After doing an interview last night describing the social costs of the 2008 financial collapse, I dug up two papers, one by the St. Louis Fed (PDF), and one by the Urban Institute (PDF) that kind of go together in both describing what happened and what the current problems are now. The gist of the Fed paper is that the housing collapse was not Fannie or Freddie’s fault, but the UI paper shows that the continued problems are; sort of.
In my interview, I described how the Housing bubble was the trigger that fired the bullet into the head of the economy. Housing wasn’t the be all/end all of the financial collapse; it was just a catalyst. The real bullet was the “rentier” class, in the sense that those trading in MBS never had any skin in the game. In other words, there was little risk, and a lot of reward for the traders in the short run. In the long run of course, everyone lost.
Paul Krugman seems to make the same argument about rent seeking and a sense of entitlement from the rentier class.
The Fed paper also seems to support all of the above. The main issue is mortgages (and thus housing) for the poor. The whole point of cheap mortgages backed by GSEs was so that poor people, who didn’t have super high credit ratings, or low down payments because of Socioeconomic status (i.e. no fault of their own), could gain wealth through home ownership. Not a bad social goal to have.
What happened is that the “rentier” class took advantage of that, and created the bullet that killed the economy. Rentiers purposely made bad mortgages which turned into bad trades, in order to reap the maximum amount of rewards with the least amount of risk – almost the very definition of “rentier.”
The Urban Institute however, points to this idea in the current dilemma: Fannie and Freddie are forcing banks to buy back mortgages that default, causing the banks to not want to make loans. In other words, banks will now have skin in the game.
This is creating a scenario where Credit Scores have to be north of 720 (perfect is 810), and low LTV ratios in order for mortgages to be granted.
The problem is that most people had their credit and savings (especially 401k) wiped out in 2008. So the very people that need mortgages – the people that Fannie and Freddie were designed to help, cannot be helped. Instead, the people who DON’T need mortgages are the only ones that qualify for them.
I’d hazard to guess that this kind of credit freezing is at least partially responsible for the liquidity trap; just to overstate the obvious.
The result is this Gini Coefficient – measuring income inequality. Since “Hope and Change” came in at the alleged end of the Great Recession, income inequality keeps climbing. From this point, just about everyone from GSEs to banks to monetary policy (or the lack thereof) share the blame; a virtual Fannie Pack of Socioeconomics.