The BBC - especially the Today programme on Radio 4 - is showing ill-disguised delight at the current crisis of capitalism. Presenters such as John Humphrys have no doubt that it was as all caused by stupid, greedy capitalists and that a high priority now should be to ensure that these said capitalists do not get bailed out or rewarded or let off their crimes. His questioning of Alistair Darling, the Chancellor of the Exchequer, a short while ago was nearly all directed at attacking the idea of the innocent taxpayer being made to pay for the self-serving idiocy of bankers. He asked what the taxpayer was getting out of this.
It was, of course, a rare pleasure to hear Mr Humphrys suddenly develop an interest in the well-being of taxpayers. For many years he has suggested that the answer to any problem is for the government to spend more money on it and thus increase the tax burden. Leaving that to one side, what Mr Humphrys seemed to have trouble grasping is that we are dealing here the risk of a major recession and that the whole purpose of the Mr Darling's dramatic interventions was to try to prevent this happening. Mr Humphrys seemed unaware that banks are not like other businesses. They are central to the working of an economy. Incidentally, he also seemed unaware of the difference between spending money that disappears (as in spending it on a meal) and handing over money to banks that will in theory - and probably in reality - repay it.
Given the statist leanings of Mr Humphrys and other presenters, it is not surprising that the whole crisis is treated as a failure of capitalism and no effort is made to establish what role governments had in creating it. No, that is not entirely fair. I did hear Laurie Taylor, in an afternoon programme, searching for any academic economist who had forecast this crisis. He found a retired Professor Dale who had long ago warned about the change in the law that was known as Big Bang. This made it much easier for banks to own securities. He suggested - nearly 20 years ago - that the owning of securities by banks contributed to the Great Depression in America. He implicitly warned that Big Bang carried with it a risk of a repetition. This ascribing of at least a little responsibility to a government was unusual. There is much more scope, though, in this area.
Some may think, "How on earth could governments have contributed to the crisis?". I suspect there are a variety of ways but here, for a start, is quite an important one. On September 30th 1999 an article appeared in the New York Times headlined, "Fannie Mae Eases Credit To Aid Mortgage Lending".
Fannie Mae was the biggest underwriter of mortgage loans in America. I am no expert on American instituions but I understand it was an offshoot of government and in response to government pressure, according to the article, it was now going to "encourage...banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans."
Essentially this was an official move to embark on sub-prime lending - the very sub-prime lending that is at the core of the current financial crisis. Sub-prime lending means extending mortgages to people whose credit is "not good enough".
Part of the idea was to make more profit. But the article plainly states that Fannie Mae "has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people". You can easily imagine that Clinton and other Democrats thought it was a generous and popular act to get Fannie Mae to underwrite lending to the poor. But, as we now know, it was a disastrous act. The poor can't pay their loans back. The institutions that rely on them to pay back go bust.
Impressively, the writer was aware of this danger: "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."
That was spot on.
Let us lay to rest the idea that this crisis is entirely made by greedly capitalists. One President Clinton, that figure much-loved by the Left-wing consensus at the BBC, was one of its creators.
The New York Times article is here.
Posted by James Bartholomew • Indexed in Media, including BBC bias • Off the subject • Politics
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Take a look at the 2000 City Journal article "The Trillion Dollar Shakedown" by Howard Husock.
Posted by: Laban at October 18, 2008 10:46 PM
There are a number of economists who predicted the collapse, most notably Peter Schiff of Euro Pacific Capital. Check out his website and youtube appearances. Also his book "Crash Proof: How To Survive The Coming Economic Collapse" (published Feb 2007) spells it out and what he predicts will happen next.
It's pretty scary stuff.
Posted by: Peter Plus at October 28, 2008 03:49 PM
It is good to see you quoting Harry Benson's research in an earlier blog about cohabitation.
Lord Turner of Ecchinswell, Chairman of the FSA, said, according to the uncorrected transcript of oral evidence taken before the Treasury Committee on Monday 3 November 2008:
"I believe that Northern Rock's accounts show that the average loan to value on new lending in 2007 was 79%. Now that in and of itself would
not immediately tell you that there was a major problem .......... the creditworthiness of a mortgage is always a combination of the asset
cover and the income cover. I will accept entirely that there was a minority of the Northern Rock book which had some particular features but I think, looking at the average figures at that time, whether it was loan to value ratios or whether it was the arrears' experience then being experienced, you would not necessarily have seen Northern Rock as an outlier in terms of quality of mortgages."
It must be correct that "the creditworthiness of a mortgage is always a combination of the asset cover and the income cover", but surely for a
loan with a projected duration of 25 years or so, a significant part of the risk is connected with the borrower's ability to maintain the income cover over a long period?
Trends in mortgage borrowers' repayment difficulties [Council of Mortgage Lenders Housing Finance Issue 11/2005] suggests:
- The incidence of repayment difficulty and arrears increased with the number of children and among lone parents with children.
- Households with savings were much less likely to suffer from mortgage repayment problems, whereas MPPI [Mortgage Payment Protection Insurance] only has a marginal effect.
- Married households tend to have the lowest incidence of repayment difficulties, whereas divorce and separation tend to increase mortgage
repayment problems.
The extraordinary increase in cohabitation, particularly during the last decade, combined with births to unmarried parents - now around 50%
to the White/Anglo population - has exacerbated both our social and economic problems.
This and other evidence suggests that the people in arrears with their mortgage payments are much more likely to be cohabiting than married couples, and it is this recent and rapid increase in cohabitation that has probably triggered the repossession boom and the accompanying house
price and economic slump. For example, research shows "the difference in family breakdown risk between married and cohabiting couples is
sufficient that even the poorest 20% of married couples are more stable than all but the richest 20% of cohabiting couples" [Harry Benson].
The mortgage lenders are being very coy about the arrears and cohabitation figures. There was a very interesting article recently in the East Anglia Daily Times, "Mutuals weathering the financial storm" [14 October 2008]. "At Ipswich Building Society, the average LTV is 56.3%, with a maximum on new lending of 75%, while Saffron's is 55%. Norwich & Peterborough's LTV is 37% for the mortgage book, and 54% for lending completed in 2008, while Britannia's is 42% in total, and 54% for new lending in 2008." These figures suggest to me that the deposits these Societies require are sufficiently high to deter the majority of cohabiting couples who probably went with Northern Rock and the other more aggressive lenders.
There is some evidence - anecdotal, I am afraid - that parents are more likely to give money for deposits to married offspring than those who
cohabit. My belief is that because the more aggressive lenders were more willing to lend with little or no deposit and more readily to cohabiting couples, they are suffering much more from mortgage payment arrears than the mutual societies. In effect it is the lending to
cohabiting couples - who break up at a much faster rate than married couples - that has brought down the financial system both here and in
the US.
Mortgage brokers ask applicants for their marital status. Mortgage lenders categorise borrowers as 'single', 'joint', or 'multiple'. That is unsatisfactory. It should be possible to classify those in arrears by marital status if a proper picture of a lender's loan book is to be considered.
I realise that the government mantra "we shall not promote one type of family structure as opposed to another" has imbued the political
landscape with a 'correctness' which is commonly accepted, especially by major mortgage lenders. To this extent they are culpable.
Posted by: Nick Gulliford at November 12, 2008 07:51 AM
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Hi James,
You are right to name government as the fundamental cause of the financial crisis. The primary way in which it is to blame is in its manipulation of interest rates: the state forced interest rates down, which punishes a long-term outlook in favour of immediate consumption. Like all price controls, this is unsustainable, and we are now seeing reality reasserting itself.
The main factor preventing people from seeing this is moral philosophy. Because the interest rate manipulations were done by government officials concerned with the "public interest", and because the dominant moral philosophy today is altruism, people prefer to blame those "greedy" bankers for our problems, even though this is unjust.
As Ayn Rand pointed out, in the absence of government intervention, rational self-interested action is a powerful force for good in the economy and in the world in general. The current crisis has occurred because government intervention has twisted the profit motive and set it against us all.
If we want to defend capitalism, we must defend the moral philosophy of egoism which underlies it.
I wrote about this in more detail on my own blog here.
Many thanks!
Andrew
Posted by: Andrew Medworth at October 18, 2008 11:16 AM