Now I’m Mad

There’s a lot of talk today about how “Worsening Credit Crisis Leading to Meltdown of Financial System and Severe US Recession” (it’s long and written by economists, but please at least read the first paragraph) and “New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario” and just to top it all off, banks have billions of dollars of undisclosed risk — they may not even know for certain how bad it is because much of it was kept off-balance-sheet. Huh. I thought we had tighter accounting rules in the post-Enron world.

Now, I have not been as angry at the banks and the Fed as many writers have been. I know enough about economics and modern banking to know that there will be no way out of this mess that does not involve banks. Who do you think is going to provide the money to refinance all those crappy mortgages so people can keep their homes? It’s not the government; they can’t afford it. It’s not Fannie and Freddie; they don’t give loans. It’s banks and other mortgage providers.

But now? Now I am mad. Robert Shiller wrote this piece for the New York Times. You can find a no-registration version here and here and links to other people’s thinking on it here. I’m only going to directly quote a few paragraphs. After telling us that indeed, a 30% decline in housing values has precedent and could happen, he posits that “This crisis should be an occasion for some inspired thinking about fundamental changes in our real estate institutions. The actions that have already been taken are not impressive.” Then he lists the measures taken in the early 1930s, without which “the Great Depression would have been much worse than it was, and we would be in a more vulnerable situation today”:

In 1932, the National Association of Real Estate Boards proposed and Congress created the Federal Home Loan Bank System, modeled after the Federal Reserve System…. This was an ambitious plan: these banks were to be a special lender of last resort for real estate, discounting mortgages so that troubled banks and loan associations could keep issuing mortgages.

Also that year, the real estate appraisal industry pulled itself together to become a truly professional organization, founding the Appraisal Institute, which established national standards.

In 1933… Congress modified bankruptcy law to allow insolvent wage earners to file to protect themselves from eviction from their homes. This was a democratization of bankruptcy law: the new statute led the way to the current situation, in which individuals and businesses both have access to important bankruptcy arrangements.

Later in 1933, after Franklin D. Roosevelt became president, Congress created the Home Owners Loan Corporation to sponsor loans for those having trouble making payments, replacing short-term mortgages — then typically five years with a final balloon payment that was often hard for homeowners to afford — with much more sensible 15-year ones that were fixed-rate and self-amortizing. In 1934, Congress created the Federal Housing Administration; it insured mortgages and insisted they be 20-year fixed-rate and self-amortizing.

The Federal Deposit Insurance Corporation, a radically new invention intended to prevent runs on banks from depleting resources for home mortgages, among other calamities, was also created in 1934. And in 1938, Congress created Fannie Mae, which eventually led to the huge securitization of mortgages.

Now, leaving aside for the moment that a 20 year mortgage was an innovation 70 years ago, and now 30 years is standard, leaving aside how anemic the governmental response is to a crisis that the rest of the world is worried about. Let me tell you the part I am truly angry about:

Congress is already on track to eliminate the provision — Section 1322 of Chapter 13 of the bankruptcy law — that prohibits courts from adjusting terms of first mortgages.

This makes me mad because part of the problem is that the bankruptcy reform bill passed back in 2005 is what pushed so many families into Chapter 13 bankruptcies in the first place.

Oh, and because “Minorities hit hardest by housing crisis” and disproportionately have sub-prime loans, remember that the problems facing middle America are only worse for people of color in America. Remember all the hoopla about encouraging minority home ownership a few years ago? As recently as October of 2006 President Bush himself was encouraging minorities along with everyone else to go out and buy a house.

Administration policies fed the housing bubble, which in turn fed the mortgage mess we are currently trying to dig out of. Their proposals have been nothing more than media hype, and Congress has done little better. When you can look back at Herbert Hoover and say he did a better job with a similar problem, that’s really pathetic.

In closing: Brilliant at Breakfast points out Barney Frank on jobs and wage stagnation in our “service economy”; the Archcrone borrows the drum I’ve been beating to point out that universal health coverage is not the same thing as universal health care; if you haven’t been to my professional site, you have probably missed Teller’s House of Mystery and Imagination; it turns out kids will eat healthy food if you serve it to them; one Seattle Post-Intelligencer writer asks “If not now, when?“And finally, a must read article on social mobility. A mixed bag of researchers from “the American Enterprise Institute, the Brookings Institution, the Heritage Foundation and the Urban Institute” found that it just doesn’t exist anymore! Don’t zone out before this paragraph (emphasis mine):

[Julia B.] Isaacs [of the Brookings Institution] said she was surprised at finding that the personal income of American men—including white men—has been almost perfectly flat for the past three decades. One of Isaacs’ studies indicates, in fact, that most of the financial gains white families have made in that time can be attributed to the entry of white women into the labor force. This is much less true for African-Americans; in 1968, when the sample group was first surveyed, black women were far more likely to already have income-producing jobs.

So, when you hear so-called “family values” sorts talking about how “all today’s problems are because mom is out working instead of taking care of the kids at home”? They are not only saying “all today’s problems are because mom can actually leave a bad and/or abusive marriage,” they are in fact saying “all today’s problems are because American families have too much money.” Somehow, that does not jive with my experience. How about yours?