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PaperclipPerfector  1mo ago (text post)   24823 thread views

Culture War Roundup for the week of September 29, 2025

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It's also an argument that no one has made in the 20 years since banks went further than the progressives asked them to and started writing mortgages to people who couldn't pay them off if they lived to be a million, then repackaged them as AAA securities.

Not quite no-one. Kochtopus-funded economist Kevin Erdmann has been arguing for over a decade that a huge part of what is wrong with the post-Great Recession economy is that post-crisis regulations on mortgages have destroyed the bottom half of the owner-occupied housing market for no good reason. Erdmann and Scott Sumner have successfully convinced me that their contrarian theory of the 2008 crisis is probably correct:

  • Pre-2006, rents and prices in a number of cities with restrictive zoning, and in particular greater LA, increased faster than incomes because of a housing shortage. This wasn't a bubble, it was supply and demand.
  • There was a bubble in the "Contagion cities" like Las Vegas, driven by people migrating out of California for cheaper housing, creating a temporary surge in demand which local supply couldn't keep up with in the short term. But that would have resolved itself spontaneously as supply caught up with demand.
  • The national picture looked sufficiently like a housing bubble that the Fed decided to raise interest rates until the bubble burst.
  • Because there wasn't a bubble, this meant raising interest rates high enough to cause a recession.
  • The 2008 banking crisis was caused mostly by the recession, and only secondarily by poor lending practices. Subprime was never large enough to cause the bank losses we saw.
  • The Fed doesn't cut rates fast enough once it is clear we are in a recession and a financial crisis because they don't want to be seen as bailing out irresponsible bankers and homeowners.
  • For 4-5 years after 2008, the main way low interest rates stimulate the economy (by encouraging housebuilding) doesn't work because it is illegal to build in HCOL cities and post-crisis regulations mean nobody can get a mortgage in LCOL cities.

[Mercatus Center] economist Kevin Erdmann

Erdmann and Scott Sumner have successfully convinced me that their contrarian theory of the 2008 crisis [free 70-page report, Amazon book] is probably correct:

Quote from the linked report:

In the standard view of the housing and business cycle of the 2000s, there are at least eight interconnected assumptions:

(4) The boom was fed by deregulation of banking, pressure from government regulators, or both, which led banks to make too many mortgage loans.

We will show that these assumptions are unwarranted. Lending during the housing boom was mostly directed toward affluent households.

I prefer the theory advanced by American Enterprise Institute economist Peter Wallison (free 90-page report (p. 441), Amazon book).

Quote from the linked report:

Before the enactment of the GSE Act in 1992, and HUD’s adoption of a policy thereafter to reduce underwriting standards, the GSEs followed conservative underwriting practices. For example, in a random review by Fannie Mae of 25,804 loans from October 1988 to January 1992, over 78 percent had LTV ratios of 80 percent or less, while only 5.75 percent had LTV ratios of 91 to 95 percent. High-risk lending was confined primarily to FHA (which was controlled by HUD) and specialized subprime lenders who often sold the mortgages they originated to FHA. What caused these conservative standards to decline? The Commission majority, echoing Chairman Bernanke, seems to believe that the impetus was competition among the banks, irresponsibility among originators, and the desire for profit. The majority’s report offers no other explanation.

However, there is no difficulty finding the source of the reductions in mortgage underwriting standards for Fannie and Freddie, or for the originators for whom they were the buyers. HUD made clear in numerous statements that its policy—in order to make credit available to low-income borrowers—was specifically intended to reduce underwriting standards. The GSE Act enabled HUD to put Fannie and Freddie into competition with FHA, and vice versa, creating what became a contest to lower mortgage standards. As the Fannie Mae Foundation noted in a 2000 report: “FHA loans constituted the largest share of Countrywide’s [subprime lending] activity, until Fannie Mae and Freddie Mac began accepting loans with higher LTVs [loan-to-value ratios] and greater underwriting flexibilities.”

HUD’s policy was highly successful in achieving the goals it sought. In 1989, only one in 230 homebuyers bought a home with a downpayment of 3 percent or less, but by 2003 one in seven buyers was providing a downpayment at that level, and by 2007 the number was less than one in three. The gradual increase in LTVs and CLTVs (first and second loans combined to produce a lower downpayment) under HUD’s policies is shown in Figure 4. Note the date (1992) when HUD began to have some influence over the downpayments that the GSEs would accept.

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