Spreading the Manure

Does the story you tell of the Great Financial Crisis leave out the irrational, spreading panic that arbitrarily devalued perfectly fine mortgage-backed security assets well in excess of actual defaults, which have been higher since (during the pandemic) without causing the same crisis?

~ rsm spreading some manure

Spreading bullshit is a practice similar to the phenomena of self-deception. Whether done consciously or not, the bullshitter has no care for the actual facts or truth, only that they can make others believe their bullshit. Case in point is the bullshit spread by RSM above, who makes the claim that mortgage defaults were higher during the pandemic and yet caused no global crisis. In fact, his claim is false. The fact is one can shop around for the numbers (massaged statistics) one wants and that fit one’s ideological bias; the charts are all over the place, clearly showing that they have been massages to fit a specific narrative. Consider that even by more recent measures RSM’s bullshit claims are refuted:

Under the effects of the coronavirus crisis, the mortgage delinquency rate in the United States spiked to 8.22 percent in the second quarter of 2020, just one percent down from its peak of 9.3 percent during the subprime mortgage crisis of 2007-2010. Following the drastic increase directly after the outbreak of the pandemic, delinquency rates started gradually declining and reached 3.45 percent in the third quarter of 2022.

statista, Mortgage delinquency rate in the U.S. 2000-Q3 2022, Jan 13, 2023

As the evidence below shows the prevalence of predatory lending and its consequent mortgage defaults were the cause of the GFC, not some irrational panic, albeit once the wider societal ramifications of the near collapse of the global financial system did spread fear and panic. But this was an effect of not the cause of the GFC. RSM seeks to put the cart-before the horse because (as his comments on RWER show) he favors an unregulated securities market where banks and inventors can turn the global economy into a casino economy. Sophistry indulges in half-truths, falsehoods, and outright lies to make others believe their bullshit. In RSM’s story the shit is wearing the pants; there never was a case of predatory lending; homeowners were not conned out of stable and safe conforming loans into predatory loans inevitably destined to cause them to default. And the rising default rates we not due to the toxic debt of homeowners foreclosed on by predatory banks. They just turned in their keys out of irrational panic!

[T]he age of chivalry is gone. That of sophisters, economists, and calculators, has succeeded; and the glory of [the world] is extinguished for ever.

~ Edmund Burke (1790) cited in Bernstein (2004), A Perilous Progress, 185.

I always love that kind of argument. The contrary of a thing isn’t the contrary; oh, dear me, no! It’s the thing itself, but as it truly is. Ask any die-hard what conservatism is; he’ll tell you that it’s true socialism. And the brewers’ trade papers: they’re full of articles about the beauty of true temperance. Ordinary temperance is just gross refusal to drink; but true temperance, true temperance is something much more refined. True temperance is a bottle of claret with each meal and three double whiskies after dinner.

~ Aldous Huxley, Eyeless in Gaza (1936), in Hardcastle’s Bullshit and Philosophy.

Bullshit and Truth … [B]ullshit results from the adoption of lame methods of justification, whether intentionally, blamelessly or as a result of self-deception. The function of the term is to emphatically express that a given claim lacks any serious justification, whether or not the speaker realizes it. By calling bullshit, we express our disdain for the speaker’s lack of justification, and indignation for any harm we suffer as a result.

~ Scott Kim Brough, On Letting it Slide, in Hardcastle’s Bullshit and Philosophy.

When … [one adopts] poor methods, such as the “method” of cherry-picking facts to support a political agenda, the result is bullshit. And it’s bullshit to repeat the results not only because what is repeated is bullshit, but because the method of arriving at the opinion in question is not to be trusted. Warmed over bullshit is not merely a stale imitation of the original, but a fresh deposit that compounds the methodological faults of the original.

~ Scott Kim Brough, On Letting it Slide, in Hardcastle’s Bullshit and Philosophy.

The subprime crisis didn’t have to happen. It could have been stopped. It is the story of how greed unchecked can bring down the global financial system. Thanks to Greenspan and ilk like him predatory lending was given a green light. Under Greenspan’s watch:

“Federal regulators gave subprime lending their blessing by leaving subprime loans untouched, even though many of the loans violated the most basic tenet of lending: that no loan should be made unless the borrower can repay. Worse yet, federal regulators actively resisted using their substantial powers of rule-making, examination, and sanctions to crack down on the proliferation of virulent loans. At the same time, they gave banks the green light to invest in subprime mortgage-backed securities and CDOs, leaving the nation’s largest financial institutions awash in toxic assets (Subprime Virus).”

Predatory lending goes back thousands of years, but subprime loans that underpinned the GFC were being reported even in the early 1990s. What started as a niche market of selling risky subprime loans to the poor and credit challenged using dodgy predatory practices eventually moved from sketchy to mainstream institutions on Wall Street. Feeding the mortgage machine was the name of the game. From lenders’ perspective, the mortgage machine needed constant feeding in order to generate constant fees. Volume was what mattered.

Lenders dropped underwriting standards and conned borrowers who qualified for cheap prime loans into agreeing to costlier subprime loans and in addition saddled borrowers the with predatory fees. Countless sad examples of these predatory financial practices have been documented. These subprime loans were by design meant to default so upon a borrower’s’ default they could be flipped. Lenders targeted just such individuals with NINJA loans knowing they would default so they could “flip” the borrowers into more expensive loans under the pretense they were helping them.

Each “loan flip” resulted in more fees for the brokers and lenders, which they tacked onto the principal. With each flip, the borrowers’ equity shrank and their monthly payments went up, until their equity disappeared and they could no longer qualify for loans. The easiest loans to flip were those that borrowers couldn’t afford in the first place. There is damming evidence of other professionals (banks, accountants, lawyers etc. engaging in collusion with lenders/mortgage brokers to commit outright fraud with lenders.

It is easy to blame the SEC for failing in its enforcement, but this ignores the ideologiical (type III) bias of individuals like Alan Greenspan et. al. whose ideological prejudices precluded them from actually doing their jobs and regulating the financial markets as they were tasked to do. In addition, regulatory capture was a real issue resulting in the foxes in the hen house and/or defunding of agencies so they were under staffed and unable to properly perform their regulatory roles. Yet, many so-called “liberals” who were actually neoliberals pushing neoliberal economic doctrines about the “free market” did just that, blaming the SEC rather than looking for deeper causes. And this form of pernicious Ideological III bias persists to this day with predatory finance still remaining largely unregulated in the United States.

Another frequent trope trotted out is that the government GFCs Fannie Mae and Freddie Mac caused the GFC. Half-truths really are nothing more than propaganda and lies used for ideological puposes. The full truth is in the details. The GSEs eventually became private entities with shareholders and up until Wall Street got into the subprime game only accepted what is called conforming loans opposed to non-confroming loans. The difference between these two forms of underwriting are crucial to understanding how Wall Street and putting foxes in the hen house corrupted the role of GSEs and the entire housing market.

A conforming loan is a mortgage that meets the dollar limits set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Freddie Mac and Fannie Mae who set the gold standard up until the crowding out effect of Wall Street’s’ predatory financing practices. Conforming loans adhere to strict underwriting standards; incomes are verified, credit records checked, and all due diligence is performed to assure that the borrower meets such strict standards that they qualify for the loan. And most importantly, the terms of the loan are designed to assure that they are not so onerous as to be the cause of default. In addition, the financial industry lobbied hard to keep hidden their default rates so they could milk the cash cow of predatory lending as long a they possibly could. So while Fredde Mae and Freddie Mac were only processing conforming loans Wall Street and its predatory lenders were flooding the market with non-conforming loans that guaranteed massive defaults while enriching the 1% at the top and wiping out regular homeowners conned into accepting these loans, sometimes even switching from a safe conforming loan into a non-conforming predatory loan. By 2006 80% of predatory “private label” non-conforming subprime loans were being securitized by Wall Street and given AAA ratings by ratings agencies despite the real underlying rot that was being sold (i.e., pass the trash) by market makers like Goldman Sacks ([13:55_14:14], [14:54_15:27]).

Eventually the crowd out effect undermined the ability of conforming loans to compete thereby driving what before had been responsible lending institutions to “get into the game” and start selling subprime loans (or in the GSEs case, buying them) and join the race to the bottom. Predatory lenders and their greedy Wall Street financiers who were packaging up these toxic time bombs didn’t worry about solvency; they were to busy making profits and “passing the trash” to unwary investors around the world who were being told by ratings agencies these little turds were AAA rated. In other words, the shite was wearing the pants!

The predatory banks couldn’t get enough of these toxic turds. They flooded middle-class neighborhoods with freshly minted salespersons who would canvass neighborhoods door-to-door selling these time bombs, often trying to get homeowners out of safe fixed-rate conforming loans and into their predatory products. “According to the Wall Street Journal, 55 percent of all subprime loans in 2005 went to people with sufficiently high credit scores to qualify for prime loans (Subprime Virus).” We know, for they tried to do it to us. Before the subprime driven GFC my wife and I were daily barraged with mortgage brokers seeking to move us from a 30-year fixed into one of Wall Street’s new subprime adjustable-rate loans that Greenspan crowed so glowingly about. I knew this was a shell game and Ponzi scheme even then. We finally invited one of the poor ignorant salespersons into our home so we could witness their BS selling points for ourselves (never once intending to fall for this short-sighted Ponzi scheme being waged against middle class Americans with little financial education). She sat there flipping pretty pie and bar charts reciting her sales mantra (“You will save $600 a month on payments”) never once discussing the downside — when interest rates change so does your payment, or interest only payments don’t decrease the principle, or when balloon payments kick-in and you can’t refinance as promised was so easy, you are essentially screwed. She made a point of telling us she herself had one of these exotic little financial monstrosities birthed on Wall Street. Most likely she lost her home with the rest of the fools who bought into this Ponzi scheme. It should not come as a surprise that by 2009 default rates were skyrocketing, going from 5 percent in 2004, to 8 percent in 2008, to 16 percent in 2006, when finally, the music stopped, and many homeowners ended up without a chair to sit in.

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