The One Chart That Explains the Entire Financial Crisis

This evidence is now pouring in (it was always there, but needed to be collected and coherently laid out) that the financial crisis of 2008 was nearly exclusively created by government’s misguided interventions and manipulations of the housing market.  Gretchen Morgenson’s new book Reckless Endangerment lays out the whole corrupt, government-directed interventionist debacle.  This book was needed but not necessary, it doesn’t tell us something we didn’t already know.  Economists and financial markets experts knew exactly how, why and when the government’s insane pursuit of “affordable housing” built up risks in the system that eventually exploded into the financial crisis.  The Wall Street Journal was warning us to beware of Fannie Mae and Freddie Mac for years.  I personally went to many conferences where speakers accurately predicted the housing and financial meltdown years in advance.  Numerous financial players saw and organized strategies to profit from the very foreseeable blowup, as chronicled in Michael Lewis’s book The Big Short.  (And for every big name player like John Paulson, there were thousands of little guys who made smaller bets against the housing bubble and made nice gains if not the billions that the recognizable names made.)

All of this history and commentary is well worth familiarizing yourself with, but if you had to look at just one chart to understand it all, Mark Perry today has that chart over at his Carpe Diem blog.

3%!  Simply amazing.  3% isn’t even close to serious.  If you are only able or willing to put down 3% you simply aren’t serious about homeownership.  It’s laughable.  3% would have gotten you laughed out of any bank in America prior to 1994.  Yet by 2007 40% of all mortgages had less than 3% downpayments.  It’s additionally frightening to wonder what that number would be for less than 4% down or 5% down, still totally laughable and unserious levels of equity.

I have said it here at SAB and at my own blog for awhile – mortgage lending to creditworthy homebuyers has been a stable, profitable, and boring business in the United States of America for about a hundred years; so for those who blame “Wall Street greed” for the crisis, I ask you “why now?”  Why did greed not appear, not infect the system, not attempt to seize filthy lucre for that hundred years?  Why did greed only show up at that particular moment in time?  I further ask why did greed not make its way to Canada, where they did not have a housing and/or banking crisis?  Is greed only a US and highly time specific phenomenon?

The answer is that government embarked, at the urging of “social justice” activists, on a policy campaign to degrade the prudential standards that prevailed in the housing lending market.  The government effectively demanded and enforced irresponsible lending, and they got it.  Unfortunately the government can’t repeal the iron laws of economics, so what they got was a flimsy, risk-infected financial system that was bound to crash, which it did.

The government caused the financial crisis and ensuing recession.  And as a result the government has claimed more power over the economy under the auspices of a bill named after two of most culpable parties – Messrs. Dodd and Frank – and a whole host of central (and bad) actors are unimaginably wealthy and one is now Governor of New York and talked about as a presidential contender.  Enjoy your country in the 21st century, America!

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  • robert108

    Not only does redistribution not work, but it harms those it’s claimed to benefit.  The only ones who benefit are the Dem politicians who buy votes and consolidate their political power by promising redistribution.
    In addition, the recently reported increase in the gap between rich and poor in this country is due to the collapse of the home mortgage market. More damage done by residtributionism.

  • http://www.bikebubba.blogspot.com bikebubba

    I am personally counseling a friend not to go for a 0% down mortgage.  He has income of about $35k/year and the real estate and mortgage people are telling him he can buy a $120k home.  Crazy stuff. 

    Ticks me off that government types are pushing this kind of garbage–yes, it is an FHA loan he’s thinking of getting. He has no savings and has some credit card debt, too.

  • WOOF

    The Bush “Ownership Society ”

    • mickey_moussaoui

      Bush tried to reel-in Fanni and Freddi over 18 times and Pelosi and her corrupt democrats fought it tooth and nail. This is the Democrats mess for the most part, starting with Clinton and the CRA

      • robert108

        Mostly agree, but Carter started the CRA, and Clinton increased it.  It was redistribution gone wrong.

    • http://sayanythingblog.com Rob

      Actually, the Bush ownership society was really about subsidizing home ownership.  But your point, it seems, is that it’s somehow objectionable for people to be responsible for themselves.

      What’s so bad about that?

      • WOOF

        The free unregulated market:
        “widespread fraud and abuse throughout Wall Street and the rest of the
        private mortgage market. From borrowers, to brokers, to lenders, to
        bank securitizers, to credit rating agencies, to institutional
        investors,”
        People  responsible for themselves, the rest stuck with bad paper.

        • robert108

          Bad paper created by the Dem affirmative action home loan mandates, covered up by Fannie and Freddie.  The bad paper had to be created before there was a market for it.  Duh.

          • WOOF

            The private mortgage market brought down the house.
            “With Private Lenders Your Credit IS NOT an Issue”

          • robert108

            None of that happened until Carter started the CRA.  The facts prove you a liar.  Before Carter, your credit, down payment and income was the only issue in getting a mortgage.  Carter and Clinton changed all that, and we have all suffered for it.

    • robert108

      Carter and Clinton, liar.

  • mickey_moussaoui

    I’d also add that Dodd and Frank should get kicked in the nuts but I suspect Frank would enjoy that.

  • Bat One

    Since I was working on a more robust post on this anyway…

     

    That chart highlighted by Professor Mark Perry
    is taken (with acknowledgement) from an article by American Enterprise
    Institute Senior Resident Scholar Edward Pinto, available with copious
    footnotes here (http://www.american.com/archive/2011/july/government-housing-policy-the-sine-qua-non-of-the-financial-crisis)  Pinto’s article completely de-bunks the
    notion that either Wall Street or the Bush administration are in any way
    remotely responsible for the “mortgage meltdown” and the ensuing and on-going financial
    crisis.  No one but a hyper-partisan, intellectually
    paraplegic moron can read Mr. Pinto’s thoroughly researched article and not
    conclude that the cause of our mortgage and financial crisis was liberals whose
    policies of “social justice” and “affordable housing” for all forced the GSEs,
    Fannie and Freddie, to lower their underwriting standards.

     

    Mr. Pinto, by the way, is also a former Fannie Mae senior vice
    president for credit.  He knows from
    first hand experience exactly what he is talking about.

     

    But Mr. Pinto’s AEI article is only a summary of a far more
    lengthy (187 pages in .pdf format) and scrupulously researched and documented
    research paper which can be found here (http://www.aei.org/docLib/Pinto-Government-Housing-Policies-in-the-Lead-up-to-the-Financial-Crisis-Word-2003-2.5.11.pdf)  For those with the patience, and the
    knowledge, and the courage, to read the entire paper, it makes fascinating, and
    irrefutable reading.

     

    As DB notes, Andrew Cuomo, the current NY Governor, was the
    HUD Secretary under Clinton who
    opened the floodgates, using the Community Reinvestment Act. of 1977, the
    Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the GSE
    Act) of 1992, and HUD’s 1995 National
    Homeownership Strategy to force both FHA and the GSEs
    to lower their underwriting standards (creditworthiness, LTV,
    collateral assessment, time on the job, and liquid reserve requirements) to
    make “affordable housing” for all a reality, which in turn caused both an
    explosion in sub-prime and “Alt-A” lending and the ensuing housing bubble and ultimate
    housing finance and credit collapse.  Cuomo, however was only expanding on the directive of Clinton’s first HUD Secretary, Henry Cisneros.  And make no mistake, the intent was to have Fannie and Freddie gobble up and expand the sub-prime mortgage market.

     

    To try and blame the Bush administration, which was blocked
    by Democrats each time it tried to reform the GSEs, is nothing less than
    willfully dishonest stupidity.

     

    Incidentally, the man at Fannie Mae whose job it was to
    design and market the new Alt-A and sub-prime mortgage products, was Mr. Herb
    Moses, the then live-in lover of Congressman Barney Frank, at the time Chairman of
    the House Financial Service Committee, which is tasked with oversight of Fannie and
    Freddie and the chief obstacle to GOP reform efforts in the House.  Among those who blocked reform legislation in the Senate by threatening filibuster, Christopher Dodd and Barack Obama.

  • Dakotacyr

    This is the chart that shows the entire financial crisis:  http://www.washingtonpost.com/blogs/ezra-klein/post/obamas-and-bushs-effect-on-the-deficit-in-one-graph/2011/07/25/gIQAELOrYI_blog.html?fb_ref=NetworkNews

    • robert108

      Nope.  First, the Bush tax cuts increased revenues, and didn’t involve any payouts, so he lied with that one.  Second, he didn’t count all the nosebleed costs of obamacare, including the half TRILLION obama looted from Medicare Advantage, then double counted it as “savings”.
      The truth is that obama spent four times as much as President Bush in the same time frame.
      In addition, the deficit is not the cause of the financial crisis; it’s the result of obama’s financial mismanagement.

    • tony_o2

      Because sub-prime mortgage lending had nothing to do with the mortgage meltdown…..

    • Bat One

      Since you’re a liberal this advice is probably in vain, but perhaps if you read the post and the previous comments, and understood the subject being discussed, you’d be a bit less likely to embarrass yourself with really stupid comments.

    • http://www.symmetrycapital.net art

      Dakota, I get the clever “one chart” angle, but the financial crisis had little to do with federal budget deficits. If anything, they became too small after the 2006 elections.

  • http://www.symmetrycapital.net art

    How the hell does that chart lay all the blame entirely at the feet of the USG?

    First, Fan and Fred weren’t buying the crap. But they were highly leveraged to home values (see 2004 inflection point below), so when the entire housing market turned south, they were doomed.

    The inflection points on the 97% LTV line are:
    1997 tax law changes re residential R/E
    1999 financial deregulation (look up Brooksley Born, she predicted the outcome)
    2004 further deregulation that lifted investment banks’ leverage limits

    And a key factor behind the blue line was the movement of many echo boomers into household formation age which increased demand for residential R/E. That, along with laxer regs, certainly helped push the speculative activity along.

    Did govt policy changes make the crisis possible or at least worse? Absolutely, as outlined above. The mortgage industry was allowed to write just about anything it wanted to for a few years (as one veteran told me recently, how much money you made was merely a question of how many hours you wanted to put in), and Wall St banks and some of their clients were allowed to lever up big time as they underwrote, repackaged, and made their bets on the stuff. But Mr. Baseball makes it sound as if the financial industry has aleays been about prudent self-regulation. First off, history shows that to be utter nonsense. And second, if it were true, then (1) the industry wouldn’t have bothered pushing for the 1999 and 2004 actions as hard as it did, and (2) the crisis could not and would not have happened, even with those legislative and regulatory changes.

    The logical conclusion of Donny’s commentary is that the govt needs to return to a stronger regulatory and oversight framework of the financial industry. I’m not sure that’s what he intended, but it’s glaringly obvious.

  • http://www.facebook.com/people/Futuredatabank-Globaltrends/100001425984731 Futuredatabank Globaltrends

    Everyone needs to get this correct… (REPOST ON TWITTER, FACEBOOK)

    America is controlled by the 3 privately owned states (district of columbia, the city of london, and the vatican.) Each has it’s own flag, pays no taxes and has it’s own laws. All 3 are part of an interlocking “ONE” called “City Of The Empire” Or “Black Sun”. 

    When you pay taxes it goes to The Bank Of London and straight to the vatican. These 3 privately owned tiny nation states are owned by 13 families that rule the entire planet militarily, financially, and spiritually. Without a doubt. OPEN YOUR EYES AND YOU WILL SEE IT.

    They control the markets, the religions, the media, and they rob you of your wealth. Wake up. Time to wake everyone up. Nothing will change until the people SEE the TRUTH about their miserable extistence that has been dictated to them by these CREEPS

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