Tuesday, February 7, 2012

The Big Short is a Big Disappointment

The Big Short: Inside the Doomsday Machine by Michael Lewis was a big disappointment.  Lewis discusses the symptoms and the fallout of the housing crisis.  However, like many others, he completely fails at addressing the real disease and the genesis of the problem: poor government policy.  If one would like a real look inside the "doomsday machine", Thomas Sowell's The Housing Boom and Bust provides further details on the real culprits and their policies, legislation, and accompanying regulation that led to perverse incentives, moral hazard, and outright foolishness on the part of the federal government.

As shown on page 11 of the CBO report: Fannie Mae, Freddie Mac, and the Federal Role in the Mortgage Market; Fannie Mae, Freddie Mac, and Ginnie Mae hold over half of the mortgage debt outstanding.  This is due to government policy that, in the effort to "increase home ownership", compelled the three institutions to buy mortgages on the secondary market at a skewed price.  If Congress sets up entities to buy (subsidize) something in the secondary market; albeit mortgages, automobilesethanol, or solar energy, then the end result will be an influx of each from mortgage originators, auto dealers, corn farmers, and  "clean energy producers" respectively.  This influx is not due to a market demand acting upon what is economical, but a distorted and perverse incentive of artificially inflated values of the afformentioned goods.  Also revealed on page 7 of the report, the triumvirate (Fannie, Freddie, Ginnie) dominated the Mortgage Backed Securities (MBS) issuance market.  Yet somehow we are supposed to believe it was the (not-so-)free market that caused a housing catastrophe.

4 comments:

Anonymous said...

Not sure why you are killng the messenger. Michael Lewis wrote an excellent story from a different perspective. Are you dis'ing him for not writing more or for writing it at all?

www.nydivide.org said...

Not killing anyone, and Lewis is not the messenger as he is merely narrating past events. I don't know what you mean by "dis'ing" and can only assume you mean "disrespecting". This is not disrespect, only a critical view of his work; a book that has influenced many (with insufficient information and at times inaccurate insinuations). What is being criticized is his narrow and selective view of past events. Either he does not know any better (which he should if he wrote Liar's Poker) or he is attempting to appeal to an impressionable audience - that is not well informed on the issues discussed - by oversimplifying and selectively editing what really happened to the extent of being irresponsible. Thank you for the comment.

Patrick Odea said...

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Grace Johnson said...

There's really a need to review on the provisions and some laws that had been passed. As you know, time passes by and the circumstances every now and then changes that's why it's really important to take a step on verifying things up cause the effectivity might not be that powerful just like before. Actually, several mortgage companies in ma were also agreeing if the review and validation pursue.

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