Posts Tagged ‘financial crisis’

The lesson of Japan’s failure

Thursday, February 12th, 2009

Ten years ago, Japan had a banking crisis very like the one we just had.  It was discovered that financiers and big businessmen had blown staggering sums of money, whereupon the government massively intervened to keep those that had screwed up from losing their jobs.

The Japanese economy has been stagnant ever since, even though, or perhaps because, the government has poured huge amounts of “stimulus” over the economy, so much “stimulus” that the Japanese government is now approaching bankruptcy.

President Barack Obama correctly observed:

There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade”. They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Obama then proceeds to explain why we are going to do what failed for Japan:

we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

No we don’t. We want to retain a strong sense that businessmen who succeed, win, and businessmen that foul up, lose their shirts. It is not capitalism when the capitalists are kept in power by the state.

To work, capitalism has to be run by people who are smart.  The entrepreneur unites other people’s money and other people’s labor, to create value.  The Wall Streeters revealed themselves to be idiots who massively subtracted value.

Similarly General motors, who managed to destroy the amazing sum of about four hundred billion dollars of value over the last decade.

The big factor in downturns is that people attempt to continue saving, while holding back from investing, whereupon the economy bogs down, thus the big factor is distrust of financial intermediaries.  In this sense, recessions are largely supply side problems rather than demand side problems. In the last three years, vast numbers of financial intermediaries have been revealed as untrustworthy and incompetent.

In Japan, in a similar crisis thirteen years ago the insiders were revealed to be incompetent and corrupt. In a similar response, the Japanese government intervened to protect insiders from the consequences of exposure, keeping them in charge of other people’s wealth.

This in Japan as here led to massive decline in investment and demand, to which the Japanese government responded with “stimulus” – building bridges to nowhere, paving rivers, and so on and so forth.

This led to a massive increase in Japanese government debt, now the highest in the world, but failed to cure the recession.  The government could manufacture demand, but not supply.

Japanese government debt is the highest in the world not because no other government was prepared to borrow so much, but because all other governments that attempted to borrow as much, have gone bust.

Bridges to nowhere will not fix the supply side problem, and tax cuts can have only limited effectiveness. Rather, a new crop of productive entrepreneurs must arise, the creation side of capitalism’s creative destruction.  But in a world of bailouts, the way to success is connections, political correctness, and getting on with the rest of the elite, which gives us the sort of capitalist establishment that got us into this mess.

The banks that were run by bankers of the Ebenezer Scrooge type, who accepted CRA with the same enthusiasm as they turned up at their dentist for a root canal, tended to be taken over by banks of the Washington Mutual type, who were rewarded for their political correctness in embracing CRA with genuine enthusiasm, by regulatory favor in their takeovers.  And that crowd, the Washington Mutual sort, is the crowd that is still in charge, government guaranteed to be in charge.  We need a finance sector run by the likes of Ebenezer Scrooge, and an automobile industry run by the likes of Hank Rearden.  To get that, badly run businesses have to go bankrupt, and their assets need to be auctioned off at the block.

How many CRA loans, how much affirmative action payout?

Wednesday, November 5th, 2008

From 2000 to 2007, blacks and hispanics received six hundred and thirteen billion dollars more in home purchase mortgages than they would have received had they received the same proportion of the money that they received in 1999 – a figure that strikingly resembles the total cost of the bailout.

In 1999, people warned that CRA loans, affirmative action loans, racial quota loans, began to endanger the financial system

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people …

…These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, …

… “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

1977 was the start of turning the finance industry into a political slush fund, and with each regulatory  intervention, the amount of money at risk increased  exponentially

How many CRA loans, affirmative actions loans, racial quota loans, were there?

Fortunately the data for new house loans by race is available, and from this data we can calculate that CRA loans, affirmative action loans, racial quota loans, for new house purchases, in the period 2000 to 2007 were at least  six hundred and thirteen billion dollars, which is pretty close to the total US bailout cost.

613 billion dollars.

So this was an affirmative action financial crisis, and we are for the most part bailing out financial institutions that were forced to lend to unqualified borrowers by race, and perhaps also bailing out the culture of corruption that results from rating mortgage securities AAA that were generated in the course of signing up people to vote democrat with a bottle of cheap whiskey and a million dollar mortgage – because rating them differently would be racist, much as Princeton was corrupted because when it graduated Obama’s wife, fearing that it would have been racist had it failed to pass her thesis merely because it was a barely literate rant against racism.  We are required to pretend Obama’s wife is educated, and we are required to pretend that these borrowers are credit worthy.  It corrupts the universities, and it corrupts the financiers.

There was a massive increase in the value of loans to black and hispanic borrowers.  To the extent that these loans grew much faster than loans to white people, this most likely represents affirmative action.  This is a conservative estimate, since affirmative action lending has been enforced by the Community Reinvestment Act (CRA) since 1977.  What was new in 1999 was not affirmative action lending, it was affirmative aciton lending on a scale that threatened the financial system.

In 1999, mortgages to black and hispanic new house borrowers were 10.4% of mortgages to white new house borrowers.

In 2006, mortgages to black and hispanic new house borrowers were 36.5% of mortgages to white new house borrowers.

I calculate what new home mortgages would have been had new home mortgages to black and hispanics remained 10.4% of new home mortgages to whites.

The excess, the difference between hypothetical mortgages and actual mortgages, is a conservative estimate of CRA loans, affirmative action loans, racial quota loans.

In this table, the first column is new housing loans to whites, the second column is new housing loans to blacks and hispanics. Estimated CRA loans are the difference between the actual and hypothetical loans, and at the bottom I total numbers.

The numbers for new house mortgages in billions of dollars come the government racial quota monitoring website.  The number for affirmative action loans is my estimate, calculated as new house mortgages to blacks and hispanics minus 10.4% of white new house mortgages

The numbers for new house mortgages in billions of dollars come the government racial quota monitoring website.  The value for affirmative action loans is my estimate, calculated as new house mortgages to
blacks and hispanics minus 10.4% of white new house mortgages

Home Purchase Mortgages in Billions of dollars

Year Black and
Hispanic
White estimated
CRA
1999 37.60 359.90 0.00
2000 43.72 364.54 5.63
2001 51.18 381.41 11.33
2002 89.44 469.03 40.44
2003 128.40 537.96 72.20
2004 135.26 547.41 78.07
2005 236.06 757.33 156.94
2006 247.55 678.20 176.70
2007 129.53 547.41 72.34
Total 1098.75 4643.20 613.65

Unfortunately, no racial breakdown on default rate is available, but the Hispanics I saw buying houses in Sunnyvale in 2005 and 2006, looking at them from twenty paces, you could tell in two heartbeats that the chances of them making payments was very poor indeed.

Implicit government guarantees produce a vast river of easy credit to the too-big-to-fail beneficiary of that guarantee, and inevitably politicians are tempted to direct that river to political voting blocks – sometimes political voting blocks that are unlikely to repay the money.

It is a fundamental moral hazard problem in government regulation and intervention, which cannot be regulated away.  Instead of regulating, the beneficiaries of these guarantees must be shrunk – regulated to become small enough to fail, instead of regulated to benevolently hand out money to the politically favored.  Instead of sending that mighty river of money in the direction of desirable voting blocks, politicians must shrink it – which, like dieting, is hard for them to do.

The financial crisis in America was one of affirmative action and the community reinvestment act, of Black and Hispanic deadbeats robbing honest hardworking whites, but thinking of it in those terms of the particular voting blocks is not useful, will not get us to a financial system that moves savings from honest thrifty savers to honest hard working investors who can put the money to profitable use.  Such thinking, thinking in terms of voting blocks, will at best merely change the skin color of the deadbeats robbing the honest folk.  The financial crisis in the rest of the world had different beneficiaries with diverse skin colors, but the common factor was political favor sending funds to political voting blocks, rather than to people able to put the money to profitable use.  It is more useful to think in terms of moral hazard – that politicians cannot regulate, for they have perverse and dangerous incentives, and therefore corrupt financiers.

That politicians dispatched our money to cat eating wetbacks should enrage us, but we should be enraged at the politicians, rather than at migrants looking for work who have difficulty affording meat from a butcher, migrants who are prohibited from honest work by those politicians, and then offered welfare and a million dollar mortgage no money down by the same politicians.  The politicians corrupted Hispanics and financiers alike.