Monday, December 15, 2008

Chart of the Day

In the December 18th National Review on dead tree, economist Kevin Hassett tried to test the off-heard notion that Federal laxity or de-regulation caused the financial crisis:
[If this thesis is correct], then the economic crisis should be worse in countries that have looser regulations fueled by a "failed ideology."

The data show the exact opposite.

The vertical axis in the accompanying chart measures the change in stock performance among major industrialized countries during the past year. The horizontal axis is the Fraser Institute's Economic Freedom of the World index, which provides a measure of financial-market freedom. The index measures economic liberty by taking into account government size, property-rights protection, monetary policy, trade freedom and regulatory barriers across countries. Freedom increases from left to right.


source: Dec. 18th National Review at 10 (subscription only; image here)

The fitted line is a regression line that captures the basic tendency of the data. If [the theory] were correct, the line would slope downward, and countries that are economically free would have had bigger collapses in their stock markets. In fact, the line is upward-sloping, which implies that over the past year, countries that are economically free have suffered less than countries that are not. (For those keeping score: The line is statistically significant.)
Obviously, the Fraser index is an imperfect proxy for financial oversight deregulation. But, in a world where all economies are suffering, could the free market have blunted the blow as much as possible?

Yes, there may be more out-right fraud than previously known. But I still believe there's no more fraud here than in other markets, including the developing world (see China).

7 comments:

bobn said...

re: the off-heard notion that Federal laxity or de-regulation caused the financial crisis

Carl, you're backsliding. I thought we had this all worked out.

OBloodyHell said...

> Carl, you're backsliding. I thought we had this all worked out.

If you did, then you were both wrong. The CRA was, if not central to it, enormously contributory.

> 3) It emphasizes the role of the GSEs, when during the period that this was being baked in (2004-2006) their share of mortgages fell significantly.

It doesn't matter. You're attempting to make a disconnect which doesn't apply, since by 2004, on, the impetus had shifted off the GSEs and infected the entire system.

By that time, the GSEs and their falsified numbers (the reasons for that wonderful video of Dems ripping the heads off of auditors rather than the people falsifying numbers -- i.e., Gorelick and Raines -- for personal benefit -- i.e., massive bonus payouts thanks to the great numbers) -- by that time, the falsified numbers had convinced everyone and sundry that the old mechanisms for deciding on the viability of a proposed debt instrument were no longer valid, so *everyone* was ignoring the old rules and making bad loans while spreading the problems around so that everyone wound up interlocked and ready for the whole thing to collapse. The last time that sort of widespread interlocking stupidity was in play I think they called the result The Great War.

The CRA was a stinkin' incredibly bad idea from its inception, and its relevant proponents and defenders should have their balls/tits ripped off with rusty hacksaws. Starting with Mr. "I want to roll the dice some more" Frank and his former boytoy Raines.
>:-/

In short, the whole mentality was that of a gold rush. Once the GSE's made it look like it worked, everyone else wanted in on it... it's pretty hard to stick to your entrenched guns when everyone around you is throwing down their shovels and running towards the pot of gold, to mix metaphors.

So yes, the laxity contributed (by allowing them to ignore the rules), but it was also the fact that the GSEs + the pressure from the CRAs which led decisionmakers to being pushed towards bad decisions in both a "push" and a "pull" manner -- the push of the threat of boycott, racist accusations, and civil rights suits, the pull of "reasonable greed": when everyone around you is making lots of money doing something, it's hard to resist the pull of doing it too -- that's how those idiot "own your own business" infomercials work. "Hey, THIS guy is making lots and lots of money doing this -- why not you, too?!?"

The answer to that is usually in the fine print.

Carl said...

I wasn't signaling a retreat. And while I agree CRA is a bad law, political pressure on the GSEs is the nearest thing to a proximate cause of the credit crunch. CRA states a misguided aspiration, one that contributed to the crazy political climate. Still, because CRA itself does not mandate particular loans, it did not itself contribute significantly to the crisis.

bobn said...

OBH,

You have to willfully ignore all the relevant facts available about CRA vs SubPrime to propound your current views. Then you have to further ignore the non-Subprime but even more toxic Alt-A and Option ARM loans

The "whole system was infected" by private securitizers offering "yield spread premium" which encouraged the most toxic loans. Google "yield spread premium" for more information.

The GSEs were out of the way while most of this was baked in: google the phrase "conforming loan" for more info.

The GSEs were encoruaged to try and keep the game going in 2007 and 2008 - by a Democratic congress stupidly influenced by testimony of a stupid Ben Bernanke of the sorta-kinda independent Fed.

Barry Ritholtz once again demolishes the CRA mythology here.

And once again, this really was a failure of regulation, caused by deregulationistas in both parties, though oddly enough, Phil Gramm was leading the way for most of the more demented charges.

OBloodyHell said...

> You have to willfully ignore all the relevant facts available about CRA vs SubPrime to propound your current views.

No you don't -- you have to willfully ignore and take out of context events which occurred leading up to the current problem in order to think the CRA was not a substantial part of the whole problem. Not the entirety of it, but the central act against which most of the other failures played.

You can't just look at the state of things in 2008, or even 2004, but at how they got there, which ties directly to the CRA, the GSEs, and the false reporting done by them in the early 2000s by Gorelick and Raines.

You shout "HEY, There's GOLD here!!" and get people to believe it, they tend to do stupid things and go into stampede mode. Tell them that everyone else is making gold finds, and even the resistent ones start to join. Set off a loud whipcrack (via the CRA) and all but the most determined are off to the races.

And that is what the CRA as a push, and the GSEs as a pull, did to the existing financial business models.

Yeah, they were stupid and dunderheaded. But everyone (including the GSEs) were too busy selling the false mantra "real estate prices just don't go down".

> Barry Ritholtz once again demolishes the CRA mythology here.

I'll see you that article and raise you two:
Fannie Mae Eases Credit To Aid Mortgage Lending
Racial Pattern Is Found in Boston Mortgages

The idea that the CRA didn't affect the rules is just ***utter crap***.

It, along with falsified numbers from the GSE, made the whole idea acceptable, because it made it look like the old rules were overly cautious.

It provided banks/lenders with an impetus to go in that direction, to soften the old rules, by making a case that the GSEs were making lots of money on them (when in real fact their numbers were abysmal, as OFHEO auditors pointed out and got their heads ripped off for daring to do so by Democrats).

So of course the various institutions and the regulatory agencies sought changes.

Why not? The GSEs "weren't having any problems". Why shouldn't all the others get a piece of that pie?

Then they collateralized all the crap to spread the risk around, while they clearly had no idea who had what and how much the overall total was. Bad move.

You can't just look at the state of it in 2004-2008 and ignore the run-up to it, which is clearly where the smoking gun on the CRAs and the GSEs sits waiting for attention.

If the GSEs did not exist, if the CRA did not exist, then this whole mess probably would not have happened at all.

Because the financial institutions and the regulatory agencies would not have perceived a justification for lowering their standards.

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Stop trying to ignore that, bob.
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OBloodyHell said...

LMAO. The verification word for the above post was "sculpify". Contrast with this.

Anonymous said...

When our financial system was being devised, people had different ethical standards then they have now. Everyone knows the design of the securities markets require trust, if the securities markets are to work the way they were intended to work. Honesty no longer seems to be a major value in our society and that may be why capitalism and people are suffering.