Paul Krugman is making my head explode

Zalco/bring back Sophie!

In a piece about moderate Dem candidates falling victim to what Krugman calls zombie economic theories, he says Republicans blamed the 2008 Great Recession field by sub prime loans on bankers giving unsound loans to People of Color. Krugman says the Republicans didn't outright say this bunk, but implied it. Has anyone here ever heard this accusation before, or is the Nobel Laureate making up a new narrative?

I paid close attention to the Great Recession and never heard this slander. I heard people bought more house than they could afford, banks did not require proper documentation of income and that the bad practices affected all ends of the market, save the highest. And yes, the poorest were responsible for more sub prime borrowing than the middle or the top.


From Krugman's column:


But right-wingers refused to accept the obvious. Instead, they pushed an alternative narrative in which liberals somehow caused the crisis by forcing poor innocent bankers to lend money to people of color (they weren’t usually that explicit, but that was the clear message).


https://www.nytimes.com/2020/02/17/opinion/bloomberg-buttigieg-economy.html

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Zalco/bring back Sophie!

PS Before coming to Hot Topics I was never exposed to much Fox News, so maybe they pushed such a story, but surely he NYT and WSJ would have picked up on it and let everyone know about that part of the conversation?

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dublinbay z6 (KS)

I don't remember hearing anything about liberals forcing innocent bankers into lending money to people of color who could not afford them, but I do remember that BANKERS were accused of greediness, giving out loans to anybody and everybody, whether they were loan-worthy or not. People of color were especially considered victims, taken in (as in, taken advantage of) by the "variable interest rate" loans that it turned out they couldn't afford later when the interest rates went up.

But I'm no financial wizard, so I may not fully understand what the problem was, but I thought it was the bankers who were responsible--too eager to make a profit and seducing the public with easy loans.

Kate

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Toby

Oh yes. I have heard many times specific references to people of color buying homes they couldn't afford. I'll bet some of the HT old-timers could pull up a few posts from that time.

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Zalco/bring back Sophie!

Kate, I remember the narrative as you described. And yes, we are starting to hear some things Bloomberg has supposedly said that were racist.

Hay, I get what you are saying about the crisis going back to Clinton's repeal of Glass Steagull, and I whole heartedly agree, but I got lost on the rest.

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dublinbay z6 (KS)

Toby, I don't think many people will disagree with your statement. But what I was disagreeing with was the contention in the OP that it was all a liberal plot. Those no-good liberals forced weak helpless bankers into giving bad loans to people of color? Somehow I never think of bankers as weak helpless innocents.

I do have a vague memory of some kind of pressure being exerted on the banks to make more loans available to lower income citizens, including especially people of color, but that doesn't mean liberals were pressuring bankers to make bad loans that they knew people of color would default on.

If I remember correctly, it had to do with the variable interest rates that came with the loans--and when the interest rates went up, the lower income borrowers could no longer afford the loans--which I could have predicted, so I assume bankers also knew that would happen. Let's face it--they knowingly offered bad loans. It was the lower income borrowers that were victimized and taken advantage of, not the bankers.

Kate

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Ziemia(6a)

"Instead, they [Republicans] pushed an alternative narrative in which liberals somehow caused the crisis by forcing poor innocent bankers to lend money to people of color (they weren’t usually that explicit, but that was the clear message)."

Yes, some fiscal conservatives (boot strap types) did say this. Maybe not in 2006 but soon thereafter.

Klugman should use more modifiers (aka 'some').

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katrina_ellen

Well anytime you lift a financial restriction like Clinton did, the buzzards (sub primer's) will swoop in. People saw it as a safe asset to put their money in-house prices don't go down in value do they? Theres lots of folks out there who are not educated in financial matters, they just thought it was a chance for them to own a home that they previously would not be able to attain. The subprimer's were having a field day.

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Kathy

Unscrupulous lenders loaned money to purchasers in a variety of ways. Overstating income and turning a blind eye to purchasers who had red flags. Then they bundled those bad-risky loans up with good ones and sent them to FannyMae who sold them around the world to investors. They knew when they loaned the money they were risky.

To top it off the lenders collected their losses and we paid the bill when the economy collapsed. I realize that is a simple theory and lacks details but the gist was a lot a lot of bad loans at the expense of our government.

More loans for low income started under Clinton and Bush ramped it up again is the way I understood it to happen. Bush also weakened the oversight making it worse. There was no one to blow that whistle and we see what happened.

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Zalco/bring back Sophie!

Thanks for the article, Hay. I didn't know about government incentives to increase home ownership this way.

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jerzeegirl (FL zone 9B)(9b)

Hmmm. My recollection is that it was actually George Bush Jr who started the catastrophe. (This is probably why republicans are trying to lay blame on democrats).

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Link

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carolb_w_fl_coastal_9b(zone 9/10)

Skipped down to say that there were plenty of comments here with just that talking point, back in the day. The idea that it was the fault of folks who took out the loans, and not the brokers who were pressuring people into doing it was most certainly promoted by plenty of pundits and footsoldiers.

I'm sure many people recall the CDOs that encouraged such pressure. 'Creative' investment vehicles indeed!

GOP and the libertarian/authoritarian oligarchs that fund them are really good at rewriting history and propagandizing to their own benefit.

P.S. Hubby still recalls George W talking about people being able to say 'welcome to my home' as he touted his administration's 'reforms'.

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Ziemia(6a)

Don't know why Bill Clinton was brought up. Was it because so many Trump supporters resort to "but Clinton"?

Anyways, home mortgage history has unsavory aspects.

This happened cuz of it:

"In the United States, the Fair Housing Act of 1968 was passed to fight the practice."

https://en.m.wikipedia.org/wiki/Redlining?wprov=sfla1

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Ziemia(6a)

Bush jr reference (from above comment)

But his housing policies and hands-off approach to regulation encouraged lax lending standards.

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Zalco/bring back Sophie!

Jerzeegirl, Thank you for the NYT piece on W's housing push. That was most interesting.

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Kitchenwitch111

I remember Bill Clinton getting blamed for this. And I agree that it was amped up under Boy George.

In the late '90's I was looking to buy a house, and one mortgage lender gave me an incredibly low monthly payment price. When I was interviewing another lender and told him of the big difference on the monthly payment that he was showing me, he explained that the other mortgage I was being offered was an interest-only payment, that would never amortize. This was not mentioned to me by the first lender.

I got a the conventional loan.

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soupgirl53

Big banks fought federal programs which mandated that the banks commit some of their lending dollars to community redevelopment in distressed economic areas but the banks complied with those programs which have been in in place for years and span several presidential games. The mortgage bubble burst had numerous causes, primarily greed for origination fees and the ability to pool and sell the loans to Fannie, Freddie and if the loans did not meet Fannie and Freddie's standards, to private finance companies who specialize in pooling and securitizing subprime mortgage loans. Think Countrywide, The Money Store and First Plus.


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patriciae_gw(07)

the selling point of an interest only loan was the idea that property values would keep zooming up and you would get massive appreciation that you cashed in when you sold and who cares that you never paid anything on the actual house. right.

Processing fees that were instituted during the astronomically high interest days of the early Reagan administration to make up for controls on interest were kept when interest rates came down (naturally) and that fueled the people making the loans. Because the mortgage was sold on it didn't matter that the people couldn't pay and you got your fees regardless. I remember a piece of property near here that sold about every two years and the people who bought lost it every time. Should be criminal to do that. I recall the aggressive selling to poor blacks just for this reason.

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soupgirl53

Agree, Patriciae. The origination fees were tempting and the ability to do a quarterly sale of mortgage loans to a securitization structure and take a big gain on sale each quarter boosted the stock price. But as with all good things, it was easy money and more and more people got into the prime and subprime mortgage loan origination business. Accordingly, it got harder and harder to originate prime and subprime loans as lenders would offer refinancing to their competitors customers and to keep the mortgage loan origination numbers high, some lenders forgot sound mortgage loan underwriting rules, such as no financing of second homes, no lending based on the anticipated appreciation of the real estate value and imprudent debt-to-income ratios, just to name a few of the problems.







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Kathy

I remember when Countrywide had much higher CD rates than every other bank/lender. It wasn’t too long after that til everything crashed.

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nancy_in_venice_ca Sunset 24 z10

There was a contingent on Hot Topics that blamed the lying and cheating home buyers for the collapse of the real estate market, and not the oh-so-innocent lenders, Countrywide included. The narrative tended to blame people of color for being grasping and overreaching in their home purchases, and completely ignored the scandal of lenders pushing qualified borrowers into subprime loans. The issue of the CDOs being sold as investments was ignored.

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Zalco/bring back Sophie!

Thank you all for showing me more facets of this situation. I appreciate the help.

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soupgirl53

Sadly for Bank of America, they bought Countrywide and wound up paying millions of dollars in settlements. I believe Money Store was bought by First Union, who, in turn, was purchased by Wachovia and Wachovia, in turn, was purchased by Wells Fargo who also had to pay millions of dollars to settle lawsuits.

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Sue 430

It was repeated over and over by conservatives that the Community Reinvestment Act was the cause of the financial crisis. They claimed that it forced banks into making loans to people with poor credit, when in fact what it says is that banks must lend in the communities where they accept deposits, and they must make these loans WITHOUT lowering credit standards. As a banker working in a low income area, I can assure you that we weren't making loans to people with bad credit sho couldn't afford the payments. The problem was not caused by people buying $50k houses, the problem was huge mortgages made to people with no income verification and mortgage companies and realtors who convinced appraisers to submit ridiculously high appraisals for the properties. Suddenly a lot of people were way upside down, causing them to walk away from properties. But the conservatives did try to blame it all on the poor people and on democrats for supporting the CRA

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haydayhayday

Zalco;

"Hay, I get what you are saying about the crisis going back to Clinton's repeal of Glass Steagull, and I whole heartedly agree, but I got lost on the rest."

I posted a response to that nonsense. That post is now gone. Nowhere did I mention Glass Steagull at all, but now that my post saying just that is gone.

Which is leaving me appearing to agree with Zalco's comment.

Which is why I'll delete the rest of my comments from this thread.

No problem for me.

Enjoy your bliss.

Hay


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Zalco/bring back Sophie!

Hay, I have no idea of what happened to your post clearly saying you were not referring to Clinton repealing Glass Steagall. In that post you pointed me to a piece by on NBC about Clinton's home ownership incentives. I can't imagine why anyone would delete such a simple exchange between two people.

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Ziemia(6a)

I don't understand why Houzz mods don't return them.

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jerzeegirl (FL zone 9B)(9b)

Carpet bombing a thread is most likely considered aggressive, impolite discourse and not in the spirit of lively give and take conversation. Perhaps it is for that reason that posts were not returned.

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Kathy

Many homes purchased with zero down were over $300,000. People who didn’t have the credit or down payt for that size mortgage. I saw in in the neighborhoods around me. People were in over their heads hoping for the market to keep rising on home prices. As soon as the recession hit they were underwater and just walked away.

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nancy_in_venice_ca Sunset 24 z10

In my job at the time, I was the one who confirmed employment, salary and bonus history for employees who were purchasing or refinancing their homes. I usually had an employee notify me that I would be receiving a call from their bank or mortgage company. At a certain point, very few employees were notifying me, but I heard through casual conversations about refinancing, home purchases. It seemed odd at the time, but I wasn't going to complain since I had to drop everything when a verification of employment arrived, and spend an hour looking up payroll records, and giving explanations how employees had the option of which tax year to take a bonus. And no, I did not know what the current year bonus would be.

Several employees ended up underwater after the crash because of their previous refinancing after the crash.

In the aftermath of the Great Recession, verifications were more extensive and prolonged.

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Zalco/bring back Sophie!

Kathy & Nancy, you are describing what I remember of the sub prime meltdown. It cut across all swaths of income. The key was buying a lot of house with the hope it's value would increase making the spend a worthy investment instead of quicksand.

Nancy, your time verifying income and such for your company reminded me of when I was a 20 year old intern at CBS News back in '88. It was one of my first days on the job. The phone rang and the caller asked if an Adrian Taylor worked there. It was a small bureau, I thought I knew everyone, and no, no one by that name worked there I replied. Just as I hung up, a producer, Clem Taylor walks over, Was that a call about Adrian Taylor working here? Yes, I said. That's me, Clem answered. I bet that was the mortgage company verifying my employment. Oops. I was mortified.

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nancy_in_venice_ca Sunset 24 z10

It cut across all swaths of income.

There were some investigations afterward -- I remember reading that persons of color were more likely to be pushed into subprime mortgages even if they qualified for a standard mortgage. The unscrupulous lenders were taking advantage of naive buyers whenever they could.

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Zalco/bring back Sophie!

I meant to say the over buying cut across all swaths. The outright swindling done by the banks, that, of course, was focused on poorer people.

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Zalco/bring back Sophie!

Jerzeegirl, I don't think Hay's comment correcting me for putting words in his mouth was carpet bombing. I certainly didn't take offense at his correction and I hope he didn't take offense at my misconstruing his words.

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