September 9, 2010

The PC-Libertarian Worldview

From the New York Times:
President Obama on Friday will promote a longtime economic adviser, Austan D. Goolsbee, to chairman of his Council of Economic Advisers, signaling continuity even as a high unemployment rate has left much of the public dissatisfied with administration policies. ... Mr. Obama’s decision to elevate Mr. Goolsbee, a left-of-center economist, to succeed Christina D. Romer, who returned this month to the University of California, Berkeley, is part of a broader flux within the White House economic team, as architects of the government’s response to the worst recession in 80 years begin moving up and out and their roles shift.

Goolsbee was Barack Obama's chief economic adviser in 2007, the first year of his Presidential run. Here are excerpts from Goolsbee's March 29, 2007 column in the New York Times, where he demonstrated his economic prescience by defending subprime mortgages because they increase homeownership among minorities:

... Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.

Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much. ...
Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.

And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. ...

Of course, basing loans on future earnings expectations is riskier than lending money to prime borrowers at 30-year fixed interest rates. That is why interest rates are higher for subprime borrowers and for big mortgages that require little money down. Sometimes the risks flop. Sometimes people even have to sell their properties because they cannot make the numbers work.

The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. ...

Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. As Professor Rosen explains, “The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment.” It has allowed them access to mortgages whereas lenders would have once just turned them away.

The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups. Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

Tyler Cowen posted the paragraphs about minorities benefiting from subprime loans on Marginal Revolution under the approving title "Austan Goolsbee Is Not a Credit Snob." I commented on March 29, 2007:
"There was a huge push by the government over the last 12-14 years to get banks to make more home loans to minorities. As Malcolm X would have said if he was an economist, today, the chickens are coming home to roost."

Do you think anybody will dare bring up Goolsbee's column to his face?

30 comments:

  1. Marginal Revolution also had an article proving conclusively that subprime loans to minorities was not the cause of the current economic malaise. In fact, it was the encouragement of white-americans against the loan industry which loans out and employs some curious methodology involving the plan to raise home ownership for minorities. I am convinced this is the more likely cause.

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  2. Word needs to get out that this push to bring under-class minorities up to the level has been disastrous for this country.

    The intellectual discourse in this country absolutely has to change.

    It's a shame that no one in the mainstream challenge claims about how discrimination is the cause of every minority un-achievement and under-achievement.

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  3. if anybody was uncertain as to how much of a load of shit the entire field of economics actually is, the fact that christina romer is a tenured professor of economics at university of berkeley, should settle the matter conclusively. anybody who witnessed her exit interview/press conference thing, at which she was free to openly express that she was baffled by the failure of obamanomics and the stimulus package to create jobs or grow the economy, should have laughed in her face and told her out loud that she is a F'ing moron.

    this total moron, who understood nothing about how a large modern economy functions in a developed nation, holds a PHD in her "field" and is a full professor at one of the most highly regarded universities in america. in 2008, her salary at berkeley was 250000 dollars. can you believe this stuff? she is actually paid real money to lecture 20 year olds about this subject, as if she knew a goddamn thing about it, which she doesn't.

    as i've described before, there is now, in 2010, an entire class of people who have lived their complete lives in an artificial world created by really good technology and fiat money. a fake world where shuffling paper and typing on keyboards "creates" enough green slips of paper for them, so they can feed themselves, purchase european automobiles, and never have to do any labor to get anything done - they give those slips of green paper to people with actual skills, who do all the cooking, repairs, construction, et cetera. these people have been divorced from reality for 40, 50, even 60 years. they have never done an actual day of work or labor in their lives, and do not understand how the real world functions. from birth they have been living inside the academic and legal world created after world war 2, a world constructed on a foundation of 500 years of previous hard labor, war, invention, manufacturing, and construction.

    the president of the united states is a member of this class, a clueless man who's only plan in any tricky situation is "Take the whites to court". if there were no europeans to sue, what could he do for himself? what could he accomplish? he has no practical skills, literally zero. likewise with christina romer and the entire "professional elite".

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  4. I think it's clear--these lefties, whether politicians or economists, don't WANT capitalism to work.

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  5. good comments jody, but why do you hate capital letters?

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  6. The "sub-prime" aspect of the GFC has been flushed down the memory hole, as too embarassing for both sides of politics.

    The whole fiasco illustrates in microcosm what has gone wrong with US political culture and economy since Nixon left the bridge.

    I call it the "debtquity and diversity" sting. Its the ultimate synthesis of New Right and New Left.You have Wall Street uber-class acting like "Masters of the Universe" selling dodgy deals to the Back Street under-class who play the part of "Greater Fools".

    But who winds up picking up the tab is the long suffering tax-paying, share-holding, home-owning middle class. That is, the social basis of democracy carries the can.

    So no wonder that this social group starts to flare up, what with Tea Partys and the like. It sucks that the US middle class is so let down by the top-dogs and under-dogs.

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  7. Of course the point that all these panglossian types fail to understand is that incomes in the USA - and thus ability to pay mortgages have stagnated for 40 years, therefore rendering the general notion that individuals will earn more in the future as a nonsense.
    Of course this fact is entirely due to the open borders importation of the low skilled - a policy supported by the elite and panglossian 'economists'.
    The destruction of incomes due to 'free trade' wiping out whole industries and earning power didn't help.

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  8. 'The main innovations in the mortgage market have let in the excluded'

    What utter, utter tosh!!!

    The whole point of capitalism, the very bedrock on which it sits, is exclusion by the pricing mechanism - that's the whole point of the whole free-market, capitalist shebang, you just can't bullshit, quibble or 'enlighten' or 'innovate' your way out of that most fuundamental of fundamental facts.
    You see, the basic idea hit upon by caveman flint-knappers back in the day was only a certain minimum number of skins were acceptable for day's work in knapping a flint axe.
    The point is that free markets *ration by price* rather than by 'shortage'.The whole idea is that tradeable goods are exchanged by freely negotiated prices - the price in itself reflecting the 'value' of the goods to the seller and purchaser alike.
    To try and bullshit your way through this elementary fact and say that somehow a 'modern innovation' (though it's nothing of the sort, no new technology was ever devised, no technique not known to the Sumerians was used), changed this axiomatic fact is bollocks of the highest order.

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  9. Jody, that may be your best post ever. Very well said. The make believe economy is going to go away quite fast when the dollar craters.

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  10. Will Drudge run the story?

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  11. Funny the difference a couple of years makes. Now left-of-center brainiacs are saying that the subprime mess destroyed the wealth of millions of minorities -- that minorities were targeted by evil bankers.

    Oh well. Back to the old drawing board. Maybe we can come up with something else that'll make everybody happy ...

    http://money.cnn.com/2010/09/09/real_estate/who_repays_tax_credit/index.htm

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  12. More proof that social science is going to destroy civilization.

    Often people tackle the topic, "Has social science produced a body of knowledge that is true and non-trivial?" But forget what's intellectually trivial or not -- how about what's harmful or not?

    Add up all the harmful and beneficial social science "research," and it's clear that the net impact has been destructive.

    We have an exact copy of rationalistic, arrogant, life-polluting medical doctors. Only now they're social doctors. The medical episode went on for centuries -- I guess we can be thankful that we're only living through the beginning of the social doctor plague, before they get really carried away.

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  13. ...where he demonstrated his economic prescience by defending subprime mortgages because they increase homeownership among minorities:...

    You might think that's explained by this:

    ...Mr. Goolsbee, a left-of-center economist,...

    Except that as you've written, the "left-of-center" types were ably abetted by the Stupid Party.

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  14. This is extremely disappointing. I haven't followed what Peter Orszag has done, but this a son of Stephen Orszag, math professor at Yale who has done a lot to move forward computational methods for fluid dynamics (my field). He only needed to think for a couple minutes about his own father to notice that there is more going on than 10,000 hours of practice.

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  15. What, exactly is "The PC-Libertarian Worldview"?

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  16. 'Innovative products' allowed minorities who were previously denied mortgages to become house owners.

    What utter crap!

    Stripped of all the extranoeos bullshit, sub-prime, Alt-A, CDOs, CDSs, AIG etc etc and all the rest of the alphabet soup of financial geek-speak are nothing more than usury pure ans simple.Nothing new about that at all, in Sumerian times a money lender would have lent a certain number of talents to a peasant in expectation of getting a bigger number back.
    The crucial difference being this.The ancient Sumerian actually *knew* the man who he loaned to, and never in a hundred million years would even consider loaning out money to somone he didn't know or couldn't possibly know.
    And people call this so-called 'innovation' 'progress'.

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  17. What does this have to do with libertarianism? I'm not aware of any libertarians PUSHING FOR GOVERNMENT involvement in this area. Indeed, most want Fannie and Freddie to be demolished and mortgage lending returned to the private sector (where it hasn't really been in the past 50 years)

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  18. Never trust anyone with a cockamamie name like Austan D. Goolsbee.

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  19. Excellent comment, Jody. For some reason I'm finding good stuff all over today - far fewer trolls and "can't we all get along" types.

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  20. Jay Gould was once asked why he was so rich. His reply, "It's God's way of saying - this is my own, my beloved son".

    That's not a popular sentiment today but there is a nugget of truth there. God - or Nature if you prefer - makes choices. Darwin understood this. In any group or gathering, a few will emerge as the most successful. The failures will have government.

    So to support the "natural" order of things we should tax the poor and reward the rich. Government in modern democracies terms preferences to losers as "progressive". "God" chose some for failure and extinction - why should we interfere?


    Albertosaurus

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  21. I am Lugash.

    The late, great Tanta from the housing/econ blog Calculated Risk wrote a harsh critique of Goolsbee's article. She was of the mindset that redlining did occur, and should be stopped. Given the choice between stopping redlining or preserving credit standards, she was definitely for the latter.

    http://www.calculatedriskblog.com/2007/03/dr-goolsbee-ill-stop-impersonating.html

    I am Lugash.

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  22. Paragraphs three and four of Jody's post were spectacular. To add my accolades to those of the rest.

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  23. That MR comment thread is hilarious.

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  24. jody, great post. Clear, clean thinking and writing. Thanks.

    Too bad we can't expect the same level of excellence from the "professional elite". They have long since proven themselves so blinded by ideology as to be unreachable and unteachable.

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  25. WTF? Am I missing something? What's this got to do with libertarianism?

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  26. I'm not surprised by this blast from Big Dick Pete's past. He recently earned the M. McM kiss of death. Boors.

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  27. A degree of statistical rigor will be useful in these posts about the role of minorities in the housing bubble. For example, what % of non-prime loans were taken out by minorities ? If NO such loans had been given out to minorities, would the housing bubble been averted ?

    The evidence on the ground here in SW Florida (the area between Sarasota and Naples) suggests not. Much of the problem here seems to have been caused by mid-level WASPs - managers, accountants, realtors, etc, many emigres from the mid-west - trying to get in on the housing boom, but unfortunately waiting until the tail-end of the bubble to do so.

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  28. Curvaceous Carbon-based Life Form9/12/10, 4:30 PM

    "The evidence on the ground here in SW Florida (the area between Sarasota and Naples) suggests not.

    Much of the problem here seems to have been caused by mid-level WASPs - managers, accountants, realtors, etc, many emigres from the mid-west - trying to get in on the housing boom, but unfortunately waiting until the tail-end of the bubble to do so."

    Think harder.

    The WASPs getting in late GOT in BECAUSE the bubble was blowing. Had the loans to NAMs never been made, there'd never have been bubble started to be late getting into.

    Just as it takes a headache-inducing hard first breath to start blowing up a balloon and it's easy to blow to popping thereafter, a monetary bubble is hard to start, but as it gains its own momentum, quickly reaches "pop" stage.
    NAM loans were the lung-bursting first breath of the housing bubble. Utterly necessary to get the process going.
    Read "Extraordinary Popular Delusions and the Madness of Crowds" to understand the psychology of financial bubbles that causes hordes of previously-sensible people to buy at ridiculously inflated prices -- right before the bubble bursts.

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  29. I have read "Extraordinary Popular ...". An original and extraordinary work.

    However, my posting asked for empirical evidence of what Steve and you seem to take for granted - that loans to NAMs were the cause of the housing bubble.

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