Tag: financial crisis

University of Michigan Study Confirms Link between Financial Bailout and Corruption

Since Senators engaged in open extortion and bribery to enact Reid’s government-run health care plan, it is hardly newsworthy that Washington is riddled with corruption. But the magnitude of sleaze is probably far greater than most people realize. There is a new study from a couple of academics at the University of Michigan, who found significant relationships between lobbying and bailout money, as well as a greater chance of getting bailouts depending on a bank’s ties with either the Federal Reserve or key members of Congress. Hopefully, people across America will draw the obvious conclusion and realize that big government is inherently corrupting, as discussed in this video. Reuters has the details on this latest example of big government and malfeasance:

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday. Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan’s Ross School of Business. Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds. Political influence was most helpful for poorly performing banks, the study found. “Political connections play an important role in a firm’s access to capital,” Sosyura, a University of Michigan assistant professor of finance, said in a statement. Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP’s Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.

Good News on Housing!

The Wall Street Journal reports that some mortgage insurers and lenders are beginning to relax their down-payment requirements, so that buyers in some parts of the country can now borrow 95% instead of 90% of a property’s value. Buyers who can’t come up with even a 5% down payment can turn to the Federal Housing Administration, which will make loans with as little as a 3.5% down payment. Unsurprisingly, the FHA is increasing its market share.

Meanwhile, the Treasury department is pressuring mortgage companies to reduce payments for many more troubled homeowners, averting foreclosures. So, good news: people who lack income and assets will be able to take out loans to buy houses, and if they can’t make the payments they signed up for, the government will pressure their lenders to accept lower monthly payments in return. We’re back on the road to easy, universal homeownership.

Oh, wait.

It’s the Obama Economy Now

Undoubtedly President Obama inherited an economic mess.  Also undoubtedly, he’s made it worse.  Barring substantial revisions to recent job loss estimates, we have now crossed the line where as many jobs have been lost during this recession under President Obama as under President Bush.  From the start of the recession, in December 2007, until President Obama took the oath of office at the end of January 2009, there have been 3.36 million nonfarm payroll jobs lost.  From February 2009 until now there have been about 3.36 million nonfarm payroll jobs lost (estimates from ADP employment report).

Even during the best of times, the economy experiences substantial job loss.  However, we consider those times good because the labor market is also creating lots of jobs, so that job losses are offset by job gains.  The early parts of a recession are generally characterized by large increases in job losses, with minor declines in job creation.  Eventually the job losses moderate and job creation picks up, bringing us out of the recession.  We are arguably past the worst of the job losses.  What has escaped us is job creation.

And it is on the job creation front that Obama takes ownership of the economy.  While there are certainly problems in the credit markets, the major reason behind the lack of job creation is the massive uncertainty being generated by Washington.  For any employer today, it is almost impossible to estimate what the future health care costs of new hires will be.  It’s impossible to gauge what your environment costs are going to be.  Same with the costs of the 90 new workplace rules that the Department of Labor promised would be forthcoming over the next year.

Sadly this administration learned the wrong lesson from the defeat of the Clinton health care plan.  The history lesson they should have learned is that Clinton inherited a recession as well (as did Bush for that matter), but that job creation was weak until the Clinton health care plan stalled. 

Until employers and investors feel it is safe once again to put their businesses and investments at risk, and Washington ends its war on the productive elements of our society, we will not have significant private sector job growth.

Does CRA Undermine Bank Safety?

A recent policy forum here at Cato discussed the role of the Community Reinvestment Act (CRA) in the financial crisis.  While the forum focused on the federal push for ever expanding homeownership to marginal borrowers, the analysis did not touch directly upon the question of whether CRA lending undermines bank safety.

Fortunately this is a question that one economist at the Federal Reserve Bank of Dallas bothered to ask.  While his research findings were available before the crisis, they were clearly ignored.

In a peer-reviewed published article, appearing in the journal Economic Inquiry, economist Jeff Gunther concludes that there is “evidence to suggest that a greater focus on lending in low-income neighborhoods helps CRA ratings but comes at the expense of safety and soundness.”  Specifically he finds an inverse relationship between CRA ratings and safety/soundness, as measured by CAMEL ratings.

In another study Gunther finds that increases in bank capital are associated with an increase substandard CRA ratings.  Apparently bank CRA examiners prefer that capital to be lend out, rather than serve as a cushion in times of financial distress.

Given the current attempts in Washington to expand CRA, it seems some people never learn.  One can always argue over how CRA should work, but the evidence is quite clear how it has worked, once again proving: there’s no free lunch.

Thursday Links

  • Prepare to pay more: Today, an average insurance policy can cost about $2,985 for an individual or $6,328 for a family.  Under the Senate bill, those premiums will increase to $5,800 for an individual worker and $15,200 for a family plan by 2016.

Homeownership Myths

In a recent Washington Post op-ed, Professor Joseph Gyourko, chair of the Wharton School’s Real Estate Department, lists what he sees as the five biggest myths about homeownership. Given the central role of federal housing policy, particularly Fannie Mae and Freddie Mac, in our recent financial crisis, it is worth following Professor Gyourko’s suggestion and question whether a national policy of ownership, all the time for everyone, really makes sense.

Professor Gyourko’s five myths:

1.  Housing is a great long-term investment.

2.  The homebuyer tax credit makes buying a house more affordable.

3.  Homeowners are better citizens.

4.  It’s safe to buy a house with a very low downpayment.

5.  Owning is always cheaper than renting.

You’ll have to read the op-ed to see his explanations.  An important qualification on his analysis is that in many cases what can be good for the buyer, such as putting no money down, may not be good for the economy if it results in additional foreclosures.

A Plug for Financial Fiasco

The distinguished Harvard economist Richard N. Cooper, former president of the Federal Reserve Bank of Boston, praises Johan Norberg’s Financial Fiasco: How America’s Infatuation With Homeownership and Easy Money Created the Economic Crisis in Foreign Affairs:

The economic crisis of 2008-9 will no doubt spawn dozens of books. Here are two good early ones….

Norberg, a knowledgeable Swede, provides a much more detailed account of the broader events of 2007-9, from the useful perspective of a non-American. He finds plenty of blame with all the major players in the U.S. financial system: politicians, who thoughtlessly pushed homeownership on thousands who could not afford it; mortgage loan originators, who relaxed credit standards; securitizers, who packaged poor-quality mortgage loans as though these were conventional loans; the Securities and Exchange Commission, which endowed the leading rating agencies with oligopoly powers; the rating agencies, which knowingly overrated securitized mortgages and their derivatives; and investors, who let the ratings substitute for due diligence. Senior management in large parts of the financial community lacked an attribute essential to any well-functioning financial market: integrity. But solutions, Norberg warns, do not lie in greater regulation or public ownership. Politicians and bureaucrats are not immune from the “short-termism” that plagues private firms.

The other book he praises, by the way, is Paul Krugman’s The Return of Depression Economics. And oddly, his list of Norberg’s villains doesn’t include one implied in the title: the Federal Reserve Bank, which issued the “easy money” that allowed the boom to happen. Purchase Financial Fiasco here or on Kindle.