Greenspan: Desis Can Save Us

Abhi asks how “Does the credit crisis affect ‘us’” and what Desi’s could do so I thought I’d chime in. Personally, although I’m a pretty strident free trader, the more I learn, the more I believe some sort of bailout is ultimately necessary (and so I’m probably disappointed by the House’s failure to pass legislation – don’t know enough of the deets to say for sure).

The Solution to the Credit Crunch? More Desis.

How do I resolve the apparent contradiction? Well, the govt was a large part of why we’re in this mess and it must now reap what it sows. Uncle Sam both directly and indirectly helped push mortgages into new hands that couldn’t afford them (and thus piled on to a Wall Street orgy). Had this been an entirely Wall Street phenomena, perhaps the “housing bubble” would have looked like the prior “dotcom bubble” – painful, but not exactly disastrous. It truly takes the government, however, to ratchet things up to the next level.

Of course, it’s awful on almost all counts that taxpayers get stuck holding the bill. But as I often say here, most of life’s choices aren’t between good and bad (and a bailout is clearly bad) but rather, between bad and worse (an economy-wide credit crunch). It’s cheap & easy moral pontificating to iterate the umpteenth reason why the situation is Bad (or why some sort of Wall Street comeuppance is Good). What real adults have to do is accept the bad to avoid the worse.

This interview from Greenspan, circa August 2008 is quite plain & direct about the necessary outcome –

The collapse in home prices, of course, is a major threat to the stability of Fannie and Freddie. At the Fed, Mr. Greenspan warned for years that the two mortgage giants’ business model threatened the nation’s financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt “inevitable,” he said. “There’s no credible argument for bailing out Bear Stearns and not the GSEs.”

If there’s a silver lining here, perhaps it’s that taxpayers & voters will have been taught a bitter lesson about what danger lurks the next time a politician tries to promise some new class of positive, economic rights


p>There’s no such thing as a free lunch and when a politician promises economic benefits to one group what it usually means is that costs will be displaced either in time or to a different, less politically favored group. Most often, that “group” is the public at large who have better things to do with their time than scrutinize the cost of individual earmarks. We’re now seeing the price of govt attemps to create a “right to home ownership“; similar days of reckoning await with “right to retirement” and “right to healthcare”. (Imagine the massive unused daytime TV commercial airtime and unemployment in the Scooter industry when/if the Medicare gravy train grinds down )

So what is perhaps uniquely Desi about the whole thing? Well, in that same interview, Greenspan offers one, relatively straightforward (albeit partial) remedy. Simply put, the current crisis is caused by a price collapse as too many homes chase too few folks who reliably make their mortgage payments. So, why not *import* folks who are more predisposed than average to being both credit worthy and buying new homes?

“The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants,” he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. “Perhaps 150,000 of those are loosely classified as skilled,” he said. “A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale — and hence help stabilize prices.”


p>And, of course, any wholesale increase in “skilled immigration” to the US has a pretty disproportionately positive impact on Desi’s. So Desi’s – do your part, go forth, multiply, and continue to maintain your credit scores assiduously.

UPDATE: Another Desi angle -

Corporate America has just lost a chunk of its value the size of the Indian economy.

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217 thoughts on “Greenspan: Desis Can Save Us

  1. 200 · bess said

    maybe if you take those bad apples, smash them up, add some sugar you could repackage it as apple sauce – repackage and sell. Don’t forget to lie about the expiration date.

    Sure Bess; but if i did that I’d make sure to distribute the sauce thru retail supermarkets. I wouldn’t serrve it to my own family.

  2. though i suppose if i did serve it to my own family, i’d hope medicaid will take care of us. so, i guess bess’ analogy sums up where we are.

  3. 204 · Manju said

    these are lean times

    Goodbye Wall Street: An Indian Story

    All too real for some people. Nikhila Natarajan writes in the Hindustan Times of the Great Crash of ’08 and its impact on a DBD family.

    Anand was ‘let go’…Suddenly, the view from my living room window wasn’t so hot anymore. The extra bedroom felt like a $500 fine…and here we were, out of a job and wondering how we could cut and run from this $3,000 headache. By 4 pm everyday, the wait would become unbearable….With no money left, we took a loan, and our usually overstocked fridge started looking very different. We bought just enough for the next two days, no extras. We stopped dining out, stopped buying toor daal from the desi dukaan in Queens and instead bought Hispanic pulses at one fourth the cost…
  4. 120 · vinod said


    VINOD WROTE: 121 · Manju on October 1, 2008 02:43 PM · Direct link · “Quote”(?)

    120 · vinod said

    Loans in general --> only a small % are defaulting... so it's true that 90% (or whatever) of CRA loans are doing well. it's the 10% that are the problem. This is a classic marginal pricing problem (e.g. behavior at the margin sets the rules for the mid market)

    this is true, only a small % have defauted but something more has happenned to the MBSs. here what i gather happenned:

    In the good ol days the MBSs, complex securitues packedged individual mortgges togheter, were very liquid, mostly AAA rated. If a Hedge Fund or whoever owned them needed cash, they could quickly sell them at a fair market price. When housing prices started to decline and defaults increased, funds wanted to sell the risky MBSs so buyers started to worry that the seller may simply be trying to unload their worst assets, but had no efficient ay of really knowing, given the complexity of these instruments. this asymmetric information, ie the buyer not knowing the exact composition of the MBSs, made the entire market for all MBSs illiquid. You couldn’t sell these thing in a panic b/c the mere fact hat you’re selling tells the buyer you hold crap. The derivatives, irrationally, started to be valued at close to zero while the underlying mortgages were worth much more.

    i think.

    Boston_Mahesh wrote: The derivatives should have been worth a lot, but the underlying assets could have been valued close to zero. The derivatives, i.e. calls and puts, increase in value when the underlying asset has more volatility, among other things. A derivative is worth 0 if it’s a call, and the underlying is much less than the strike price. however, the puts are worth a lot of money for this case.

    I think that what you meant to say is that the derivatives were worth something – maybe more or less depending on the type of derivative – but the underlying asset wasn’t worth much.

  5. Just for the record, here’s a thorough refutation of everything you believe in:

    Private sector loans, not Fannie or Freddie, triggered crisis David Goldstein and Kevin G. Hall | McClatchy Newspapers last updated: October 11, 2008 04:56:24 PM WASHINGTON — As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail. Commentators say that’s what triggered the stock market meltdown and the freeze on credit. They’ve specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie’s and Freddie’s financial problems. Federal housing data reveal that the charges aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis. Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height vrom 2004 to 2006. Federal Reserve Board data show that: _ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. _ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. _ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics. The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday. Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages. “I don’t remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster,” said Neil Cavuto of Fox News. Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don’t lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans. It’s a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more. This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families. To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares. But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party’s standard bearer, President Bush, didn’t criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership. Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble. During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data. In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages. Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market. About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve. Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods. Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they’re lending and investing in their communities. Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, “it led to tremendous pressure on Fannie Mae and Freddie Mac — who in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity.” Fannie and Freddie, however, didn’t pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market. What’s more, only commercial banks and thrifts must follow CRA rules. The investment banks don’t, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans. These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren’t subject to federal regulation or the CRA, originated most of the subprime loans. In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today’s problems. “Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans,” she said. “The CRA has increased the volume of responsible lending to low- and moderate-income households.” In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, “that this new lending is good business.” (e-mail: khall )at)
  6. Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent,

    Wow! I didn’t know their holdings went as high as 48%. I always read around 20-30%. And an implied govt backing for this. And this doesn’t include their over-leveraged insurance biz that goes into the trillions. Vinod’s right, “they vastly increased the size/scope of the bubble”

  7. well, in the presence of voodoo economics like that embodied in this post, what a great day it is for krugman, the voice of sensible leftist economics for the past 20 years or so, to have been awarded the nobel. once again, he has been proved right with his persistent calls for nationalization, where all his detractors have landed up with egg on their face. once again.

  8. Oops, what in the world does Krugman’s analysis of trade patterns and location of economic activity have to do with Vinod’s post? I mean, even the Volokh post you cite makes clear: “I believe Krugman’s Nobel is well-deserved. He is clearly among the most important economists of his generation.”

  9. 214 · Manju said

    Oops, what in the world does Krugman’s analysis of trade patterns and location of economic activity have to do with Vinod’s post?

    I know! It’s like people think there’s some kind of politics to economic analysis, which we all know is absurd ;)

  10. it’s ok, manju. don’t take nationalization by komissar paulson so hard that you respond to a comment about volokh i never made :)

  11. 216 · oops i did it again said

    it’s ok, manju. don’t take nationalization by komissar paulson so hard that you respond to a comment about volokh i never made :)

    well, as an unprincipled opportunist, I can’t say I’m taking the nationalization hard at all, especially with todays rally… though as an Obama supporter I am concerned a short-term stablization could give mccain an opening, though he probably needs one more event beyond that.

    But I pulled that Volokh quote from the very post you cited, from the poster himself in fact, not just a commentator, so it has more weight vis a vis the zeitgeist in libertarian world regarding Krugman’s nobel (of which i have no opinion).