Despite H.L. Mencken's adage that economists have a solution for every problem, "simple, neat, and wrong," it seems that simplicity with teeth would work well in keeping depository institutions on the straight and, ahem, narrow. First, get rid of the "risk-based" facet of capital requirements; bankers eventually will figure out how to game them. Instead, simply have a specified capital requirement with teeth, that is, a fairly high capital ratio to assets (or deposits) so that equity holders and depositors have a stake in monitoring banks' safety and soundness. Second, allow narrow banks to set up shop; their only assets would be U.S. Treasury obligations. These banks would have relatively low capital requirements and ample deposit insurance. Let "broad" banks sink or swim more or less on their own, again relying on invested capital to keep the banks sound, with relatively high capital requirements and more limited deposit insurance.
In closing, it's notable that a couple of Senators - Angela Alsobrooks (D-MD) and Bill Haggerty (R-TN) - recently proposed expanding deposit insurance from the current $250,000 of coverage per depositor to allow certain types of depositors to enjoy $10 million of deposit insurance. What a singularly bad idea.
"More limited deposit insurance" isn't realistically on the table as an option. Neither is a narrow bank invested only in treasuries but it's still an interesting idea.
I see no reason to have higher capital requirements AND reduce deposit insurance. And asking depositors to monitor a bank's soundness just sounds silly. Most depositors have near zero ability to do that and we added the insurance to avoid runs, which would surely become a problem if the insurance went away.
Re: your singularly bad idea, I don’t really disagree, but of course with SVB and with many banks during the Great Financial Crisis, taxpayers bailed out essentially unlimited deposits.
Making the banks responsible for their own capital is good as far as it goes, but add in the possibility of discretionary bail-outs by politicians and you turn the whole system into a game of pseudo-competitive rent seeking.
As a better way to make bankers behave responsibily, I would recreate the banking system Scotland had during Adam Smith's time. Meaning, deny the corporate veil to banks, investment banks, and investment advisors, and make them organize as partnerships, with an absolute ban on bail-outs from any source even indirectly tax-funded. This puts responsibility where it belongs. A banker or broker who mismanages and loses your life savings absolutely should stand to lose his own.
Of course, this will not solve the difficulty of buying a home, because the great difficulty there is scarcity of homes and their resulting high price, not the scarcity of huge loans that ought not be necessary. To make homes affordable, stop keeping unbuilt land off the housing market and abolish the urban planning agencies, or at least make them answerable to antitrust law when they behave as the cartel they are.
I think ending Glass Steagal was probably bad net net in hindsight.
I don’t see how you could implement an absolute ban on bailouts and make it stick. Even I don’t think there should have been *zero* government response to the (partially but IMO not completely caused by government) Great Financial Crisis. But of course the problem was that what bailout there was was far too generous to the banks and the GM union.
Absent legislating against “too big to fail” banks, then limiting the types of orgs who will be bailed out, and limiting the leverage of those who most represent systemic risk, is about the best we can do.
The general bailouts issue is imo separate from the home ownership Fannie/Freddie issue. That piece really can simply be managed better and have the risk minimized. The general case is much more difficult.
> In the 1920s, farm prices fell. The decline in farm income meant that when the balloon mortgages became due, farmers did not have the money to repay the loans.
Do you mean crop prices? Lower farm prices should make it easier to repay loans.
War zones conscript farmers and ruin farm land, leading to more imports. After the war, most of those farmers come back, war land reverts to farm land, and the demand for imports drops. The US was the main exporter during the war and for a year or two afterwards.
Reduced demand and lower prices make it harder to earn a living by farming, make it harder or impossible to repay those repeated 5 year balloon mortgages, and banks won't loan as much on farms which are less valuable.
The financial crisis of 2008 would not have happened if the federal govt. had not forced lenders to weaken their standards. That's how sub-prime mortgages came to be dominant, not market forces. There is a ton of respectable scholarly work on this; Ted Day and Stan Liebowitz, for instance, were warning about the pending disaster in the late 1990s.
I don’t completely agree with this. The GFC could have happened w/o government pushing for weakened credit standards. It was a factor, but not the predominant one. I’d point a lot more to a lack of skin in the game. Many mortgage shops (including banks) were lending money then quickly securitizing them to sell in the public debt markets. Not having to keep the loans they made on their own books reduced their duration risk from 10 years to several months. Ratings agencies stamping AAA on all this garbage is what made these shenanigans possible. Give me a business where as party C, I lend party A’s money to party B with no recourse for defaults to me, and I would probably talk myself into doing the same thing. All I’d care about is volume.
All the ratings agencies are still here. Most of the investment banks are still here. If you want to know the next time this will happen, it’s now. Private credit is a Pandora’s box of crappy credit with suspect marks. Private credit firms are loaning out other peoples’ money to poor credit risks and raking in big fees while the party lasts. The government isn’t forcing it, just the availability of large pools of other peoples money and clever financial engineers working two layers of abstraction above the reality of the underlying businesses.
Listener, almost no one was making these dicey loans until the 1990s when there was a full court press on the home lending industry to relax their standards. All in the name of eliminating 'discrimination' or 'redlining'. For which the evidence was highly dubious. Up to this assault by activists, about 2% of home loans were subprime. By 2008 that had risen to 58%.
There's no question that banks didn't do this on their own volition. It started in Boston with the Boston Fed falling for an amateurish study by Alicia Munnell's Boston College grad students: https://personal.utdallas.edu/~liebowit/mortgage/mortgages.pdf
The Boston Fed then published their own pamphlet, titled, 'Closing the Gap,' which actually threatened lenders with criminal prosecution if they didn't loan their money to people with poor credit histories. Banking is a heavily regulated industry, if you don't do what those regulators want, good luck operating profitably.
If the lending standards hadn't been lowered, how would the crisis happened?
Anyone (including me) claiming a single cause to the GFC is wrong. Government and government-like regulatory bodies (like Basel III) put their thumb on the scale to make holding mortgages more attractive from a reserve requirement standpoint. That in and of itself doesn’t feel like the prime driver. If you want to blame government, I’d point more directly to them purchasing the mortgages originated by others. This ties our two complaint together. For me, no skin in the game for lenders, for you - government. My focus here was on the fact that you had a market where players could privatize gains and socialize losses by being paid to originate crap (by either the government or private sector investors in MBS). Forcing originators to hold real risk from their loans on their books in a way that hit company executives personally feels necessary if we are to avoid repeats of this in a variety of flavors.
Listener, you are missing my point (or ignoring it). Lenders did not make the kinds of loans that were the 'sine qua non' (without which not) of the crisis. There is a rich literature in economics demonstrating that it was the regulatory requirement of lowered standards that got the avalanche started.
Presumably, bankers were always greedy for profit, but until their self-imposed constraints were interfered with by powerful outsiders, they made loans only to those who had demonstrated an ability to repay them. The financial crisis simply would not have happened without the regulatory muscle dictating reduced standards.
Those lending changed didn't appear out of thin air by people risking their own money. They were the result of government changing the rules and subsidizing supply.
It's always government. If in doubt, look for what government had been diddling.
Yes, for catastrophes, you need government. They are the best at creating catastrophes.
Perhaps you mean Katrina and other hurricanes where the locals were helping immediately, and all the government did was try to turn them back. Yes, you are right, only government can create that kind of catastrophe.
Then there’s all the emergency laws confiscating guns during emergencies and refusing to send in police to deter looters. It takes government to forbid “price gouging” which is the best way to attract help from outsiders bring in supplies. Yes, you are right. Only government can create that kind of catastrophe.
I'd stress another point. A free market in widgets it much more like textbook.
The widget is fungible, easily transported and interchangeable, has an incredibly liquid market, transaction costs & upkeep are low, and has few externalities.
I second that question -- I'd love to hear speculation on how land and home ownership and mortgages would have evolved over the years if governments had simple left them alone.
I'm also curious how ownership has evolved in other countries. This alleged "American dream" of home ownership -- I will guess some form of home ownership is universal, simply from wanting to settle down and not move too often merely because a landlord says time to do. But I will also guess that politicians can think of lots of ways of providing that, such as renters' rights and sticking it to landlords.
I don't know any work on the matter off the top of my head, but there should be a fair bit of history of the early US ownership market in English. I specify English because most places did not have any particular rules for land markets outside the direct influence of government power (e.g. cities and long term, densely populated farming regions) that the real limiting factors are "did people write down what they did?" and "can I read it?"
The US is particularly good for that since it was largely open until fairly recently in relative historical terms, so things are written down after spelling was invented and can be compared across regions. How people paid for houses in 1840's Philadelphia vs Kansas City for example might be interesting.
I took it as referring to the appearance of the printing press and dictionaries, which standardized spelling. Andrew Jackson, less than 200 years ago, supposedly said it was a poor man who couldn't think of several ways to spell a word.
Precisely. Prior to about 1700 words were spelled rather recklessly, with a single manuscript sometimes having what is apparently the same word spelled different ways within. Especially names were often all over the place. Makes reading really old stuff really awkward, although once you get used to pronouncing everything phonetically in your head with the appropriate accent it can help.
Platonically free markets will never exist in the mortal realm, but on long enough timelines we can clearly see gradations between more free and less free. It's also a good and perhaps profound question as to how much and what type of state support free markets require to avoid those same markets being abolished by the concerted efforts of aristocrats.
Markets in land are much more free now in Anglo-America than they ever were prior to the long march towards the presumption against inalienability of land that began in earnest in the 13th century. In Britain (and thus in our shared history) the enemy of free markets in land was always the fee tail, which forbade heirs from selling land, and mandated that certain plots only pass down to blood relations.
This made it so land was very hard to acquire and very hard to sell on a market basis. Lands not entailed were artificially scarce. This also doomed many aristocratic families who found themselves land-rich but cash-poor or otherwise heavily indebted.
Fee tail was not completely abolished in Great Britain until the 20th century, but it generally disappeared in the US in most states much earlier. An argument can be made, however, and has been gaining currency in the US with widespread abolitions of the Rule Against Perpetuities, that it is more free to permit entail-like restrictions on the sale of land with the consent of everyone. Our contemporary arguments for and against zoning are of a similar type to these very old arguments balancing freedom of disposition and the promotion of market exchange.
This is a good question, and in a lot of situations there is no conflict between the two impulses. However, when we're talking about things like the fee tail or modern perpetual trusts, there is a conflict because if the property owner has the freedom to prevent sale of the asset, it constrains the reach of markets in practice.
E.g. imagine something like a Hawaiian island; 95% of the acreage can only be passed down on death to a lineal descendant of the current owner. What might have been a more liquid property market becomes very thinly traded and illiquid. It becomes impossible to determine accurate comparable prices because most of the comparable land cannot be transferred by market means. Economic development on the island also is impossible because of the restrictive covenants on most of the acreage requiring traditional usage. So, by respecting absolute freedom of disposition on the island, the viability of market exchange has greatly diminished.
“if the property owner has the freedom to prevent sale of the asset”
I don’t think you are using words the same way as most of us.
The property owner ALWAYS (save eminent domain) has the right to prevent the sale - choose not to sell.
The question is whether or not someone else OTHER THAN the property owner can prevent a sale.
Any such ability to block a sale, whether it might be wise or beneficial public policy or not, is by definition in opposition to free markets.
In your Hawaiian example freedom of disposition is not respected, it is the almost diametric opposite of respected.
Freedom of disposition PROMOTES market exchange. The two are not in opposition in any generalized way.
Unless we are in an Orwellian world where the government has redefined “freedom”…
P.S. I think I *finally* figured out that in your non-Hawaiian case you mean the person creating a will or trust being able to control the property after their death when they no longer ARE the owner of the property (being dead). So there you were using the words unintentionally misleadingly for we laypeople not up on estate planning jargon. My bad.
But even assuming I now have that right, it doesn’t explain how the Hawaiian case is one where “freedom of disposition” exists.
That's what these words mean, and I am not sure what you are trying to get across. The topic that I raised was the end of entailment and how it highlights the tension between respect for freedom of disposition and promotion of market exchanges. It is an interesting topic because in the abstract there is no tension between them, but in our actual history they were directly opposing forces.
I do not expect anyone who has not studied either medieval history or property law to understand or care about any of that stuff. The whole topic will be deeply confusing to anyone who has not done either of those things. It is deeply confusing to the point of impenetrability to most people who have studied those things. For some people that makes for a fun topic to discuss. For others, it makes them angry online.
Had you merely put in a brief description for we in the vast majority that “freedom of disposition” does not actually means what the plain language should seem to indicate, all would have been averted.
Myself I know a little bit about property law,but nothing of the jargon, and little of relevance of medieval history.
A masterpiece of engineering: powerful gun, thick armor, exceptional optics.
Very hard to break in theory. But when it did break (and it broke often), it required:
- specialized mechanics
- complex machinery
- hard-to-find spare parts
- extensive time in a repair facility
In battle conditions, a broken Tiger was often lost, not repaired.
The Soviet T-34 Tank:
Crude compared to the Tiger. Simpler design, basic manufacturing, highly standardized parts. Much easier to fix — the crew could repair many problems in the field.
Even if a T-34 wasn’t as individually effective as a Tiger, the system (Soviet tank brigades) was more resilient.
About the only change I would make is substitute the US M4 Patton for the Russian T-34. The Patton was more advanced (one axis stabilization) and easier to drive and shoot than the T-34, and had something like 80-90% availability rate due to being so easy to repair and having plenty of spare parts. It also had one of the best crew survival rates of all WW II tanks.
I have read that the Tigers cost 2-3 times as much as even other German tanks, and it was somewhat intentional, since they didn't have enough resources to build 2-3 times as many or enough crew to man them all. But that's getting way beyond the point of the comparison.
Yeah, it’s hard to be satisfied with a Soviet tank. You climb in expecting grit and discipline and instead you get a metal box that screams ‘I was built during a national shortage of everything.’ Meanwhile, Brad Pitt rolls up in a tank looking like war is just another photoshoot for GQ.
I suppose hiking with family is not trending, but there aren’t good hills to climb in our area of North Carolina, so we’ve been flying kites, canoeing, fishing, and touring museums.
I love the first about 2/3rds of this piece, and appreciate the education it provides.
When it got to the explanation for the Great Financial Crisis of 2007-2009, I found that part incomplete and unsatisfying. To me, the causes of the problem were not primarily what AK cited, and only partially of the government’s doing. The far greater government-caused harm was the nature of the bailouts done, and the cementing of “too big to fail” as policy going forward.
But re: solutions, at least as it related to home ownership, I actually prefer the one more or less like what Arnold has proposed a couple of times now recently: Fannie and Freddie only back 30 year fixed mortgages on primary residences, up to the median national (or regional in high-cost markets) home value, with [one of 10% / 15% / 20%] down payment or a 5% down payment and appropriately priced mortgage insurance.
This approach comes closest to guaranteeing stability, minimizing future government bailouts, while providing a nice but mild boost for homeownership, which I continue to believe is a positive for civil society, as it means more people who have a stake in the system.
" It would be better to provide subsidies and encouragement toward saving for a reasonable down payment."
Maybe you should take off your rose-colored glasses. Would the people having the most difficulty buying a house actually take advantage of those subsidies? I'd argue the subsidies for retirement plans suggests not. Note this doesn't even factor in whether they take advantage of employer matches or if they are contributing regularly.
We don’t want to encourage people who can’t afford houses to buy them.
And AK didn’t suggest subsidies for all.
What I read was something much like what I personally favor for the federal government’s role in education. I.e. get out of the loan business (where the cost of the subsidy, especially given bailouts and “forgiveness”, is hidden) and instead offer more scholarships to those who are needy and deserving.
[I don’t actually agree with AK’s suggestion here for housing, I’m just saying that it’s not “rose-colored glasses”.]
Literally the first thing you wrote after the rose-colored glasses comment was “Would the people having the most difficulty buying a house actually take advantage of those subsidies?”
Literally the first thing you wrote after “rose-colored glasses” referred to subsidies.
To suggest after the fact anything other than that you were at *least* as much referring to subsidies with your comment as savings is just not credible.
Or means you weren’t reading your own comments…
Now separately, of course, AK specifically said he was NOT trying to encourage more homeownership,so criticizing him for that (a preference you and I share, but he does not) as having “rose-colored glasses” is silly. He merely said if you’re gonna subsidize homeownership, he prefers doing it that way. He never claimed it would result in higher levels of homeownership. He basically claimed it would result in greater financial system stability. Which is almost certainly true.
But what subsidies???? Subsidies that encourage saving for a bigger downpayment. It is literally the only homeownership subsidy he mentions positively.
You are right he isn't looking to increase home ownership. Today about 60% own their home. If mortgage subsidies were replaced with saving subsidies, would 60% of non-hom etowners take advantage of the program over the long-term? I don't think so.
Maybe more detail will help you. Our government encourages retirement savings by giving a tax advantage for IRAs and 401k-type accounts. Who takes advantage of these? Mostly people who would have saved for retirement without the encouragement. How many does it actually motivate? Not many. Rose-colored glasses refers to thinking encouragement for down-payment savings would motivate those most needing the encouragement.
Beyond that, sure, the saving part would also include a subsidy. I could be wrong but it seems like the only type of subsidy AK is referring to positively. Now read your response. Do you mention anything about encouraging people to save? No. Loans, bailouts, forgiveness, and maybe something akin to a scholarship. I was not referring to any of these.
As long as government does their thinking for them, and actively discourages people thinking for themselves and taking responsibility for their actions, people are going to look to government for answers. It's the rational solution. I believe that if people had a true free choice of telling the government to butt out and let them handle it themselves, more people would opt-out than remain opted-in. Of course, it's impossible to set up such an experiment.
Andy G is right, I mean if they had a real choice. Look at how many people traveled across the plains in the 1800s; they chose hardship for a better life. Look how many people abandoned Europe in the 1800s to get away from government excess. I believe that if people had a true free choice of the current nanny system and a minimal government without regulation or welfare and with true free markets, a large fraction would choose the free system. Maybe I have too much faith in people and too little in government.
Ok, see, where I disagree with *you* is, if given a choice between the current system, which for somewhere between 65% and 80% of people is a net “free lunch”, and the “true free choice” you describe, it’s not clear to me that a majority would choose the latter.
[Remember, part of the free lunch is coming from the higher income minority, and part of it is coming from future generations.]
Both because people value the “free lunch” aspect *and* because almost everyone does put some value on the “economic security” bit that our generous social safety net provides as well.
Where if you subtract the free lunch portion, I agree with you that we could likely get a majority on “our side”, though as I note above it’s not completely clear.
Now, if people could see the side by side “experiment” of the two systems played out over 20-25 years, and so see the substantial increase in incomes and wealth the minimal government approach would deliver, THEN I agree with you that large majorities would choose as we would.
So yes, I do think you have too much faith in people… 😏
[Unless, of course, they can borrow from their descendants freely, and count on at least partly being bailed out by the productive…]
But if said system doesn’t currently exist, I’m afraid that in the 21st century I must now agree with stu, that if given a choice we likely would not get a majority to choose it in advance.
Nobody is leaving. Just a question of how much their productivity is obstructed and how much we restrict/deter additional productive people coming here.
Banks should be required to purchase deposit insurance (ultimately paid by depositors & banking fees). The insurer would be tasked with judging the financial strength or weakness of the bank. Of course the question becomes who insures the insurers?
This question should give pause. Capitalism cannot last if society is unwilling to endure financial loss - if losses must be socialized.
Personally, I believe the GFC and Covid were the same phenomenon. With the GFC, hyperbole of financial collapse bailed out shareholders of certain financial institutions and served a useful political purpose. Likewise, the hyperbole of Covid empowered certain bureaucrats, provided an excuse for massive money printing and served a useful political purpose.
Seeing this, one should probably conclude that no system of rules will be sufficient to counter social hysteria, given the acute incentives of certain financial, media and political insiders to crash the system.
The only sure solution is no bailouts and that solution is simply not politically feasible.
Despite H.L. Mencken's adage that economists have a solution for every problem, "simple, neat, and wrong," it seems that simplicity with teeth would work well in keeping depository institutions on the straight and, ahem, narrow. First, get rid of the "risk-based" facet of capital requirements; bankers eventually will figure out how to game them. Instead, simply have a specified capital requirement with teeth, that is, a fairly high capital ratio to assets (or deposits) so that equity holders and depositors have a stake in monitoring banks' safety and soundness. Second, allow narrow banks to set up shop; their only assets would be U.S. Treasury obligations. These banks would have relatively low capital requirements and ample deposit insurance. Let "broad" banks sink or swim more or less on their own, again relying on invested capital to keep the banks sound, with relatively high capital requirements and more limited deposit insurance.
In closing, it's notable that a couple of Senators - Angela Alsobrooks (D-MD) and Bill Haggerty (R-TN) - recently proposed expanding deposit insurance from the current $250,000 of coverage per depositor to allow certain types of depositors to enjoy $10 million of deposit insurance. What a singularly bad idea.
"More limited deposit insurance" isn't realistically on the table as an option. Neither is a narrow bank invested only in treasuries but it's still an interesting idea.
I see no reason to have higher capital requirements AND reduce deposit insurance. And asking depositors to monitor a bank's soundness just sounds silly. Most depositors have near zero ability to do that and we added the insurance to avoid runs, which would surely become a problem if the insurance went away.
Re: your singularly bad idea, I don’t really disagree, but of course with SVB and with many banks during the Great Financial Crisis, taxpayers bailed out essentially unlimited deposits.
Making the banks responsible for their own capital is good as far as it goes, but add in the possibility of discretionary bail-outs by politicians and you turn the whole system into a game of pseudo-competitive rent seeking.
As a better way to make bankers behave responsibily, I would recreate the banking system Scotland had during Adam Smith's time. Meaning, deny the corporate veil to banks, investment banks, and investment advisors, and make them organize as partnerships, with an absolute ban on bail-outs from any source even indirectly tax-funded. This puts responsibility where it belongs. A banker or broker who mismanages and loses your life savings absolutely should stand to lose his own.
Of course, this will not solve the difficulty of buying a home, because the great difficulty there is scarcity of homes and their resulting high price, not the scarcity of huge loans that ought not be necessary. To make homes affordable, stop keeping unbuilt land off the housing market and abolish the urban planning agencies, or at least make them answerable to antitrust law when they behave as the cartel they are.
I think ending Glass Steagal was probably bad net net in hindsight.
I don’t see how you could implement an absolute ban on bailouts and make it stick. Even I don’t think there should have been *zero* government response to the (partially but IMO not completely caused by government) Great Financial Crisis. But of course the problem was that what bailout there was was far too generous to the banks and the GM union.
Absent legislating against “too big to fail” banks, then limiting the types of orgs who will be bailed out, and limiting the leverage of those who most represent systemic risk, is about the best we can do.
The general bailouts issue is imo separate from the home ownership Fannie/Freddie issue. That piece really can simply be managed better and have the risk minimized. The general case is much more difficult.
> In the 1920s, farm prices fell. The decline in farm income meant that when the balloon mortgages became due, farmers did not have the money to repay the loans.
Do you mean crop prices? Lower farm prices should make it easier to repay loans.
Not if the loan is in the higher amount, which is now more than the farm is worth.
War zones conscript farmers and ruin farm land, leading to more imports. After the war, most of those farmers come back, war land reverts to farm land, and the demand for imports drops. The US was the main exporter during the war and for a year or two afterwards.
Reduced demand and lower prices make it harder to earn a living by farming, make it harder or impossible to repay those repeated 5 year balloon mortgages, and banks won't loan as much on farms which are less valuable.
The financial crisis of 2008 would not have happened if the federal govt. had not forced lenders to weaken their standards. That's how sub-prime mortgages came to be dominant, not market forces. There is a ton of respectable scholarly work on this; Ted Day and Stan Liebowitz, for instance, were warning about the pending disaster in the late 1990s.
Peter Wallison was another sounding alarms, even on Brian Lamb's 'Booknotes' program. https://www.c-span.org/program/qa/peter-wallison/194671
I don’t completely agree with this. The GFC could have happened w/o government pushing for weakened credit standards. It was a factor, but not the predominant one. I’d point a lot more to a lack of skin in the game. Many mortgage shops (including banks) were lending money then quickly securitizing them to sell in the public debt markets. Not having to keep the loans they made on their own books reduced their duration risk from 10 years to several months. Ratings agencies stamping AAA on all this garbage is what made these shenanigans possible. Give me a business where as party C, I lend party A’s money to party B with no recourse for defaults to me, and I would probably talk myself into doing the same thing. All I’d care about is volume.
All the ratings agencies are still here. Most of the investment banks are still here. If you want to know the next time this will happen, it’s now. Private credit is a Pandora’s box of crappy credit with suspect marks. Private credit firms are loaning out other peoples’ money to poor credit risks and raking in big fees while the party lasts. The government isn’t forcing it, just the availability of large pools of other peoples money and clever financial engineers working two layers of abstraction above the reality of the underlying businesses.
Have a nice day.
Listener, almost no one was making these dicey loans until the 1990s when there was a full court press on the home lending industry to relax their standards. All in the name of eliminating 'discrimination' or 'redlining'. For which the evidence was highly dubious. Up to this assault by activists, about 2% of home loans were subprime. By 2008 that had risen to 58%.
There's no question that banks didn't do this on their own volition. It started in Boston with the Boston Fed falling for an amateurish study by Alicia Munnell's Boston College grad students: https://personal.utdallas.edu/~liebowit/mortgage/mortgages.pdf
The Boston Fed then published their own pamphlet, titled, 'Closing the Gap,' which actually threatened lenders with criminal prosecution if they didn't loan their money to people with poor credit histories. Banking is a heavily regulated industry, if you don't do what those regulators want, good luck operating profitably.
If the lending standards hadn't been lowered, how would the crisis happened?
Anyone (including me) claiming a single cause to the GFC is wrong. Government and government-like regulatory bodies (like Basel III) put their thumb on the scale to make holding mortgages more attractive from a reserve requirement standpoint. That in and of itself doesn’t feel like the prime driver. If you want to blame government, I’d point more directly to them purchasing the mortgages originated by others. This ties our two complaint together. For me, no skin in the game for lenders, for you - government. My focus here was on the fact that you had a market where players could privatize gains and socialize losses by being paid to originate crap (by either the government or private sector investors in MBS). Forcing originators to hold real risk from their loans on their books in a way that hit company executives personally feels necessary if we are to avoid repeats of this in a variety of flavors.
Listener, you are missing my point (or ignoring it). Lenders did not make the kinds of loans that were the 'sine qua non' (without which not) of the crisis. There is a rich literature in economics demonstrating that it was the regulatory requirement of lowered standards that got the avalanche started.
Presumably, bankers were always greedy for profit, but until their self-imposed constraints were interfered with by powerful outsiders, they made loans only to those who had demonstrated an ability to repay them. The financial crisis simply would not have happened without the regulatory muscle dictating reduced standards.
Those lending changed didn't appear out of thin air by people risking their own money. They were the result of government changing the rules and subsidizing supply.
It's always government. If in doubt, look for what government had been diddling.
Easy for me to believe that private actors can make a mess, but for catastrophes - you need government involvement.
Yes, for catastrophes, you need government. They are the best at creating catastrophes.
Perhaps you mean Katrina and other hurricanes where the locals were helping immediately, and all the government did was try to turn them back. Yes, you are right, only government can create that kind of catastrophe.
Then there’s all the emergency laws confiscating guns during emergencies and refusing to send in police to deter looters. It takes government to forbid “price gouging” which is the best way to attract help from outsiders bring in supplies. Yes, you are right. Only government can create that kind of catastrophe.
I also should have mentioned James R. Hagerty's book: 'The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall.'
A large question or two, perhaps naïve:
Have free markets in land ever been possible in a market economy, given political psychology (the median voter) and adjacency of banks to the State?
(Arnold occasionally reminds us that the State needs banks for debt finance, and banks need the State for privileges and bailouts.)
Does the thicket of regulation of land ownership, land use (zoning), and real estate finance in defy any practical relevance of libertarian ideas?
I'd stress another point. A free market in widgets it much more like textbook.
The widget is fungible, easily transported and interchangeable, has an incredibly liquid market, transaction costs & upkeep are low, and has few externalities.
Real estate is nothing like that.
I second that question -- I'd love to hear speculation on how land and home ownership and mortgages would have evolved over the years if governments had simple left them alone.
I'm also curious how ownership has evolved in other countries. This alleged "American dream" of home ownership -- I will guess some form of home ownership is universal, simply from wanting to settle down and not move too often merely because a landlord says time to do. But I will also guess that politicians can think of lots of ways of providing that, such as renters' rights and sticking it to landlords.
I don't know any work on the matter off the top of my head, but there should be a fair bit of history of the early US ownership market in English. I specify English because most places did not have any particular rules for land markets outside the direct influence of government power (e.g. cities and long term, densely populated farming regions) that the real limiting factors are "did people write down what they did?" and "can I read it?"
The US is particularly good for that since it was largely open until fairly recently in relative historical terms, so things are written down after spelling was invented and can be compared across regions. How people paid for houses in 1840's Philadelphia vs Kansas City for example might be interesting.
“spelling was invented”?
You’re suggesting this occurred only in the last 200-250 years?
I took it as referring to the appearance of the printing press and dictionaries, which standardized spelling. Andrew Jackson, less than 200 years ago, supposedly said it was a poor man who couldn't think of several ways to spell a word.
Precisely. Prior to about 1700 words were spelled rather recklessly, with a single manuscript sometimes having what is apparently the same word spelled different ways within. Especially names were often all over the place. Makes reading really old stuff really awkward, although once you get used to pronouncing everything phonetically in your head with the appropriate accent it can help.
> once you get used to pronouncing everything phonetically in your head
So people who read aloud to themselves are probably time travelers not used to our spelling. Now it all makes sense :-)
Platonically free markets will never exist in the mortal realm, but on long enough timelines we can clearly see gradations between more free and less free. It's also a good and perhaps profound question as to how much and what type of state support free markets require to avoid those same markets being abolished by the concerted efforts of aristocrats.
Markets in land are much more free now in Anglo-America than they ever were prior to the long march towards the presumption against inalienability of land that began in earnest in the 13th century. In Britain (and thus in our shared history) the enemy of free markets in land was always the fee tail, which forbade heirs from selling land, and mandated that certain plots only pass down to blood relations.
This made it so land was very hard to acquire and very hard to sell on a market basis. Lands not entailed were artificially scarce. This also doomed many aristocratic families who found themselves land-rich but cash-poor or otherwise heavily indebted.
Fee tail was not completely abolished in Great Britain until the 20th century, but it generally disappeared in the US in most states much earlier. An argument can be made, however, and has been gaining currency in the US with widespread abolitions of the Rule Against Perpetuities, that it is more free to permit entail-like restrictions on the sale of land with the consent of everyone. Our contemporary arguments for and against zoning are of a similar type to these very old arguments balancing freedom of disposition and the promotion of market exchange.
What is “balancing freedom of disposition and the promotion of market exchange”?
They seem to be on the same side to me.
This is a good question, and in a lot of situations there is no conflict between the two impulses. However, when we're talking about things like the fee tail or modern perpetual trusts, there is a conflict because if the property owner has the freedom to prevent sale of the asset, it constrains the reach of markets in practice.
E.g. imagine something like a Hawaiian island; 95% of the acreage can only be passed down on death to a lineal descendant of the current owner. What might have been a more liquid property market becomes very thinly traded and illiquid. It becomes impossible to determine accurate comparable prices because most of the comparable land cannot be transferred by market means. Economic development on the island also is impossible because of the restrictive covenants on most of the acreage requiring traditional usage. So, by respecting absolute freedom of disposition on the island, the viability of market exchange has greatly diminished.
“if the property owner has the freedom to prevent sale of the asset”
I don’t think you are using words the same way as most of us.
The property owner ALWAYS (save eminent domain) has the right to prevent the sale - choose not to sell.
The question is whether or not someone else OTHER THAN the property owner can prevent a sale.
Any such ability to block a sale, whether it might be wise or beneficial public policy or not, is by definition in opposition to free markets.
In your Hawaiian example freedom of disposition is not respected, it is the almost diametric opposite of respected.
Freedom of disposition PROMOTES market exchange. The two are not in opposition in any generalized way.
Unless we are in an Orwellian world where the government has redefined “freedom”…
P.S. I think I *finally* figured out that in your non-Hawaiian case you mean the person creating a will or trust being able to control the property after their death when they no longer ARE the owner of the property (being dead). So there you were using the words unintentionally misleadingly for we laypeople not up on estate planning jargon. My bad.
But even assuming I now have that right, it doesn’t explain how the Hawaiian case is one where “freedom of disposition” exists.
That's what these words mean, and I am not sure what you are trying to get across. The topic that I raised was the end of entailment and how it highlights the tension between respect for freedom of disposition and promotion of market exchanges. It is an interesting topic because in the abstract there is no tension between them, but in our actual history they were directly opposing forces.
I do not expect anyone who has not studied either medieval history or property law to understand or care about any of that stuff. The whole topic will be deeply confusing to anyone who has not done either of those things. It is deeply confusing to the point of impenetrability to most people who have studied those things. For some people that makes for a fun topic to discuss. For others, it makes them angry online.
Thanks.
Had you merely put in a brief description for we in the vast majority that “freedom of disposition” does not actually means what the plain language should seem to indicate, all would have been averted.
Myself I know a little bit about property law,but nothing of the jargon, and little of relevance of medieval history.
See
A History of Money and Banking in the United States by Murray Rothbard.
I like the Tiger Tank analogy in your 2009 essay.
The Tiger vs. T-34 Analogy Explained
The German Tiger Tank:
A masterpiece of engineering: powerful gun, thick armor, exceptional optics.
Very hard to break in theory. But when it did break (and it broke often), it required:
- specialized mechanics
- complex machinery
- hard-to-find spare parts
- extensive time in a repair facility
In battle conditions, a broken Tiger was often lost, not repaired.
The Soviet T-34 Tank:
Crude compared to the Tiger. Simpler design, basic manufacturing, highly standardized parts. Much easier to fix — the crew could repair many problems in the field.
Even if a T-34 wasn’t as individually effective as a Tiger, the system (Soviet tank brigades) was more resilient.
Bottom line:
High complexity → high fragility
Low complexity + redundancy → high resilience
About the only change I would make is substitute the US M4 Patton for the Russian T-34. The Patton was more advanced (one axis stabilization) and easier to drive and shoot than the T-34, and had something like 80-90% availability rate due to being so easy to repair and having plenty of spare parts. It also had one of the best crew survival rates of all WW II tanks.
I have read that the Tigers cost 2-3 times as much as even other German tanks, and it was somewhat intentional, since they didn't have enough resources to build 2-3 times as many or enough crew to man them all. But that's getting way beyond the point of the comparison.
Yeah, it’s hard to be satisfied with a Soviet tank. You climb in expecting grit and discipline and instead you get a metal box that screams ‘I was built during a national shortage of everything.’ Meanwhile, Brad Pitt rolls up in a tank looking like war is just another photoshoot for GQ.
I’m glad you like movies. What other hobbies to you have that no one cares about?
I suppose hiking with family is not trending, but there aren’t good hills to climb in our area of North Carolina, so we’ve been flying kites, canoeing, fishing, and touring museums.
I like the tiger/T-34 example. Three thoughts:
1 I'd bet T-34 tank crews suffered far more casualties. Is that acceptable?
2 while the germans lost, we could still argue over whether the tiger or T-34 is more effective across a variety of scenarios.
3 I'm not at all sure how the analogy fits. What's the home mortgage/ownership equivalent to the T-34?
I like the Tiger Tank analogy because it provides a visually striking image of system fragility.
It serves as a warning regarding the growing tendency of our legislative system to produce opaque, complicated, and sometimes fragile systems.
We want simple, easy to understand rules that lead to robust outcomes. We want to avoid catastrophic outcomes and regime uncertainty.
We can do better than Tiger Tank legislation. T-34 legislation, while not perfect is something to consider due to its simplicity and anti-fragility.
It’s just an analogy, not a comprehensive design methodology.
I love the first about 2/3rds of this piece, and appreciate the education it provides.
When it got to the explanation for the Great Financial Crisis of 2007-2009, I found that part incomplete and unsatisfying. To me, the causes of the problem were not primarily what AK cited, and only partially of the government’s doing. The far greater government-caused harm was the nature of the bailouts done, and the cementing of “too big to fail” as policy going forward.
But re: solutions, at least as it related to home ownership, I actually prefer the one more or less like what Arnold has proposed a couple of times now recently: Fannie and Freddie only back 30 year fixed mortgages on primary residences, up to the median national (or regional in high-cost markets) home value, with [one of 10% / 15% / 20%] down payment or a 5% down payment and appropriately priced mortgage insurance.
This approach comes closest to guaranteeing stability, minimizing future government bailouts, while providing a nice but mild boost for homeownership, which I continue to believe is a positive for civil society, as it means more people who have a stake in the system.
" It would be better to provide subsidies and encouragement toward saving for a reasonable down payment."
Maybe you should take off your rose-colored glasses. Would the people having the most difficulty buying a house actually take advantage of those subsidies? I'd argue the subsidies for retirement plans suggests not. Note this doesn't even factor in whether they take advantage of employer matches or if they are contributing regularly.
https://news.gallup.com/poll/691202/percentage-americans-retirement-savings-account.aspx
I think you have a point, but perhaps overstated.
We don’t want to encourage people who can’t afford houses to buy them.
And AK didn’t suggest subsidies for all.
What I read was something much like what I personally favor for the federal government’s role in education. I.e. get out of the loan business (where the cost of the subsidy, especially given bailouts and “forgiveness”, is hidden) and instead offer more scholarships to those who are needy and deserving.
[I don’t actually agree with AK’s suggestion here for housing, I’m just saying that it’s not “rose-colored glasses”.]
If you read my comment, you should see that I was referring to the saving part.
Dude, do you read your *own* comments?
Literally the first thing you wrote after the rose-colored glasses comment was “Would the people having the most difficulty buying a house actually take advantage of those subsidies?”
Well?
Literally the first thing you wrote after “rose-colored glasses” referred to subsidies.
To suggest after the fact anything other than that you were at *least* as much referring to subsidies with your comment as savings is just not credible.
Or means you weren’t reading your own comments…
Now separately, of course, AK specifically said he was NOT trying to encourage more homeownership,so criticizing him for that (a preference you and I share, but he does not) as having “rose-colored glasses” is silly. He merely said if you’re gonna subsidize homeownership, he prefers doing it that way. He never claimed it would result in higher levels of homeownership. He basically claimed it would result in greater financial system stability. Which is almost certainly true.
But what subsidies???? Subsidies that encourage saving for a bigger downpayment. It is literally the only homeownership subsidy he mentions positively.
You are right he isn't looking to increase home ownership. Today about 60% own their home. If mortgage subsidies were replaced with saving subsidies, would 60% of non-hom etowners take advantage of the program over the long-term? I don't think so.
Maybe more detail will help you. Our government encourages retirement savings by giving a tax advantage for IRAs and 401k-type accounts. Who takes advantage of these? Mostly people who would have saved for retirement without the encouragement. How many does it actually motivate? Not many. Rose-colored glasses refers to thinking encouragement for down-payment savings would motivate those most needing the encouragement.
Beyond that, sure, the saving part would also include a subsidy. I could be wrong but it seems like the only type of subsidy AK is referring to positively. Now read your response. Do you mention anything about encouraging people to save? No. Loans, bailouts, forgiveness, and maybe something akin to a scholarship. I was not referring to any of these.
As long as government does their thinking for them, and actively discourages people thinking for themselves and taking responsibility for their actions, people are going to look to government for answers. It's the rational solution. I believe that if people had a true free choice of telling the government to butt out and let them handle it themselves, more people would opt-out than remain opted-in. Of course, it's impossible to set up such an experiment.
I think you are mistaken. I'm pretty confident most people want government to solve their problems in a way that requires no effort on their own part.
…and no cost to them either.
Funded solely by “taxing the rich”.
Yes, people love free lunches.
While I don’t agree with Chartertopia fully, a fairer critique is what people prefer if free lunches are off the table.
As recently as a generation ago, I’m confident his take - for Americans, specifically - would have been more correct than yours.
Today I grant that it’s far less clear.
Andy G is right, I mean if they had a real choice. Look at how many people traveled across the plains in the 1800s; they chose hardship for a better life. Look how many people abandoned Europe in the 1800s to get away from government excess. I believe that if people had a true free choice of the current nanny system and a minimal government without regulation or welfare and with true free markets, a large fraction would choose the free system. Maybe I have too much faith in people and too little in government.
Ok, see, where I disagree with *you* is, if given a choice between the current system, which for somewhere between 65% and 80% of people is a net “free lunch”, and the “true free choice” you describe, it’s not clear to me that a majority would choose the latter.
[Remember, part of the free lunch is coming from the higher income minority, and part of it is coming from future generations.]
Both because people value the “free lunch” aspect *and* because almost everyone does put some value on the “economic security” bit that our generous social safety net provides as well.
Where if you subtract the free lunch portion, I agree with you that we could likely get a majority on “our side”, though as I note above it’s not completely clear.
Now, if people could see the side by side “experiment” of the two systems played out over 20-25 years, and so see the substantial increase in incomes and wealth the minimal government approach would deliver, THEN I agree with you that large majorities would choose as we would.
So yes, I do think you have too much faith in people… 😏
When the more productive leave for the free system, the less productive get less free lunch.
…if there exists such a system, agreed.
[Unless, of course, they can borrow from their descendants freely, and count on at least partly being bailed out by the productive…]
But if said system doesn’t currently exist, I’m afraid that in the 21st century I must now agree with stu, that if given a choice we likely would not get a majority to choose it in advance.
Nobody is leaving. Just a question of how much their productivity is obstructed and how much we restrict/deter additional productive people coming here.
The culprit, once again, is inflation, inflation, inflation. And not poor Marcia.
The cure, as always, maintain creditably stable levels of sovereign debt. And let the public mind their q's and and p's will accommodate.
Banks should be required to purchase deposit insurance (ultimately paid by depositors & banking fees). The insurer would be tasked with judging the financial strength or weakness of the bank. Of course the question becomes who insures the insurers?
This question should give pause. Capitalism cannot last if society is unwilling to endure financial loss - if losses must be socialized.
Personally, I believe the GFC and Covid were the same phenomenon. With the GFC, hyperbole of financial collapse bailed out shareholders of certain financial institutions and served a useful political purpose. Likewise, the hyperbole of Covid empowered certain bureaucrats, provided an excuse for massive money printing and served a useful political purpose.
Seeing this, one should probably conclude that no system of rules will be sufficient to counter social hysteria, given the acute incentives of certain financial, media and political insiders to crash the system.
The only sure solution is no bailouts and that solution is simply not politically feasible.
Great history, tho a few more specific details of the post WW I farm price changes & produce changes would have been welcomed. Tho it makes it longer.