Interview at Self Directed Investor

|Peter Boettke|

I did an interview today with Scott Nystrom at Self Directed Investor.  It is on their website for roughly the next 24 hours, and then after that will be in their interview archives.

Thanks Scott for the great opportunity.

Comments

[James H]

Pete,

That was a really interesting interview. I wonder, though, if you don't overstate the importance of sub-prime lending and govt encouragement thereof in causing the housing crisis and the fallout at the banks and i-banks. The main reason for the crappy underwriting c. 2003-2007 was the ability to securitize those bad mortgages and sell them, not harangues from Barney Frank or Andrew Cuomo. Also, Basel II favored MBS over stand-alone mortgages for the purposes of capital requirements.

As much as I would like to blame govt. regulation (or the false appearance of regulation) -- and to be sure, the role of the GSE's is very important -- a key ingredient to making the securitization market "work" the way it did is what amounts to fraud. On the one hand, many of the CDO's and other MBS put together in this period depended on the ability to purchase CDS from entities like AIG FP. As we know, AIG FP didn't have a snowball's chance of absorbing the default risk that had been offloaded onto its books by some of the same banks who securitized the bad mortgages, but while the fun lasted they collected billions in fees on the CDS they were writing. On the other hand, companies like Countrywide were writing mortgages that were "interest-only" or had a "balloon payment" structure. They did this to ensure that the mortgage lasted just long enough to meet the requirements for securitization. In many cases they knew that these mortgages would default, but by the time of the default Countrywide, e.g., would have already collected its fees for writing the mortgage. During underwriting and securitization -- which often involved the purchase of CDS protection -- some market participants were knowingly misled by other market participants.

Still, many market participants knew what was going on. Which of these cases are actionable in civil court or worthy of a criminal investigation is hard to say, but there is much evidence in the public domain that suggests fraud was rampant. For example, it recently came to light that hedge fund manager, John Paulson, who bet big against MBS in 2007, had gone to investment banks and worked with them to craft the very CDO's which he then planned to either short or buy CDS on. I don't know whether this was legal or not, but it could constitute a form of fraud. Again, this is just one notorious example.

I largely agree with your account of the crisis, but I'm not sure the housing crisis can be blamed almost entirely on govt. interventions. The rules of the game laid down by the authorities contributed to the problems, but many of those rules were bent and broken, which made the problem much worse than it would have been otherwise.

[topills.com review]

this is certainly the of side of Mises’ thought and writings that often carry a timeless quality to them because they deal with and are articulated in terms of the general and universal aspects of man, mind, markets, and society.