The Housing Boom and Bust

Yes. Most of the, - adventurous financing was, it was in, concentrated in places like coastal California, Phoenix, a few places in Florida. and this is where, the great bulk of the, defaults and foreclosures occurred as well in la- in later years. in fact, you can break it down even finer that, it's in particular counties in these states. So really a very small part of the United States generated, the delinquencies, the defaults, and the foreclosures, which then snowballed across the country through the financial system and even spread overseas. But the origins were in these extremely expensive areas, where the prices had been forced up artificially and where people in desperation had turned to all kinds of, creative financing, such as no money down, you know, adjustable rate mortgages, subprime mortgages, all sorts of gimmicks in order to buy a house to live in or, and this is, this would be true of about, oh, at least 20% of the people who bought houses during the boom. -hmm. As pure speculation. So that given the lax lending standards, a speculator could come in and buy four or five expensive houses with a r- relatively small amount of money down, spruce them up, and sell them with- Flip them... yeah, within a very short time.

Yes.

Because, despite the abundance of land in California, laws prevented people from building on much of that land, and made it prohibitively expensive on the rest of the land so that the housing, - Prices were pri- shot up primarily because the land on which the houses were built were tremendously expensive.

Oh, yes. And I lived in one of those houses on the Stanford campus, and I remember, this shows how long ago it was. The house was $260,000. and, I saw on my insurance that it was, it was, insured for only 60,000. So that's the cost of replacing the house. Right. The other 200 grand was for the leasing of the land. I didn't even own the land.. and so it's the land that, that is really the key to this, to this whole thing. That same house, incidentally, I'm told now has sold for over a million dollars, even though it's, less than 2,000 square feet.

Yes. of course, the whole notion was that you wanted to make housing affordable to people who otherwise couldn't, buy, which meant low-income people, often people of limited education, people who had never bought a house before. And so they were presented with these complicated, mortgages that often began with very low initial rates. So you'll pay $500 a month for this house, but, in six more months you'll be paying 800, and then at the end of a year you'll be paying 1,200, and two years later you'll be paying 1,500. Well, not everybody may have understood all that. And when the, when it started going up like that, you know, the whole thing started to collapse.

hmm.

Yes. in other words, the rating companies had, decades, even generations of data on what happens with regular 30-year fixed rate mortgages with 20% down.

So, and so they used that to try to guess what it would be like with these new exotic mortgages with all kinds of complications. someone who once worked for Moody's described it as, using a century's worth of data on weather in Antarctica to predict the weather in Hawaii. And it didn't work out.

Oh, absolutely, not, more than encouraging. the government required people, by the 1990s to, s- supply data on people to whom they were lending. the race, the income, the communities in which the people were located, and if those numbers didn't suit the government, the banks could get, have, great trouble getting government permission to do things that other businesses can do without government permission. but which the banks being regulated had to depend on approval from the Federal Reserve or- Okay... from whomever else was involved.

Because the banks are regulated by the government, and the banks can only make certain decisions if the government says yes. If one bank wants to, merge with another bank, they can't just call up their lawyers and arrange it. They've gotta go to the re- government regulators, and if the government regulators approve it, then they can do it. Otherwise, they can't.

These are two government-sponsored enterprises which purchase, mortgages from banks and other lenders. And so, as these more risky mortgages come along, the, the banks don't hold onto those mortgages. In other words, the bank may lend to you or to me, knowing that we are risky, p- borrowers. But they sell the, they sell the mortgage to Fannie Mae or Freddie Mac. They get their money right then and there, and it's up to Fannie Mae and Freddie Mac to collect on those mortgages over the next 30 years.

Yes.

The, the government created these organizations, and yet they are private profit-making institutions. But the government is involved with them. It's a hybrid kind of institution, not completely private, not completely government.

absolutely. More than that, they get certain privileges. They're, they're, they're not regulated as tightly as the, as the ordinary banks would be. And so, because of... They have, I believe, something like a two bill- had something like a $2 billion, line of credit at the Treasury. I mean, we could all use a $2 billion- Yes.... line of credit with the Treasury. But not all of us somehow get it. and so, they have these advantages over other m- mortgage buyers. and then what you say is the crucial thing, which is that- Investors will invest in these, companies, relying on the fact that the government is not gonna let them go, let them fail. Whereas, the government will let some banks fail.

Yes. "

He was thinking of getting reelected. Because when you do favors of people, those people are more likely to contribute to your campaigns. They're more likely to vote for you if they're in your district. And so, all of this is perfectly understandable from the standpoint of Congressman Barney Frank. So is his more recent statement that he wants the, Fannie Mae and Freddie Mac to, lower their lending standards for condos now. In other words, lowering the standards for housing was such a big success, he's now gonna move on to the condos. I s- presumably he'll w- eventually get to the apartments.

Yes.

You'll have to ask him that. I know of no rational explanation. but his point was that he wanted more people to be able to own homes. This is, this is the magic thing about politics. You set one goal, and you don't worry about the repercussions. It was like Admiral Farragut saying, "Full steam ahead. Damn the torp-" Damn the torpedoes... "torpedoes." Right. And of course, the torpedoes got us. But, he w- he wanted the federal government, particularly the Federal Housing Administration, to make loans s- so that people could buy a house without a down payment. He thought a down payment was just one of those fussy things that the market had come up with, you know? And, and we l- w- as so often happens-

It was polit- Most disasters are politically understandable.

A lot of other people got it a lot earlier. But on the other hand, I think a- as compared to members of Congress, he was way in advance. Well- Because while he was warning Congress that there was problems down the road, especially with Fannie Mae and Freddie Mac, he was saying, "There's no immediate problem, but if this continues on to the end of the decade," which is where we're n- approaching right now, "it's gonna be a disaster."

Oh, Barney Frank, easily.

Barney Frank.

Oh, because Dallas wasn't part of the boom, and it wasn't part of the bust.

And it... Because in Dallas, they don't have the, restrictions on building houses that we have in coastal California. Houston was, is very similar. Houston doesn't even have zoning laws, and so therefore, if people wanted more houses in Dallas or Houston, the builders just built more houses, and the prices didn't rise.

Oh, well, for one thing, the, the rating companies who rate these bonds, the government restricted them to three... There were three r- rating agencies you had to use, and if you, and if you used those three agencies, then the, everything would be approved by the regulators. But if you wanted a Joe Smith and, you know, out in Silicon Valley who has his own rating agency that says these, mortgages aren't worth anything, he may be right, but you can't use him. And so now, now this happens. But I think, -

Yes.

Well, the, I wouldn't say that Moody's and the others were pretending. they really just didn't know.. In other words, there were, there was not enough data on these things. You see, in other words, with conventional mortgages, you had data covering peace and war, prosperity and depression, and so forth, and you could follow these data back for decades. and you'd have some pretty good idea what different kinds of mortgages do, behave like over a period of time. There was no such record, and so they were going by guess and by golly. But because they had such a strong, good reputation f- on the basis of their ratings of other kinds of securities, people just took them at their word.

They could've been more cautious.

They should've been more cautious.

Oh, there's no, there's no question There's

question about that. There, no ques- no question.

Abso- absolutely. Okay. th- but there's also the case that the origin- that the original problem went back to the mortgages. Right. So long as people paid their mortgages, all was well. But when you start lending to people who aren't likely to repay the mortgages, then downstream the question is, are there any correctives down there? And the answer to that wa- is there wasn't.

hmm.

Wow. I'd have to know an awful lot more about the intricacies of those particular firms to say. But what, but what is quite clear is that it left in the hands of the government the ability to pick winners and losers, and that is a very dangerous, power, not only in terms of the economic decisions that can be made, but also in terms of people being able to throw their weight around in ways that the Constitution never authorized them to do.

Because of the widespread belief that it was the New Deal which saved the country and got us out of the Depression. And, and the more- You mean it wasn't?

in politics, what matters is not what the facts are. What matters is what people believe, because people vote on the basis of what they believe and not on the basis of what the facts are.

Well, w- there are a lot of ways of going at this. One is to look at, look at the sequence of events. Right. And we can look at, look at the sequence. In October 1929, the stock market crashed. Two months later, unemployment peaked at 9%. Over the next several months, the unemployment began to subside irregularly, down to 6.3% by June of 1930. so eight months after the stock market crash, we have not yet hit double digits in unemployment. June 1930, when it's 6.3%, the government intervenes. First, the first real, intervention on a massive scale under Hoover, the Smoot-Hawley tariffs, which were designed to, reduce unemployment by restricting i- imports in the United States so that more of these goods will be built in the United States by American workers. It sounds good. A thousand economists from the leading universities around the country signed a public appeal to Congress and the president not to pass this bill, that it would not do what they said it would do. It would not r- reduce unemployment. it would, in fact, lead to retaliation that would make it harder for Americans to sell their goods in other countries. As often happens, no one paid the slightest attention. The bill was passed, and, within five months after the bill was passed, we had double-digit unemployment for the first time. This is from a bill designed to lower unemployment. Right. And when it hit... And this time, it did not subside. It never fell below double digits for the entire remainder of the decade of the '30s, not even for a single month. not all of it was the Ha- Smoot-Hawley tariff. When FDR came in '33, he then put in the National Industrial Recovery Act. He put in the, Agricultural Adjustment Act. He put in the Wagner Act. He issued more presidential, executive orders than all subsequent presidents throughout the remainder of the 20th century. So the government intervened on a massive scale, and yet the unemployment never came down below double digits for the entire decade.

Yes.

Yes.

Yes.

Yes.

The war.

But the question is, what about the war?

Well, one of the things that the war did that most people seem not, not to, notice is that it took 12 million men out of the civilian labor force and put them in uniform.

It will. Right. Yes. FDR actually put his finger on, on something that other people overlook, and he had a wonderful statement about how with the coming of the war, Dr., Dr. New Deal was replaced by Dr. Win the War. And what that meant is the war put an end to the New Deal, and when you put... And moreover, it went the other direction. Instead of creating all this uncertainty, which all this intervention does, quite aside from the merits of the particular interventions, it gave a tremendous certainty because it began the practice of cost plus contracts for military's, equipment suppliers. And so if you signed a contract with the government for a million dollars, you were guaranteed you'd get your million dollars back, plus whatever profit they allowed in the contract So before, you see, because of all the anti-business rhetoric, you never... W- o- once you start intervening, it's not just a question of the merit of the particular intervention, it's the fact that nobody knows when you're gonna intervene again. And that's true now. That, you know, this whole thing about... N- no one said that you could fire the ch- the head of General Motors by giving them this money. But once they decided they're gonna do it, they can do it. And so nobody knows what's gonna happen next.

Because it means that the crisis is presenting them with an opportunity to do things they wouldn't be able to do otherwise, and that's how he sees it. And everything that has happened since the, new administration indicates that's how the administration as a whole sees it.

Just as in the case of the New Deal. That the, the New Dealers, mo- most of the key people in the New Deal, were for big government intervention long before there was a stock market crash. It's just that the stock market crash gave them an opportunity to step in. It's, another parallel is that people are talking about all these high, these highly intelligent people with whom the president has surrounded himself, in Wash- FDR surrounded himself with highly intelligent people. that is no guarantee of anything, except for brilliant rationalizations for failure in some cases.

Well, I, I'm not as optimistic in, in predicting how things are gonna be wonderful in a, in a couple of years. But we'll know more in a couple of years. - If you look at the stimulus package, the one thing it has not done is stimulate. prior to the, bailout money for the banks, the banks were lending a certain amount. After the bailout b- money, the banks were lending less. suppose, s- I mean, a stimulus means that he's not depending just on the government's own money being spent producing the result, that this will stimulate others in the economy. It is not. Money, the circulation of money, the speed with which money circulates in the economy fell to the lowest level in 50 years. It fell during the-

Yes. business reduced its investment by, oh, something like 25 or more percent, so that if you're looking in terms of what actually happens rather than the words that are used, what actually has happened shows, no such stimulation as they, as they're talking about.

Oh, it's a wonderful way to raise money, to raise money without saying that you're taxing people. whether it will in fact cut down on, the greenhouse gases significantly, and whether if it, even if it does, whether that will really, be enough, 'cause after all, we are only a small part of the world. To, to affect the entire temperature of the earth, it seems quite dubious. despite the sort of, notion that, it's a proven fact that manmade factors create, global warming, there are literally hundreds of people who spend their lives specializing in the study of climate who say, no, that is not the case.

Oh, boy. It's, it's hard to even know where to start. - It really is. I, first of all, what earthly reason is there to believe that the government, of all institutions, can make healthcare m- less expensive? It can refuse to pay the expenses, which is entirely different. Other countries have gone that route. They have refused to pay the cost of maintaining the health system, and so, in places like Britain or Canada, you don't find the same availability of healthcare that you have in the United States. You have something like, something like, recently s- studies show that 30,000 Canadians, have gone to other countries for health treatment even though they get it free of charge in Canada, and they've gotta go pay for it somewhere else, and they go, because the quality is not the same. the MRIs per capita in Canada are about half what they are in the United States, and Britain, which also has a government health program, they're about a fourth of what they are in the United States. If you're talking about going in for surgery, s- I don't have the exact figures right in front of me, but, something like, a fourth of the people in Canada, wait six months or more for surgery. For surgery. in Britain, it's a higher percentage. In the United States, only 5% wait that long. In Canada, you wait 10 weeks for an MRI to find out what's wrong with you. Now, a lot of things can happen in 10 weeks, and many of them are very bad. So, if you want something cheaper, you can always get something cheaper. it's just that you're not gonna get the same quality. In or- in order for them to bring down the cost of healthcare, the government would have to operate the system more efficiently than the market does. I can't think of anything that the government operates more efficiently than the market does. And if it's all, you see the profits of the oil- of the, pharmaceutical companies and the hospitals and all that, there are thousands of non-profit organizations in this country. If the profits are the problem, the non-profit organizations could go in, undercut these people who are making these unwarranted prof- profits, and lower the cost to us all. Why don't they do it?

Oh, I don't know. It depend, if you have, I, it depends who you're talking about. If you're talking about politicians, there's no question about it. I mean, when the first of, when Bush 41 talked about a kinder and gentler economy, I mean, that was the beginning of the downward spiral. when, his son started talking about compassionate conservatism, which does not mean compassionate to the taxpayer, by the way- No that was a further move in that direction. So lots of p- folks, when they got power, it was easier for the Republicans, for example, to do what the Democrats had done, use that power to do special favors for people here and there in hopes of gaining their political and financial support. Fine. they've now paid the price.