Washington Post: Boom, Bust & Aftermath


Following last week’s absurdity (WashPost Blames HUD for Housing/Credit Crisis), the Washington Post pays penance with a 3 part series looking at the housing and credit bubble (today, Monday and Tuesday).

Subtitled: "How homeowners, speculators and Wall Street dealmakers rode a wave of easy money with crippling consequences," it purports to explain the crisis:

"There was something very new about this particular housing boom. Much of it was driven by loans made to a new category of borrowers — those with little savings, modest income or checkered credit histories. Such people did not qualify for the best interest rates; the riskiest of these borrowers were known as "subprime." With interest rates falling nationwide, most subprime loans gave borrowers a low "teaser" rate for the first two or three years, with the monthly payments ballooning after that.

Because subprime borrowers were assumed to be higher credit risks, lenders charged them higher interest rates. That meant that investors who bought securities based on pools of subprime mortgages would enjoy higher returns.

Credit-rating companies, which investors relied on to gauge the risk of default, gave many of the securities high grades. So Wall Street had no shortage of customers for subprime products, including pension funds and investors in places such as Asia and the Middle East, where wealth had blossomed over the past decade. Government-chartered mortgage companies Fannie Mae and Freddie Mac, encouraged by the Bush administration to expand homeownership, also bought more pools of subprime loans.

One member of the Fed watched the developments with increasing trepidation: Edward Gramlich, a former University of Michigan economist who had been nominated to the central bank by President Bill Clinton. Gramlich would later call subprime lending "a great national experiment" in expanding homeownership.

In 2003, Gramlich invited a Chicago housing advocate for a private lunch in his Washington office. Bruce Gottschall, a 30-year industry veteran, took the opportunity to pull out a map of Chicago, showing the Fed governor which communities had been exposed to large numbers of subprime loans. Homes were going into foreclosure. Gottschall said the Fed governor already "seemed to know some of the underlying problems."

Funny, nothing in Part One about Predatory Borrowing . . .


A few factual quibbles: 

1. WaPo writes "Nasdaq stock index, which had more than doubled from January 1999 to March 2000" — actually, the Nasdaq doubled from October 1999 to March 2000 — a six month period that included the Fed opening the monetary spigots wide in anticipation of Y2K banking problems.

2. "Then came the 2001 terrorist attacks, which brought down the twin towers, shut down the stock market for four days and plunged the economy into recession."  Um, no. The 2001 recession began March 2001 and was dated as running through November 2001 according to the NBER dating committee. No credible economist believes that 9/11 was the proximate cause of the 2001 recession.


The series is not quite Pulitzer bait, but its worth reading (at least so far).

Another fascinating aspect to it: Many of the "other resources" featured will be quite familiar to regular readers of TBP and other blogs:

Interactive mapping tool from the Federal Reserve Bank of New York (which we featured in April), shows foreclosure and other data by county and zip code;

• Ned Gramlich, a former Federal Reserve governor who died late last
year, warned of the mounting subprime crisis early and often, but his
warnings many times fell on deaf ears among his colleagues at the Fed.
We looked at Gramlich’s book "Subprime Mortgages: America’s Latest Boom and Bust" last month.

"The Compleat UberNerd" provides more detail on how the mortgage industry works. (Mad props to Bill and Tanta at CR!)

Two economists from the New York Fed
explain in remarkable detail how mortgages get bundled and resold,
along with some of the friction points in that process that led to the
current crisis.

Portfolio magazine’s elegant animated illustration of how a collateralized debt obligation — one of the bogeymen of the financial crisis — actually works.

The Bubble
Alec Klein and Zachary A. Goldfarb 
Washington Post,  Sunday, June 15, 2008; Page A01   http://www.washingtonpost.com/wp-dyn/content/article/2008/06/14/AR2008061401479.html

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What's been said:

Discussions found on the web:
  1. joe commented on Jun 15

    The best overview of the whole mess for those of us rendered blind, deaf, and dumb by too many nefarious acronyms can be heard on an episode of “This American Life” that aired recently. Check the website or Itunes for a podcast. Worth the hour.

  2. anonymous 37 commented on Jun 15

    actually, the Nasdaq doubled from October 1999 to March 2001 — a six month period

    Typo — that should be 2000, correct?


    BR: Fixed that — and a few other typos — above

  3. Tom F. commented on Jun 15

    The Nasdaq peaked in 2000 – not 2001.

  4. Duke commented on Jun 15

    It seems to me that the top graph indicates the the bust is neglible. $945B out of $235T, or .4% loss.

  5. VennData commented on Jun 15

    If they’d let the…

    “Hello Suze? Thank you for taking my call, you’ve helped so many people, Suze, I have $1,000 in credit card debt… and $1,000 in cash… and I want new rims for my Yukon. What should I do?”

    …types, the Median/Mode Joes and Janes decide what their monthly loan payments should be the way banks “decide” LIBOR then this mortgage crisis would not be a problem.

  6. chris Noyes commented on Jun 15

    If Real Estate prices go back to 2003 levels then losses should be several trillion. Helo loans will be in BIG trouble . With 1 trillion in Helo loans (second lein holders ) things looks very dismal for the mortage debt holder / banks. Somehow I think we will look back and wish losses where only 935 billion.

  7. wunsacon commented on Jun 15

    My reaction is the same as Duke’s. If the losses aren’t much higher than $945B, then this doesn’t seem so bad.

    Does that $167 trillion valuation depend in part on earnings expectations of firms that won’t earn nearly as much as in 2003-2006?

  8. Armand Trevar commented on Jun 16

    I’m in retail construction, but other than the day-to-day absurdity of brokers falling over themselves to convince you that $250sf was a great deal, then (illegally) lying out their asses there were “other bids over the asking price”, with certified real estate appraisers (illegally) basing their finance report on cherry-picked cluster theory of what just sold in the same area, not actual valuation walk thru’s, our sole exposure to ARM credit.con was tag-teams in our church going around to the elderly among us, those with paid off homes and fixed incomes, then acting (illegally) as refinancing agents for that “newer car” or “vacation you’ve always wanted”, even though the terms of their ARM, such as they were, would be unpayable on a fixed income if Greenspan so much as farted, and never mind those egregious fees out of paid-off equity. When we stood in the way of these credit.con vampires, there wasn’t the slightest shame, only “move on to the next retired sucker” blood glaze in their eyes.

    It reminded us of nothing so much as brokers who called night and day in 2000 to pimp up the dot.bombs, with that famous line, “your investment is 100% liquid at all times.”

    A whole lot of ARM credit.cons should go to prison. Period. Don’t try to lay this off on double-dipping dishwashers and “unknowing brokers”. It was a deliberate, all-out, race to the finish, first in, first out, C-O-N.

  9. Mike in NOLA commented on Jun 16

    Armand’s got it right. But who expects good investigative reporting these days? Or the ability to speak truth to power.

    Looks like the financials have found new marks: those who bought in as new equity has been raised in the past few months. FT reports buyers of equity in financials have lost almost $10 billion.


  10. poopscooperforlife commented on Jun 16

    Venn Data,

    Joe sixpack can lease much better rims of his choice for a low monthly payment of only $155.

  11. Gary commented on Jun 16

    What is sad is that now people are doing the exact same thing they did in the bursting of the Nasdaq bubble. They are going to ride the bear marekt all the way down. I can’t tell you how many times I’ve been asked if I think now is a ggod time to buy real estate since prices have dropped so much.

    I cover this a bit in my weekend report which is available free to anyone who would like to read it this week.

  12. Jim Haygood commented on Jun 16

    “Then came the 2001 terrorist attacks, which brought down the twin towers, shut down the stock market for four days and plunged the economy into recession.” — WaPo

    This may be a common urban myth. But the NBER’s dating of the recession as beginning in March 2001 can be easily verified in the WaPo’s own archives. Greenspan started his emergency rate-slash campaign in the very first week of January 2001.

    Unfortunately, this blooper is typical of the shaky quality of reporting, even in some of the financially-oriented media. I recall one reporter at Bloomberg who used to speak of “the Foreign Exchange,” as if it were a building in lower Manhattan. But it’s actually in Rock Center, isn’t it? LOL.

Read this next.

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