Steep learning curve
The Obama Administration has one:
2. “No one wants banks making the kinds of risky loans that got us into this situation in the first place.”
President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take “third and fourth” looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.
Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama’s guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.
Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.
This financial crisis was all about bad debt. Why is Obama working so assiduously to create even more bad debt?
I’m not much of a tin-foil-hat type. But if Obama really was a Manchurian candidate whose secret plan was to destroy the United States, what would he be doing differently?
I don’t actually believe Obama is a Manchurian candidate. I’m just highlighting how his policies could not be more stupid even if he was.
Filed under: Deseret Review | Tags: bad debt, Obama, stupidity
Ben Pratt
March 13, 2010
The financial system has to encourage debt accrual because debt is the basis of our currency.
Vader
March 13, 2010
I wouldn’t say debt is the basis of our currency, which is simple fiat currency and really has no basis but our trust in the federal government.
But most of our M2 money is bank deposits, which is money then loaned out to others to deposit, and so on. So it may not be far off to say that debt is the basis of our M2 money.
This is nothing new, by the way. See: Kirtland Bank ca. 1830.
rameumptom
March 13, 2010
I think a big part of it depends on how much banks are loaning out compared to the amount of capitol they have. It is one thing if they are loaning out $4Billion with $1Billion in the vault. It is another thing to loan $40Billion with $1Billion in the vault. Over-leveraging is a huge problem.
Second, I DO think that Obama is focused on running the USA bankrupt. He is focusing on issues that are running up our debt, not fixing it, nor getting jobs restarted. There are many steps we could take to fix our economy – none of which he is doing.
You notice that in his State of the Union he said he would focus on jobs. You notice that he has been focusing on health care, instead. Guess what? He is an idealogue, and won’t let such distractions as bankruptcy or job loss keep him from socializing our economy.
Vader
March 13, 2010
Banks are subject to regulations regarding the amount of capital they must keep in reserve. The requirement has generally been closer to 2.5% than 25%, but it has generally been adequate. Some of the mischief prior to 2008 came from inappropriate capitalization requirements, which shifted mortgages away from traditional investment banks (which retained a relatively high reserve requirement) towards other forms of investment with lower requirements. There’s a good discussion of this in Arnold Kling’s book on the crash.
I don’t actually have a problem with risky investment or even risky debt, as long as there are clear fire walls between different levels of risk. As the Reason article points out, the problem wasn’t subprime mortgages — it was prime mortgages to unqualified borrowers who should have been treated as subprime. The firewall had broken down.
I don’t think Obama is deliberately ruining the economy. I just think he is terribly bored with mundane economics and is much more interested in ushering in the Millennium.
Which is not so different from what you said.
What he will usher in is a Millenium rather than a Millennium. You may find it entertaining to run down the subtle difference in etymology. I cannot claim credit for it, though I no longer have the link to the blog that first pointed it out.
Ben Pratt
March 15, 2010
Millenium–that’s funny.
On M2 money: precisely!