Originally posted by: dullard
Originally posted by: LegendKiller
Well, that is not completely true.
Anyone could play that game. A president could push through a law that requires all homes to be burnt to the ground, thereby causing the value of all of them to be $0. But, just because they could theoretically do something, doesn't mean they get credit or blame for letting the markets do what the irrational people want.
Neither Bush nor Clinton caused the irrationality in the people. Both Bush and Clinton could have done something to minimize the swings, but they both let the market play out. And letting the market run itself is usually the best thing to do (within limits of course) because government actions on markets tend to have very serious and very undesirable side effects.
Again, comparing an equities market boom/bust cycle to a housing market boom/bust cycle when discussing irrationality is *completely* different.
1. Equity markets depend largely on assets that you *have* in order to purchase other assets. Very few people can borrow on margin and the requirements are high and the amount of leverage is very low.
2. Equity markets are already highly regulated to the point that any more regulation regarding asset sales, margin requirements, purchases, or analyst reports would severely hinder the functioning of the capital markets.
3. Mortgages, especially exotic ones, have very little oversight in many states. Only conforming loans have any type of quality mandates. Thus, the possibility of over-leveraging yourself is *MUCH MUCH MUCH* higher than the equity markets. Equity markets would *NEVER* give a 500 FICO the ability to take out a 300,000 loan at 1% and negative amortizing principal. Not only would it violate a bazillion regulations, it would also ruin several banks as they would have to keep that on their own books.
4. Oversight into the above mortgages and lack of standards and regulations allows for cheap borrowing to unqualified buyers (in a more strict sense). This also then pushes up the market for houses.
5. Both of the above situations can be prevented by wider governance of mortgage brokers and whole-loan purchasers. Better oversight into predatory lending and higher qualitifcations for exotic mortgages.
All of this could have been mandated by the President, who also appoints OTS, OCC, and other regulatory body heads. Only now have these bodies stepped in to mandate regulations for exotic mortgages, after the damage has been done.
Comparing these two boom/bust bubbles is OK on the surface, as much as they are just bubbles. However, the fundamentals of irrational exuberance are *MUCH* different, in the fact that the housing market could have been moderated by oversight into best practices.
EDIT:
As an addendum onto this. In the past only one small company issued Option Arms in any significant amount, a smaller bank out of CA I think. This changed in the late 90's and early 00's as many people started marketing these as an affordability product. They used to be 750+ FICO but have gone down credit into the higher 600's.
Furthermore, all of the loans that used to be sold as option arms were kept on-balance sheet with borrowers of known-quality. They were not securitized or kept in large asset pools for collateralized borrowing. They were not moved off-balance sheet at all and were funded through company WACC.
This has now changed. These mortgages are slapped into massive pools, somewhat diluted as they are spun off the books into off-balance sheet securitizations. Thus, their true impact to the capital markets are dispersed. Since higher quality Alt-A with fixed (or even 5/1 arms and such) can dilute their effects, they aren't noticed as much.
However, sub-prime securitizations are starting to see delinquency upticks. Countrywide's own CEO called up some option arm borrowers, after more than 50% are only paying the mininum payment. He got so scared by the answers to his questions that he started cutting down the CFC option arm purchasing.
Regulatory oversight could have prevented this. Who is in charge of these bodies? Political appointees.
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