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March 14, 2007
Mortgage Bankers' Economist: 'The Market Is Working'
I wasn't too surprised yesterday to hear the chief economist of the Mortgage Bankers Association say--in reference to the subprime meltdown--that "the market is working."
There is a school of economics that says markets always work, just as Voltaire's Candide once said that all is for the best in this, the best of all possible worlds. When credit standards got unbelievably lax, true-believer economists averred that markets were working: After all, bankers were freely choosing to make the loans, and investors were freely choosing to buy them.
And now that subprime lenders are shutting their doors, shareholders are getting burned, and borrowers face foreclosure because they can't refinance loans they shouldn't have received in the first place, the word once again is that the market is working.
Here's an excerpt from yesterday's statement from the Mortgage Bankers Association:
"The market is working, culling over-capacity from the industry, as price signals from the capital markets lead to changes in product mix from originators, and directly and immediately impact the rates that mortgage lenders can offer to borrowers. Far from being a problem, these clear and effective market signals and actions will help the market to more efficiently regain its equilibrium."
"We would continue to caution policymakers to avoid any regulatory or legislative actions that would impede the ability of the market to respond to changes in underlying economic conditions. An important role of public policy should be to facilitate efficient markets, as these will ultimately benefit consumers."
One question: What would markets look like if they weren't working?
Before listening to the Mortgage Bankers' conference call yesterday, I spoke with John Taylor, president and CEO of the National Community Reinvestment Coalition. To put it mildly, he isn't in the Candide camp. He prefaced his remarks by saying that the only reason economists exist is to make astrologers look good.
"The Mortgage Bankers' idea that the market corrects ?? accepts the assumption that millions of people will be displaced from their homes. Congress has a higher standard. It?? not acceptable to have the market prevail and make corrections when the cost of that is literally millions of families losing their homes."
Warming to his topic ...
"Families moved out by the sheriff, leaving their keys behind, and having to look for places to live: Do people believe this is the way it should work, 'as long as the market prevails'? People ought to be able to walk into a broker?? office and know they??e going to get offered a competitive product that meets their needs."
Now, it's true that some of the consumer advocacy groups would go too far in regulating lending. Lots of people are living happily in their own homes, and establishing solid middle-class lifestyles, because the markets were free to extend credit to families that might not have gotten it before.
So I have some sympathy for the Mortgage Bankers' warnings against too much meddling from lawmakers and regulators. But a relentless insistence that "the market is working"--always--doesn't do the bankers' cause any good.
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"... the only reason economists exist is to make astrologers look good."
Now this gives me some food for thought and material to be used in my next business economics class.
Posted by: Mridula at March 15, 2007 05:56 AM
This is an argument by emotion - agreed, it is terrible when people lose their homes and are forced out on to the street. But the fact is, no one forced the lenders or the borrowers to make or take risky loans. If there was misrepresentation on either side, that's fraud, and there are already laws to deal with that. Anything else is simply trying to regulate ignorance away - good luck with that.
Posted by: Andy Joyce at March 15, 2007 11:21 AM
The market is working. The market is working? It is time for Americans to face the fact that these are American values at work. We have to stop saying that we don't believe in things that happen everyday in our country. This is what Americans want, so be it. Just stop pretending like someone else is doing these things, like it isn't really us that this is happening to, like it isn't us that is doing these things.
Posted by: Tony Baloney at March 15, 2007 12:05 PM
Yes, it's horrible to see a family lose its home. It's a deeply distressing thing to witness, the kind of thing that makes it hard to see the good in a market correction.
But keep in mind - there was a horrible side to the boom as well. Very few people would disagree that lax lending standards pushed prices high, perhaps higher and faster than they ever should have gone. This made it difficult, and perhaps even impossible, for more fiscally conservative (dare I say responsible?) people to enter the market.
In 2005, I wanted to own, but I was outbid or just gave up without bidding over and over. Why? Because I wanted to put 20% down, I wouldn't exceed a reasonable debt to income ratio, and I preferred a standard 30 year fixed loan. With those constraints, I couldn't compete with people who were willing to put 5% down and open themselves up to the risk of a 5/1 option ARM. They stretched, bid more, and won the house. I kept renting an apartment with my wife and 2 year old.
Yes, it hurts to see a family lose a house. But what you don't see is all the more fiscally prudent people who put their dream of home ownership on blocks for a while.
Posted by: Geoff B at March 15, 2007 12:36 PM
Geoff, your idea of fiscal conservatism is not simply laughable, it would endanger the risk- taking which has made our housing market so rock solid. I want my option ARM. Now! (sung to the tune of, "I want my MTV.")
Posted by: Brian R. at March 16, 2007 11:35 PM