The Mortgage CrisisPLS 480 Greed and Need

Dr. Emerson

Sub Prime ProblemDelinquency rate 2 tenths of 1 % in 1979 Today 2% (10 times higher) Moyers Report http://www.pbs.org/moyers/journal/07182008/watch.html

Context: Regulate or DeregulateConstitution requires Congress regulate banksCongress leaves regulation to States.In 1913 FED authorized by Congress.

Little Regulation Until New DealUnregulated stock marketBanks heavily invested in stocksDeposits not insured

RegulationGlass Steagall ActFDIC Security & Exchange CommissionFreddie Mac/ Fannie Mae HUD in 1960s

DeregulationDeregulation of S&Ls No regulation of derivativesMortgages may be sold in fractions.

Deregulation Continues Savings/Loan Scandal Congress repeals Glass Steagall Act in 1999.

Federal Reserve Bank PoliciesLow interest ratesSub primes unregulatedNo regulation of innovative financingNo action regarding defaults

What is market response?Over price housesPiggy back sub primes with regulated primes Little or no documentation of house/buyer

GAO ReportNo piggyback and documentation 0% defaults Piggyback OR little documentation 25-31% Piggyback AND no documentation = 60%

Why No Demands by Lenders?Dont know- decoupling If fail then resell at higher price Loan is asset not borrowers capacity to repay

EvidenceMortgage type and loss to homeowner and investor (Mortgage Banker Association)Spillover of Mortgage Subprime to Prime trends (First American Loan Performance)Stock Market Performance (Dow Jones Industrial Average)Jobs (Bureau of Labor Statistics)Recover of US (OECD)

Foreclosures By Mortgage TypeWhich type serves mortgage buyer AND homeowner?Difference between red bar, green and yellow?

Relationship of Primeto Sub-primeSpillover of subprime default on prime.Top line =subs but bottom line =primes

Stock Market Learning CurveDips and peaks in stock market performance 2000- July 2009Prior dip July 2003. Why?

JOBSImpact of policies on jobs (Bureau of Labor Statistics)

Recovery ComparisonUS System Recovery versus other Industrialized DemocraciesRed line US vs. France, Germany and Japan (OECD)

BreakBe back in 10 minutes for the analysis

Finish this lecture: (7 groups) Dem. Capitalist explainDem. Capitalist policy opt.Dem. SocialistexplainDem. Socialist policy opt.Conservatives interpretationLiberal interpretationMadison interpretation/options

Democratic Capitalists ExplainDemocratic Capitalist explain evidence ---

Democratic CapitalistsFuture Policy Preference Reasoning

Democratic Socialist Democratic Capitalist explain evidence ---

Democratic Socialist Future Policy Preference Reasoning

Conservative Interpretation of Evidence and Meaning

Liberal Interpretation

Madison ModelInterpretation/ ExplanationPolicy Options

Conclusion Justice is the end of government. It is the end [purpose] of civil society. It ever has and ever will be pursued until liberty is lost.. Madison, FP 51

Citations

Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at http://hnn.us/articles/1849.html. Bitner, Richard (2008). Inside the Subprime Debacle. U.S. News and World Report. 145 (2) 12. GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.

CitationsJost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), 409-422 Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. Reynolds, Maura. (2008). Mortgages: Loan troubles hit new heights: foreclosure rate climbs to 2% for the 4th quarter. Home equity drop. Los Angeles Times. C-1.

Q and A

PostscriptDefine issue Use Library Resources, no Wikipedia (https://blackboard.csupomona.edu/webapps/login/)See http://www.csupomona.edu/~library/databases/politicalscience.html

Postscript (cont.)Use correct APA citations. See: http://owl.english.purdue.edu/owl/resource/560/01/Looking for: timely, data (e.g. GAO), both sides of issue. NOT http://www.hillbillyreport.com/blog/bear_stearns//

Postscript (cont.)

Analysis: Freedom, Liberty, Reason and JusticeConclusions and Opposition argument Power Point: Common Errors(http://www.youtube.com/watch?v=HLpjrHzgSRM) versushttp://www.youtube.com/watch?v=vXFi7AdhhGk&feature=related (good example)

Sub-prime mortgagesThe end