We explore a mostly undocumented but important dimension of the housing market crisis: the role played by real estate investors. Using unique credit-report data, we document large increases in the share of purchases, and subsequently delinquencies, by real estate investors. In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default. Our findings have important implications for policies designed to address the consequences and recurrence of housing market bubbles.
Yes, there’s no question that the housing bubble and subsequent collapse was fueled by extensive fraud at the level of the homeowner, particular the speculators who closed on multiple homes on the same day and claimed that each one would be owner-occupied.
Which is why the best response would have been for the government to facilitate the foreclosure process rather than obstruct it. In addition, the government should have encouraged the pursuit of deficiency judgments in the case of recourse mortgages, as well as torts for homeowner fraud.
Getting it right and putting your money where your mouth is are two very different things. Let’s say you believe Portugal is the next Greece. To buy Portugal protection or short Portugese bonds, you are short that coupon at that price so you are paying out the yield to maturity on Portugese bonds while earning libor. That cost is enormous…approximately 12% per year. So, one year from now, Portugese debt has declined in value by 10% and you can pat yourself on the back and say how right you were but you just lost 2%.
It’s in general a good document? In the site of St.Louis FED I remember there was something about money multiplier and, you know, it’s not so plausible.
Thanks Unforgiven. I saw your reply on the Mike Norman’s blog and came here as you have suggested. I have been googling the topic like crazy, but so far all I can come up with are things that deal with the primary dealers, nothing on the statutes governing the Fed. The thing is, I’m pretty sure I read something about this on one of the MMT blogs recently, with a link to a web page discussing the statute. But I can’t locate it now.
Sorry to go off topic, but I have a Fed operations question: I was under the impression that the Fed could not legally buy treasury bonds in the primary market but that it had to purchase them in the secondary market. But I believe I read somewhere recently – perhaps here – that the Fed is permitted a limited amount of primary market purchases each year. Can anybody direct me to an authoritative answer to this question. I’m under the gun to get a correct answer because I need to get it right in an essay I’m publishing. Thanks in advance for any help!
“Understanding Open Market Operations” by Michael Akhtar
“The Federal Reserve is prohibited by law from adding to its net position by direct purchases of securities from the Treasury—that is, the Federal Reserve has no authority for direct lending to the Treasury. As a consequence, at most the Desk’s acquisition at Treasury auctions can equal maturing holdings.”
Interesting Dimitri Papadimitrious paper up at Levy Institute. The Levy Institute, with underwriting from the Labour Institute of the Greek General Confederation of Workers, has helped design and implement a program of direct job creation throughout Greece. Two-year projects, financed using European Structural Funds, have already begun… For those interested in the policy side, the report also provides a solid introduction to the conceptual justification behind a direct job creation program along the lines of Hyman Minsky’s “employer of last resort” idea… http://www.multiplier-effect.org/?p=2822
I suppose the Fed could set up a lending facility to finance this Eurozone-wide, call it the Eisenhower Fund, or to minimize the domestic political blowback, the Reagan Fund.
Aside from the human suffering it would relieve,which is reason enough to do it, one advantage of this approach is it wouldn’t take long for state governors here to ask why they can’t participate in the program (Austerians could hardly complain, it wouldn’t add to the federal deficit).
@beowulf, Sounds like they have one foot on the brake and another on the accelerator. Austerity-spending cuts versus job creation on the other. How does that work anyway? Stay in neutral?
Bring it here to the US? With our dysfunctional congress, no chance.
@Unforgiven, I thought I would start a popcorn concession during the debt debate. Some people around here thought we were going straight to hell and still do. But you know what they say: “you can’t fix stupid.” Some are still in awe why interest rates are not at 20% already. It’s coming they say, it’s coming.
Monica Smith Reply: December 25th, 2011 at 5:45 am
@Unforgiven, The Super Committee was designed to fail. Conservative politicians prefer planning to fail because failure is more certain than success. Moreover, failure promotes longevity in office while success is terminal. There’s nothing to “try and try again.”
Ivan Reply: December 25th, 2011 at 11:05 am
Yes Monica. The supercommittee was designed to fail so that your boy Obama can rail on the supposed “do nothing” congress. This website is about monetary operations. The more its participants identify themselves with one party or another reduces the chances that it will ever be taken seriously.
You know the best way to get attention? Warren forms a new Macro fund based on MMT theories and manages it for a fraction of a normal hedge fund. When he makes $1bln off his bets, he’ll be taken seriously. Talk is cheap. Actions are critical.
I remember talking to a macro trader a few years back when the yield curve was very steep. He was completely convinced that rates were going higher. What he didn’t understand is that an upward sloping yield curve makes shorting the bond market extremely expensive. Shorting the housing market was also very expensive. In both cases, time is not on your side.
That’s where the magic happens. If the Fed created a lending facility for state governments– thereby waiving the 6 month time limit on muni loans– Congress wouldn’t have to vote for it since 13(3) (as amended by Dodd-Frank) allows them to establish lending facilities to benefit classes of individuals, partnerships and corporations. All sovereign governments (whether of Nations or US States) are a form of corporation known as a “body politic and corporate”.
United States v. Maurice, 2 Brock. 96, 109 (CC Va. 1823) (Marshall, C. J.) (“The United States is a government, and, consequently, a body politic and corporate”)
Cotton v. United States, 11 How. 229, 231 (1851) (“Every sovereign State is of necessity a body politic, or artificial person”).
Cong. Globe, 42d Cong., 1st Sess., 661-662 (1871) (Sen. Vickers) (“What is a State? Is it not a body politic and corporate?”); id., at 696 (Sen. Edmunds) (“A State is a corporation”). http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=491&invol=58
except why would the fed want to do that if Congress doesn’t want to?
beowulf Reply: December 28th, 2011 at 4:17 am
Unlike half of Congress, Bernanke realizes that monetary policy is simply “pushing on a string” and that the economy is starving for additional govt spending. The Senate would approve, the House would object but since the Administration would be supportive (they tried to establish an infrastructure bank created in that Jobs bill that went nowhere), there’s nothing really standing in the Fed’s way.
I read something the other day, not sure if its true, that once the Fed chairman states how he’ll vote in a FRB or FOMC meeting, by custom the other Fed governors vote with him (and in FOMC, the NY Fed president does the same). If that’s so, I guess its Bernanke’s call if the FRB would approve something like this.
somebody here said in response to my comments of mr. mosler predicted every major collapsetoday including the.com bubble and real estate bubble. can someone point to specific articles or other material on the web documenting this? I am particularly interested in his rationale for the then upcoming real estate bumble.
Here is one from 1999 http://www.epicoalition.org/docs/squeeze.htm . Trust me he’s and other MMT intellectuals have been very accurate with predictions. I guess its fairly ez to make predictions when you have the right model. There have been a few misses. Its hard to get timing right on anything.
you can go back a few years with this blog and look at the bulletin board at http://www.mosler.org
In mid 06 I said it looked like the deficit was too small to continue to support the credit structure and that the economy’s growth would slow
until the deficit got over 5% of GDP, which is pretty much what happened.
I didn’t specifically predict the real estate and/or financial crash because it didn’t need to happen.
it all happened the way it did because of errant policy.
right, fiscal adjustment/payroll tax suspension and my rental proposal for mtg foreclosures
Monica Smith Reply: December 25th, 2011 at 6:20 am
@WARREN MOSLER, The real estate crash was engineered as a follow-on to the Savings and Loan crisis of the early ’80s. It was a multi-pronged effort, relying on urban renewal to hollow the cities out, the virtual elimination of the capital gains tax on homes, as Greenspan announced (about 1993), “to liberate the equity Americans had accumulated in their houses for the market” and then, to top it all off, Dubya’s announcement of the “ownership society” in February of 2003. The S&L debacle involved flipping raw land; the housing bubble involved flipping houses people didn’t need. Though, for a time, the latter had the “beneficial” side-effect of propping up the sale of shoddy imported appliances and furnishings. The “policy” position was the notion that lots of people living close together are trouble. Spread ’em out, put ’em on cages with wheels and they’ll be a lot easier to handle. That was the premise for “urban renewal,” dreamed up by people who hate living in cities.
and if they hadn’t let aggregate demand collapse in Aug. 2008 by, for example,
suspending FICA debits, there wouldn’t have been ‘the crash’
Fundamentally, by definition, in real terms, we can ‘afford’ what we can construct,
though it is possible to construct to the point where there aren’t sufficent man hours to maintain it.
but seems we’re quite a ways from there.
Ivan Reply: December 25th, 2011 at 10:58 am
Blaming Bush? Are you kidding? Not the CRA? Not the expansion of the CRA under Clinton? Not the ever increasing congressional mandate for both FNMA and FHLMC to lend or guarantee an ever larger portion of their portfolio to those below the mediam income when only 17% of those in California (30% of the housing stock) could afford the median priced home? Not Barney Frank saying he’s willing to roll the dice on this????
Oh..I understand…it’s Bush. Everything is Bush. I guess I’ll vote for Obama because he said all his problems in 3 years in office are because of Bush as well. 50 years from now…all Bush. All his fault.
Not exactly news but ……
http://www.thestreet.com/story/11345976/1/fed-flipping-fueled-housing-collapse.html
Reply
Monica Smith Reply:
December 26th, 2011 at 5:54 am
@Monica Smith, Here’s the original study in pdf
http://www.newyorkfed.org/research/staff_reports/sr514.pdf
SUMMARY
Reply
WARREN MOSLER Reply:
December 27th, 2011 at 9:10 am
yes, but nothing that meant we had to let unemployment gap from 5-10%
all we needed, and still need, is a simple fiscal adjustment.
see ‘the 7 dif’
Reply
ESM Reply:
December 26th, 2011 at 11:11 am
@Monica Smith,
Yes, there’s no question that the housing bubble and subsequent collapse was fueled by extensive fraud at the level of the homeowner, particular the speculators who closed on multiple homes on the same day and claimed that each one would be owner-occupied.
Which is why the best response would have been for the government to facilitate the foreclosure process rather than obstruct it. In addition, the government should have encouraged the pursuit of deficiency judgments in the case of recourse mortgages, as well as torts for homeowner fraud.
Reply
WARREN MOSLER Reply:
December 27th, 2011 at 9:14 am
or my foreclosure proposal on this website
Reply
Getting it right and putting your money where your mouth is are two very different things. Let’s say you believe Portugal is the next Greece. To buy Portugal protection or short Portugese bonds, you are short that coupon at that price so you are paying out the yield to maturity on Portugese bonds while earning libor. That cost is enormous…approximately 12% per year. So, one year from now, Portugese debt has declined in value by 10% and you can pat yourself on the back and say how right you were but you just lost 2%.
Reply
Monica Smith Reply:
December 25th, 2011 at 11:49 am
@Ivan, Money is to be spent, not played with. People who play with money should expect to lose it.
Reply
Ivan Reply:
December 25th, 2011 at 11:53 am
What exactly does that mean in your skewed view of economics and society?
Reply
WARREN MOSLER Reply:
December 27th, 2011 at 9:06 am
you two need to meet offsite and work this out, thanks
WARREN MOSLER Reply:
December 27th, 2011 at 9:03 am
hey, don’t be giving away all those insider secrets!
and don’t forget that biblical admonition about pearls and swine…
;)
Reply
@Ramanan,
It’s in general a good document? In the site of St.Louis FED I remember there was something about money multiplier and, you know, it’s not so plausible.
Reply
Thanks Unforgiven. I saw your reply on the Mike Norman’s blog and came here as you have suggested. I have been googling the topic like crazy, but so far all I can come up with are things that deal with the primary dealers, nothing on the statutes governing the Fed. The thing is, I’m pretty sure I read something about this on one of the MMT blogs recently, with a link to a web page discussing the statute. But I can’t locate it now.
Reply
Ramanan Reply:
December 24th, 2011 at 2:35 pm
@Dan Kervick,
Forgot the link in #5
http://research.stlouisfed.org/aggreg/meeks.pdf
Reply
Dan Kervick Reply:
December 25th, 2011 at 12:55 am
@Ramanan, Thanks Ramanan.
Reply
Sorry to go off topic, but I have a Fed operations question: I was under the impression that the Fed could not legally buy treasury bonds in the primary market but that it had to purchase them in the secondary market. But I believe I read somewhere recently – perhaps here – that the Fed is permitted a limited amount of primary market purchases each year. Can anybody direct me to an authoritative answer to this question. I’m under the gun to get a correct answer because I need to get it right in an essay I’m publishing. Thanks in advance for any help!
Reply
Unforgiven Reply:
December 24th, 2011 at 1:22 pm
@Dan Kervick,
Here’s the content of my post on Mike Norman’s blog:
@Dan Kervick –
I’m coming up with this and that on the subject (I’m not well versed in it).
Here’s something fairly recent:
http://www.newyorkfed.org/markets/lttreas_faq.html
Looks like there’s a limit on the number of offers per issue as well.
Perhaps try this query in google:
fed “primary dealer” 35 site:nyfed.org
Or the like. Anything after “site:” will limit the results to pages from that site. No space after the colon.
Perhaps someone else here can chip in some more info?
Reply
Ramanan Reply:
December 24th, 2011 at 2:05 pm
@Dan Kervick,
This?
“Understanding Open Market Operations” by Michael Akhtar
“The Federal Reserve is prohibited by law from adding to its net position by direct purchases of securities from the Treasury—that is, the Federal Reserve has no authority for direct lending to the Treasury. As a consequence, at most the Desk’s acquisition at Treasury auctions can equal maturing holdings.”
Page 37 of pub/ Page 41 of pdf.
Reply
Interesting Dimitri Papadimitrious paper up at Levy Institute.
The Levy Institute, with underwriting from the Labour Institute of the Greek General Confederation of Workers, has helped design and implement a program of direct job creation throughout Greece. Two-year projects, financed using European Structural Funds, have already begun… For those interested in the policy side, the report also provides a solid introduction to the conceptual justification behind a direct job creation program along the lines of Hyman Minsky’s “employer of last resort” idea…
http://www.multiplier-effect.org/?p=2822
I suppose the Fed could set up a lending facility to finance this Eurozone-wide, call it the Eisenhower Fund, or to minimize the domestic political blowback, the Reagan Fund.
Aside from the human suffering it would relieve,which is reason enough to do it, one advantage of this approach is it wouldn’t take long for state governors here to ask why they can’t participate in the program (Austerians could hardly complain, it wouldn’t add to the federal deficit).
Reply
jonf Reply:
December 24th, 2011 at 4:52 pm
@beowulf, Sounds like they have one foot on the brake and another on the accelerator. Austerity-spending cuts versus job creation on the other. How does that work anyway? Stay in neutral?
Bring it here to the US? With our dysfunctional congress, no chance.
Reply
Unforgiven Reply:
December 24th, 2011 at 5:25 pm
@jonf,
Dysfunction is the only thing that saved us from the Super Committee!
Reply
jonf Reply:
December 24th, 2011 at 5:43 pm
@Unforgiven, I thought I would start a popcorn concession during the debt debate. Some people around here thought we were going straight to hell and still do. But you know what they say: “you can’t fix stupid.” Some are still in awe why interest rates are not at 20% already. It’s coming they say, it’s coming.
Monica Smith Reply:
December 25th, 2011 at 5:45 am
@Unforgiven, The Super Committee was designed to fail. Conservative politicians prefer planning to fail because failure is more certain than success. Moreover, failure promotes longevity in office while success is terminal. There’s nothing to “try and try again.”
Ivan Reply:
December 25th, 2011 at 11:05 am
Yes Monica. The supercommittee was designed to fail so that your boy Obama can rail on the supposed “do nothing” congress. This website is about monetary operations. The more its participants identify themselves with one party or another reduces the chances that it will ever be taken seriously.
You know the best way to get attention? Warren forms a new Macro fund based on MMT theories and manages it for a fraction of a normal hedge fund. When he makes $1bln off his bets, he’ll be taken seriously. Talk is cheap. Actions are critical.
I remember talking to a macro trader a few years back when the yield curve was very steep. He was completely convinced that rates were going higher. What he didn’t understand is that an upward sloping yield curve makes shorting the bond market extremely expensive. Shorting the housing market was also very expensive. In both cases, time is not on your side.
WARREN MOSLER Reply:
December 27th, 2011 at 9:01 am
i guess you still take it seriously…
;)
roger erickson Reply:
December 30th, 2011 at 12:21 am
@Unforgiven, More accurate to call it miss-function. We keep trying to shoot ourselves in the foot, but, luckily, keep missing.
Russian miss-function.
beowulf Reply:
December 27th, 2011 at 3:46 am
@jonf,
That’s where the magic happens. If the Fed created a lending facility for state governments– thereby waiving the 6 month time limit on muni loans– Congress wouldn’t have to vote for it since 13(3) (as amended by Dodd-Frank) allows them to establish lending facilities to benefit classes of individuals, partnerships and corporations. All sovereign governments (whether of Nations or US States) are a form of corporation known as a “body politic and corporate”.
United States v. Maurice, 2 Brock. 96, 109 (CC Va. 1823) (Marshall, C. J.) (“The United States is a government, and, consequently, a body politic and corporate”)
Cotton v. United States, 11 How. 229, 231 (1851) (“Every sovereign State is of necessity a body politic, or artificial person”).
Cong. Globe, 42d Cong., 1st Sess., 661-662 (1871) (Sen. Vickers) (“What is a State? Is it not a body politic and corporate?”); id., at 696 (Sen. Edmunds) (“A State is a corporation”).
http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=491&invol=58
Reply
WARREN MOSLER Reply:
December 27th, 2011 at 9:22 am
except why would the fed want to do that if Congress doesn’t want to?
beowulf Reply:
December 28th, 2011 at 4:17 am
Unlike half of Congress, Bernanke realizes that monetary policy is simply “pushing on a string” and that the economy is starving for additional govt spending. The Senate would approve, the House would object but since the Administration would be supportive (they tried to establish an infrastructure bank created in that Jobs bill that went nowhere), there’s nothing really standing in the Fed’s way.
I read something the other day, not sure if its true, that once the Fed chairman states how he’ll vote in a FRB or FOMC meeting, by custom the other Fed governors vote with him (and in FOMC, the NY Fed president does the same). If that’s so, I guess its Bernanke’s call if the FRB would approve something like this.
That or he was licking his cat
Reply
somebody here said in response to my comments of mr. mosler predicted every major collapsetoday including the.com bubble and real estate bubble. can someone point to specific articles or other material on the web documenting this? I am particularly interested in his rationale for the then upcoming real estate bumble.
Reply
jcmccutcheon Reply:
December 23rd, 2011 at 5:39 pm
@Nick Boyd,
Here is one from 1999 http://www.epicoalition.org/docs/squeeze.htm . Trust me he’s and other MMT intellectuals have been very accurate with predictions. I guess its fairly ez to make predictions when you have the right model. There have been a few misses. Its hard to get timing right on anything.
Reply
WARREN MOSLER Reply:
December 23rd, 2011 at 9:34 pm
you can go back a few years with this blog and look at the bulletin board at http://www.mosler.org
In mid 06 I said it looked like the deficit was too small to continue to support the credit structure and that the economy’s growth would slow
until the deficit got over 5% of GDP, which is pretty much what happened.
I didn’t specifically predict the real estate and/or financial crash because it didn’t need to happen.
it all happened the way it did because of errant policy.
Reply
wh10 Reply:
December 23rd, 2011 at 10:22 pm
@WARREN MOSLER,
Warren, interesting. What policies would have prevented it from happening the way it did? Timing and amount of liquidity provision?
Reply
wh10 Reply:
December 23rd, 2011 at 11:34 pm
@wh10, er.. rather price of liquidity provision? or do you mean fiscal policy leading up to the crisis?
James Hogan Reply:
December 23rd, 2011 at 10:30 pm
@WARREN MOSLER,
“it all happened the way it did because of errant policy.”
OK, I’ll bite. What was the “correct” policy?
I’ve never come up with an alternative to having enough income to support the price of the mortgage. Is there a better answer?
Reply
macrosam Reply:
December 24th, 2011 at 7:48 am
@James Hogan,
Immediate payroll tax holiday, the silver bullet as mentioned in the mandatory readings section.
WARREN MOSLER Reply:
December 24th, 2011 at 8:06 am
right, fiscal adjustment/payroll tax suspension and my rental proposal for mtg foreclosures
Monica Smith Reply:
December 25th, 2011 at 6:20 am
@WARREN MOSLER, The real estate crash was engineered as a follow-on to the Savings and Loan crisis of the early ’80s. It was a multi-pronged effort, relying on urban renewal to hollow the cities out, the virtual elimination of the capital gains tax on homes, as Greenspan announced (about 1993), “to liberate the equity Americans had accumulated in their houses for the market” and then, to top it all off, Dubya’s announcement of the “ownership society” in February of 2003. The S&L debacle involved flipping raw land; the housing bubble involved flipping houses people didn’t need. Though, for a time, the latter had the “beneficial” side-effect of propping up the sale of shoddy imported appliances and furnishings. The “policy” position was the notion that lots of people living close together are trouble. Spread ’em out, put ’em on cages with wheels and they’ll be a lot easier to handle. That was the premise for “urban renewal,” dreamed up by people who hate living in cities.
Reply
WARREN MOSLER Reply:
December 25th, 2011 at 9:33 am
and if they hadn’t let aggregate demand collapse in Aug. 2008 by, for example,
suspending FICA debits, there wouldn’t have been ‘the crash’
Fundamentally, by definition, in real terms, we can ‘afford’ what we can construct,
though it is possible to construct to the point where there aren’t sufficent man hours to maintain it.
but seems we’re quite a ways from there.
Ivan Reply:
December 25th, 2011 at 10:58 am
Blaming Bush? Are you kidding? Not the CRA? Not the expansion of the CRA under Clinton? Not the ever increasing congressional mandate for both FNMA and FHLMC to lend or guarantee an ever larger portion of their portfolio to those below the mediam income when only 17% of those in California (30% of the housing stock) could afford the median priced home? Not Barney Frank saying he’s willing to roll the dice on this????
Oh..I understand…it’s Bush. Everything is Bush. I guess I’ll vote for Obama because he said all his problems in 3 years in office are because of Bush as well. 50 years from now…all Bush. All his fault.
JBH Reply:
January 3rd, 2012 at 10:32 am
@Monica Smith,
I agree, a big govt trying to manipulate society always leads to a mess.
Looks like he got started on the egg nog a little early. :^)
Reply
Matt Franko Reply:
December 23rd, 2011 at 11:12 pm
@ESM, You are mistaking ‘combativeness’ with inebriation! ;)
Reply
RSG Reply:
December 24th, 2011 at 1:46 pm
@Matt Franko,
looks more like inebriation…which makes it hard to take him seriously
Reply
jonf Reply:
December 24th, 2011 at 2:22 pm
@RSG, But he is right, you know. That counts for something.