Wikinvest Wire

Doh! They've got to be able to repay the loan

Monday, March 30, 2009

There's a special 14-page report in today's Wall Street Journal presenting the findings of last week's Future of Finance Initiative, a gathering of 100 of the "brightest minds in finance" tasked with the job of charting a path forward from our precarious current position.

No, former Fed chief Alan Greenspan was not included.

Astonishingly, not once, not twice, but at least three times, the fixing of one of the most fundamental errors of the last six or seven years is prominently featured in the many recommendation sections, what would have undoubtedly stopped the global credit bubble in its tracks years ago if someone other than "crazy housing bubble bloggers" and a few rogue economists would have brought attention to it and been able to do something about it.

This recommendation appears in Principles for Change, an interview with Peter Fisher of BlackRock Inc., it is a key element of Princeton Economic Professor Alan S. Blinder's recommendations enumerated in The Future of Banking, and it is featured as number one in a list of of almost two dozen "principles for rebuilding the financial system" in a summary section (no link found).

It's pretty simple - borrowers must be able to repay loans from income.

Gussied up a little bit for the paper it looks like this:

Minimum Underwriting Standards. Bank management and bank examiners must enforce the banks' minimum underwriting standards, focused on the borrowers' ability to repay debt from income. The bank supervisors' authority must extend beyond banks to all bank agents, such as mortgage brokers.
Maybe it's just me, but, to some of us who could see this all developing back in the first half of the decade - when Fannie and Freddie first starting having problems in 2002 and 2003, then when Wall Street got involved in a big way in 2004 and 2005, and then in 2006 when everyone laughed about "all you have to do to get a home loan is to fog a mirror" - this is just about the most ridiculous example of how maybe these guys aren't all the bright after all.

What were they saying five years ago and why did it take them so long to have this epiphany?

Alan Blinder was singing the praises of the former Fed chairman up until the housing bubble had unquestionably burst, and now he's charged with charting the new course for banking?

In just about every interview that I ever did back around the time that the housing bubble was peaking and popping, I'd always say something like the following:
All anyone has to do is spend some time in a mortgage loan office and you'll quickly see that there's no way these people are going to pay this money back. When the median home price is ten times the median income, the only way that money is getting paid back is if they sell the house at a profit and that will only work so long as home prices keep going up.
What does it say about policymakers that they couldn't see this simple truth?

When the former and current Federal Reserve Chairmen - the position that was once considered to be the second most powerful in the world behind only the U.S. president - dismiss out of hand the possibility of home prices ever declining, what hope do we have that they'll not do something equally as stupid next time?

Were they all so deluded by the apparent prosperity of our late, great asset-based economy that these wizards of the financial world were unable to see something so simple, only now realizing just how huge this simple error was?


Anonymous said...

They were all making gobs of money in the short-term, so no-one gave a fig about how unsustainable it was. They all thought they were in on the con and would parachute out before the implosion. Those who issued warnings were threatened, had their careers wrecked and were shoved out the door so as not to threaten the magical golden goose.

"It's difficult to make a man understand something when his paycheck depends on his not understanding it." - Sinclair Lewis

MiamiCondoForum DotCom said...

Excellent quote, but that was Upton Sinclair

Anonymous said...

i suppose it's plausible that even the brightest folks on wall street are just as capable of being blinded and getting caught up in the bubble craze as anyone else. but more and more i'm convinced that it's just not probable. too much money was being made, even now with all the bailouts. too much money, too many pockets stuffed, too many golden parachutes unfurled. Geithner, bernanke, bank ceo's, etc.. they all do their song and dance, pony show on capital hill, in front of CNN, and people march and waive protest signs, and still.. pockets are being stuffed, golden parachutes unfurled. we all know we're being fucked, but still.. pockets are stuffed and golden parachutes, etc, etc.


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