Steve G.

Foreclosures of the Rich and Famous

In Personal Responsibility on July 8, 2008 at 5:45 pm

From Amateur Economists:

The bursting of the housing bubble has not only hurt middle-class and semi-affluent Americans (who thought they were more affluent than they were!), but also the rich and famous. Everyone has heard about Ed McMahon’s troubles – his wife sharing how she’s been so degraded that she now shops at (gasp!) Target of all places – but he’s not the only one.

The article highlights the troubles of Latrell Sprewell, Evander Holyfield, Jose Canseco, Michael Jackson, and Aretha Franklin, before concluding with:

The housing bubble and its subsequent burst were caused by the Federal Reserve’s fiat-money central banking. On the one hand, people such as McMahon, Sprewell, and Franklin should be held responsible for the bad financial decisions they’ve made — just as the heads of all of the middle- and lower-income families have been. But on the other hand, whether it’s Michael Jackson or my parents (who lost their home of nearly 30 years), it must be recognized that the Federal Reserve System obfuscates and sends false signals to market participants. When politicians talk about “helping” the people under the distress of a housing market turned upside down, they cannot be taken seriously unless they first recognize the entity that causes booms and busts: The Federal Reserve.

Read the full article here.

  1. I should start a “professional economist” blog to refute these fallacies by “amateur economist”. I would go through the argument, but it’s much easier to just link to Professor Hummel’s article on the subject.

    http://www.investors.com/editorial/editorialcontent.asp?secid=1502&status=article&id=291507506135021

  2. Well, since I wrote the article, I would like to know where I’m wrong, Chuck.

    Are you saying that the boom and bust cycle is not created by the Federal Reserve? If so, I’ll have to side with Murray Rothbard over Chuck Moulton. I know of no other claim made by this article that could possibly be in dispute.

  3. Oh my… I clicked through the link and saw it was to IBD, to which I’m a subscriber and is the very last place I would turn to for reliable economics.

    What do you know, an avowedly fascist neocon publication defends the Fed!

  4. I take issue with this statement:

    The housing bubble and its subsequent burst were caused by the Federal Reserve’s fiat-money central banking.

    Hummel’s case for the housing bubble being caused by government intervention in the housing and credit market rather than by the federal reserve is quite persuasive. In fact it is backed up by examining which lending institutions failed and which states had the most subprime mortgage defaults.

    If you’re unwilling to read it there I see no reason by you’d be willing to read the arguments here either, but I’ll summarize them in case you have a more open mind.

    Three factors lead to the housing bubble:
    1. Moral hazard in housing loans
    2. Changes in credit card regulations
    3. Government regulation of mortgages

    Moral hazard in housing loans results from decoupling of the risk of profit from the risk of loss. Government/quasi-government entities like Fannie Mae underwrote securitized mortgages, giving investors the impression that there was risk of gain but no risk of loss. This caused banks to offer risky mortgages and securitize them into bundles to make them someone else’s problem. There was no incentive for banks to avoid offering mortgages to poor Americans who really couldn’t afford them.

    Credit card regulations changed in two ways. First, minimum credit card payments were imposed by the government. Without these mandated minimums credit card companies would compete against each other causing minimum credit card payments to be driven down (as they were before).

    Credit card companies had previously lobbied against minimum credit card payments, fearing the risk of loss would be too great because people would just declare bankruptcy. But what changed is congress passed a law at the urging of credit card companies making it much more difficult to declare bankruptcy to avoid paying credit card debt. After that change credit card companies flipped to be in favor of the minimum credit card payments regulation.

    The unintended consequence was numerous poor Americans who were saddled with both credit card and mortgage debt flipped their preferences. Previously these people had chosen to pay their mortgage debt first whenever forced to a decision because mortgages build equity and they could always just declare bankruptcy if their credit card debt got too large. After the change, they paid the credit card debt rather than the mortgage debt because declaring bankruptcy from credit card debt became near impossible, whereas walking away from a house was easy.

    The third factor was the Community Reinvestment Act which forced banks to offer mortgages in risky areas. Banks were prohibited by law from “redlining” areas that were poor credit risks. Banks were forced to make bad loans, so they did because the alternative of being shut down by the government was far worse.

    It was a perfect storm. The second factor was the trigger, the first and third factors created a disaster waiting to happen.

    As for his monetary argument, Hummel simply points out that the Federal Reserve has unintentionally been following Friedman’s prescription of freezing the monetary base, if you exclude currency held abroad from the monetary base.

    The central point is not that the Austrian business cycle theory is incorrect, but rather that it doesn’t have anything to do with the housing bubble. Your article is like trying to explain the tides by the swimming patterns of fish rather than by the moon… even if your data is flawless regarding the swimming pattern of fish, that doesn’t excuse ignoring other more important causes.

  5. Chuck, how does 0% down mortgage loans factor in? If Fannie and Freddie demand something down, lots of buyers don’t qualify and remain renters. Far fewer owners get in over their heads.

  6. The reality is that responsible parties had their responsibility taken away, as Chuck rightly notes.

    Borrowers who made poor decisions about leverage are getting bailouts from government at the expense of more sensible people — including renters.

    Banks who made poor lending decisions are getting bailouts from government at the expense of responsible borrowers, non-borrowers, and financial institutions that were making poor decisions.

    Net result: privatized profit, socialized risk.

    The flippers, speculators, dumb borrowers and subprime lenders weren’t sending me and you fat checks with our share of the profits/appreciation during their boom cycle — but they’re not hesitating to send us big bills to pay for their mistakes. All reward, no risk results in market distortion.

    The Fed’s involvement was marginal compared to the commonly held (and justified) belief that the government was going to force responsible borrowers and lenders to bail out the irresponsible ones.

  7. nevermind

  8. Placing 100% of the blame of the individuals who took out the bad loans is not fair because in a non-coercive, free economy they would not have been sent these false signals.

    That sounds like Barack Obama.

    I know several people who took out subprime loans on houses they couldn’t afford.

    One of them was my sister. She got a negative amortization ARM on a house that she paid far too much for.

    Borrowers who purchase a house have an obligation to ensure that they can reasonably afford the loan, that they understand the terms, and that they accept the risk that the house’s price can decline as well as increase. They accept ALL risks related to “equity” and such.

    Borrowers should accept the risks when they sign on the dotted line. The “signals” from government, industry, etc. should not override good old fashioned common sense.

    And any old fool could tell you that the 2 bedroom clapboard box on a postage-stamp lot with a negative amortization loan sold at half a million bucks with no down payment and a ballooning mortgage balance is a moronic “investment.” Taking attention away from the culpability of the irresponsible borrowers in this scenario is enabling the victimhood mentality lying behind the calls for bailouts.

  9. Yes, I sound like Barack Obama.

    I’m through responding to you, Brian. That’s why I thought better of my corgial reply to yet another statist distortion by you and deleted it. Not before you read it, I see, and chose another opportunity to distort and attack.

    Peace out.

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