Let's take a fond look back at one of Alan Greenspan's greatest hits:
Remarks by Chairman Alan Greenspan
Consumer Finance
At the Federal Reserve System's Fourth Annual Community Affairs Research Conference, Washington, D.C.
April 8, 2005 [i.e., during the heart of the Housing Bubble]
It is a pleasure to be here today as you conclude your discussions about our dynamic consumer finance market. Our nation's vibrant [chain-yanking ahoy!] financial services industry is remarkable in many respects, with myriad providers offering consumers a broad range of transaction and credit options. The industry is central to the functioning of our robust consumer sector. Therefore, it is essential that policymakers, regulators, bankers, researchers, and consumer groups remain fully engaged in monitoring developments in the consumer finance market and continually seek to better understand the strengths and weaknesses of the financial services industry, including how well it serves lower-income and underserved consumers. ["Underserved" is a euphemism for minority.]Evolution of the Consumer Finance Market
A brief look back at the evolution of the consumer finance market reveals that the financial services industry has long been competitive, innovative, and resilient. Especially in the past decade, technological advances have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. ...
... For example, information processing technology has enabled creditors to achieve significant efficiencies in collecting and assimilating the data necessary to evaluate risk and make corresponding decisions about credit pricing.
With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.
For some consumers, however, this reliance on technology has been disconcerting. Credit-scoring models are complex algorithms designed to predict risk. Consumer advocates have raised concerns about the transparency and completeness of the information fit to the algorithm, as well as the rigidity of the types of data used to render credit decisions. Consumer advocates contend that the lack of flexibility in the models can result in the exclusion of some consumers, such as those with little or no credit history, or misrepresentation of the risk that they pose.
To address these concerns, some firms have worked to customize credit-scoring systems to include new data and to revalue the weight of the variables employed. Also, new organizations have emerged, developing new systems for collecting alternative data, such as rent payments and other recurring payments that will enable creditors to evaluate creditworthiness of consumers who lack experience with credit. [In other words, lower credit standards.]
Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits. Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes. Access to credit has enabled families to purchase homes, deal with emergencies, and obtain goods and services. Home ownership is at a record high, and the number of home mortgage loans to low- and moderate-income and minority families has risen rapidly over the past five years. Credit cards and installment loans are also available to the vast majority of households.
The more credit availability expands, however, the more important financial education becomes. In this increasingly competitive and complex financial services market, it is essential that consumers acquire the knowledge that will enable them to evaluate products and services from competing providers and determine which best meet their long- and short-term needs. Like all learning, financial education is a process that should begin at an early age and continue throughout life. This cumulative process builds the skills necessary for making critical financial decisions that affect one's ability to attain the assets, such as education, property, and savings, that improve economic well-being.
ACORN and the like have gotten big into "credit counseling" for mortgage applicants as an alternative to actually having a track record of meeting your obligations. It provides both mortgages for marginal minority applicants and jobs for unemployed activists as "credit counselors."
A reader in New York who is a public high school English teacher says he was telling one of his students that he was in danger of flunking out of school. The student said he didn't care, he already had a job paying $12 perhour.
"What kind of job pays you $12 an hour?"
"I'm a credit counselor!"
"What?"
"You know, like somebody wants a mortgage or something, but they be a deadbeat. So, I, like, counsel them about how the bank isn't just giving them the money. They gotta, you know, pay it back. I show them a video about stuff like points, and then they can get their money 'cuz now they've been credit-counseled."
Tom Wolfe explained the inner economic logic of an earlier social work counseling fad in Mau-Mauing the Flak Catchers:
Brothers from down the hall like Dudley got down to the heart of the poverty program very rapidly. It took them no time at all to see that the poverty program's big projects, like manpower training, in which you would get some job counseling and some training so you would be able to apply for a job in the bank or on the assembly line--everybody with a brain in his head knew that this was the usual bureaucratic shuck. Eventually the government's own statistics bore out the truth of this conclusion. The ghetto youth who completed the manpower training didn't get any more jobs or earn any more money than the people who never took any such training at all. Everybody but the most hopeless lames knew that the only job you wanted out of the poverty program was a job in the program itself. Get on the payroll, that was the idea. Never mind getting some job counseling. You be the job counselor.
Of course, things have evolved since the Great Society hey-day of job counseling. I wonder how many ACORN-style "credit counselors" decided they had to get in on this homebuying game and have since defaulted on their own mortgages?
My published articles are archived at iSteve.com -- Steve Sailer
From a loan officer's prospective the situation in 2005 was very good.
ReplyDeleteYou get paid to make loans for you little storefront mortgage company, you hector your underwriter to get them approved by any means possible, and then your company puts them on the wire for WaMu (Washington Mutual) to buy up or for countrywide to buy up.
All you need are basically to have been employed for a while somewhere, have two bills that you have paid regularily for about a year (we are talking electric bill and water bill or phone bill and cable bill.....how hard is that????!), and to show that you have paid your rent on time for a period (one year or two, can't remember what my pal M, a loan officer, told me). The officer knows what has to be "bare bones" filled out. You can overstate the value of your assets (your 5 year old car suddenly becomes worth 20K on the application and your "Rooms-to-Go" furniture becomes worth 20K also, you can guess what happens with your estimates of your jewelry's worth and the like in certain communities. It goes through the roof-LOL).
If you lie well enough, you might qualify to get into a house that you'd never dream you'd live in, and get to have neighbors who never dreamed they'd have YOU for a neighbor. Great, ain't it?
Don't worry a thing either, WaMu, as my pal told me, was buying damn-near anything, and if they didn't, Countrywide or one of the others would. When a lot of local mortgage shops told you "we look for lenders to give you the best deal", what they mean is they SCOUR LENDERS to see if any ONE of them is SUCKER enough to buy our crappy loan, which we took as many points off of as possible, because we'd never service this turkey ourselves.
It wasn't this way in 1990.
M
I've been making my way through Greenspans autobiography, "The Age of Turbulence". Reading it is like being cornered at a bus stop by a guerrulous senior (albeit one with some interesting stories).
ReplyDeleteIn his book (and in person), Greenspan presents himself as a modest but curious bit player to wider world events. His history however shows him something of a wannabe nerd attention-seeker whose vanity led him to increasingly unwise decisions.
His book emphasizes how Bush I blames Greenspan's unpopular anti-inflationary measures for costing him re-election. I think this is to hide the fact that Greenspan increasingly and aggressively reinflated every bubble during the Clinton and Bush II years to feed his growing Kissinger-like rockstar status.
I should've know the markets were heading for the crapper this summer when Greenspan went on his book media tour trying to favorably revise history in the face of an impending collapse he helped cause.
It's like Greenspan, Tenet, Powell and McClellan all followed the same script to try to wipe their fingerprints off their incompetence and culpability during the Bush years+ (e.g. Me? I wasn't present). Rumsfeld disappeared while others seemed to have jumped ship without injury or so much as a by your leave like Rove and Wolfowitz. I wonder how history will sort out Rice and other Bushies. Someone should do a VH1 "Where Are They Now" on the class of Bush II.
ks
Greenspan was a sell-out from the beginning. Now they have him on the news proclaimiing that his free market ideology has failed. Makes sense that a Randian would be chasing after the main chance.
ReplyDeleteActually, you didn't even need that much. Karl Denninger spotted this website (swiftly removed) that gave you fake paperwork for a modest fee...
ReplyDeletehttp://market-ticker.denninger.net/uploads/payroll1099.png
A left that uses financial panic-mongering should lose massively. The media hype has been so extreme that hardly anyone can not see it. the left wants power and doesn't care about collateral damage.
ReplyDelete"The more credit availability expands, however, the more important financial education becomes. In this increasingly competitive and complex financial services market, it is essential that consumers acquire the knowledge that will enable them to evaluate products and services from competing providers and determine which best meet their long- and short-term needs."
ReplyDeleteThis is my favorite part. In contrast to the "Mau-Mauing the Flak Catchers" selection and M's post, you have to wonder if Greenspan (aka Bubbles) has been living in the real world.
One thing I don't understand about the mortgage meltdown. I have read that similarly irresponsible loans were being made in countries other than the United States. Anybody have information/links regarding mortgage loans made outside the U.S. during this time?
ReplyDeleteWithout defending the particular "counseling" jobs you and Tom Wolfe describe, subsidized public inner city jobs are not bad social policy.
ReplyDeletePolice, teachers, social workers, sanitation workers, city secretaries, and so on keep inner cities relatively clean and orderly.
Inner city public employees do more to impose bourgous values on ghettos than any other force. They are more likely to be married and are frequently pillars of their churches.
There are many worse things for a kid in the inner city to aspire to than a government job.
You can read Tom Wolfe's Mau-Mauing the Flak Catchers online.
ReplyDeleteWithout defending the particular "counseling" jobs you and Tom Wolfe describe, subsidized public inner city jobs are not bad social policy.
ReplyDeleteThat the fact that they're required stems directly from bad social policy.
Police, teachers, social workers, sanitation workers, city secretaries, and so on keep inner cities relatively clean and orderly.
And those evil racist conservatives want to do away with them all.
Inner city public employees do more to impose bourgous values on ghettos than any other force. They are more likely to be married and are frequently pillars of their churches.
In other words, they have little in common with numbnuts "credit-counselors."
"One thing I don't understand about the mortgage meltdown. I have read that similarly irresponsible loans were being made in countries other than the United States. Anybody have information/links regarding mortgage loans made outside the U.S. during this time?"
ReplyDeleteIn Germany they have always required 25% downpayment. That is the reason why so many people rent and don't own.
The financial problems here emanate from the big banks and other institutions playing cards with Lehmann and co.