervision and regulation of financial and credit markets. The S&L crisis that led to the credit crunch that caused the 1990 recession started when previously regulated S&Ls were deregulated and there was no sensible supervision of their activities while deposit insurance led them to “gambling for redemption” reckless lending. And blaming “evil” government-provided deposit insurance for their moral hazard gambles is again confusing cause and effect: financial institution that do strictly need deposit insurance to avoid free-market capitalism liquidity and bank runs during panic episodes do require sensible government-imposed and monitored capital adequacy ratios as well as supervision and regulation of their lending activities to avoid moral hazard-induced distortions in their lending behavior. It is not government-generated moral hazard via insurance that lead to reckless gambling for redemption: it is the lack of sensible government-based regulation and supervision that leads to credit and asset bubbles.In the 1990s this deregulation of S&L then led to a real estate bubble – both in commercial and residential real estate in the South of the US – that ended up in a bust once a glut of shopping strips, shopping malls, office centers, and residential homes piled up as a result of unregulated credit creation by the S&L. Then, the ensuing credit crunch – rather than the necessary but late government intervention to control this free market made disaster – led to a painful recession in 1990-1991, a systemic banking crisis and a bailout of these S&Ls that ended up costing the US Treasury – or better the US taxpayer – about $200 billion. Unregulated wild-west capitalism without rules and regulations was the cause of the S&L boom and bust, not the eventual government intervention to deal with this mess as the priests of the free markets voodoo religion would want you to believe.
Similarly, the last six years’ housing and subprime mortgage bubble and bust had little to do with excessive government intervention – either ex-ante or ex-post. Instead they had all to do with the lack of any basic sensible government regulation of the mortgage market, regulation in practice rather than in theory. Dozens of new subprime lenders emerged and were allowed to lend via monstrous credit practices – liar or NINJA loans, no down-payment loans, interest rate only loans, negative amortization loans, teaser rates, option ARMs with no limits or controls - that should have never been allowed in the first place. Even now that regulators are starting to crack down on the most patent monstrosities such as zero down-payment and no documentation of income, jobs and assets the voodoo priests and their acolytes in the mortgage industry are starting to blame the government for interfering with free market practices: in their ideological view there were optimal reasons for all of such practices: in market fundamentalism if such practices emerged there was a good reason for them and now the government interfering with these monstrosities will cause a credit crunch that will damage the mortgage market and cause a nasty credit crunch that will lead to an economy-wide recession. What a bunch of nonsense and self-interested baloney!
These practices instead emerged because the voodoo free market system of financial incentives for lenders – deceive borrowers with predatory practices, originate reckless mortgages to pile up fees, then securitize those mortgages and shove them on some other investors who had no clue of which toxic waste they were buying – became a whole con scheme. The way a senior and unnamed market participant put it in a bit exaggerated terms this was “an unregulated scam where a bunch of con artists fooled a bunch of clueless deadbeat borrowers”.
So do not blame excessive government regulation; it was the lack of any basic regulation that created the bubble.
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