The Mortgage Crisis
PLS 480 Greed and Need
Dr. Emerson
Sub Prime Problem
Delinquency rate 2 tenths of 1 % in 1979
Today 2% (10 times higher) Moyer’s Report http://www.pbs.org/moyers/journal/071820 08/watch.html
Context: Regulate or Deregulate
Constitution requires Congress regulate banks Regulation mostly by States. In 1913 FED authorized by Congress.
Little Regulation Until New Deal
Unregulated stock market Bank’s heavily invested in stocks Deposits not insured
Regulation
Glass Steagall FDIC Security & Exchange Commission
Freddie Mac/ Fannie Mae HUD in 1960s
Deregulation
Deregulation of thrifts No regulation of “derivatives” Mortgages can be sold in fractions. S&L scandal
Deregulation Continues
Long Term Capital Management bailout 1992 is orchestrated by FED. Congress repeals Glass Steagall in 1999.
Federal Reserve Bank Policies
Low interest Sub primes unregulated No action regarding defaults At odds with Congress
How does this happen?
Over price houses Piggy back sub prime Little or no documentation
Default Consequences
GAO report:
No
piggyback and documentation 0% OR little documentation 25-31% AND no documentation = 60%
Piggyback Piggyback
Why No Demands by Lenders?
Don’t know
If failure then resell at higher price Loan is asset not borrower’s capacity to repay
Options?
Do Nothing
Bail out Banks Bail out Homeowners
Bail out Banks and Homeowners
Break
Be back in 10 minutes for the analysis
Analyze Options
Freedom Liberty Reason Justice
Freedom
Act without constraint
Best option – nothing. Moral slippery slope if consequences mitigated by government.
Liberty
Collective standards for which all benefit.
Regulation – Pareto optimal Win and Lose
Reasoning
Biggest bang for the $.
Cause and Effects Long term versus short term
Justice
Other oriented
Know impact
Mitigate effects
What is Just?
Deuteronomy 23:19 (known)
Full disclosure of specified limits. Monitoring of practices by 3rd party.
Conclusions
FED basis for banks and customers Reinstate Glass Steagall Limit usury Derivatives with pedigrees Monitor speculation
Opposition will say…
Finance international Regulators captured by industry and costly Market simpler and quicker Need speculation for innovation
Citations
Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at http://hnn.us/articles/1849.html.
Bitner, Richard (2008). Inside the Subprime Debacle. U.S. News and World Report. 145 (2) 12. GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.
Citations
Jost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), 409-422
Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. Reynolds, Maura. (2008). Mortgages: Loan troubles hit new heights: foreclosure rate climbs to 2% for the 4th quarter. Home equity drop. Los Angeles Times. C-1.
Q and A
Postscript
Define issue
Use Library Resources, no Wikipedia (https://blackboard.csupomona.edu/webap ps/login/) See http://www.csupomona.edu/~library/databa ses/politicalscience.html
Postscript (cont.)
Use correct APA citations. See: http://owl.english.purdue.edu/owl/resource /560/01/ Looking for: timely, data (e.g. GAO), both sides of issue. NOT http://www.hillbillyreport.com/blog/bear_st earns//
Postscript (cont.)
Analysis: Freedom, Liberty, Reason and Justice Conclusions and Opposition argument
Power Point: Common Errors (http://www.youtube.com/watch?v=HLpjrHzgSRM) versus http://www.youtube.com/watch?v=vXFi7AdhhGk&f eature=related (good example)
Sub-prime mortgages
Class end