Saturday, January 29, 2011

Lessons from History (2004)

Mozilo Predicted U.S. Housing Collapse as Fed Overlooked Risk

"Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo warned as early as 2004 of a possible housing-market collapse while the Federal Reserve overlooked the threat a year later, according to documents released by the Financial Crisis Inquiry Commission".

Posted by alan @ 10:14 AM (1389 views)
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2 thoughts on “Lessons from History (2004)

  • Also prescient was Noble Prize winner Paul Krugman, who wrote in 2001:
    “The driving force behind the current slowdown is a plunge in business investment. It now seems clear that over the last few years businesses spent too much on equipment and software, and that they will be cautious about further spending until their excess capacity has been worked off…..How might demand increase? Consumers, who already have low savings and high debt, probably can’t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery……mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place”.
    http://www.pkarchive.org/column/81401.html

    And in 2002 he wrote:
    “To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble”.
    http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html

    But he wasn’t proud of this prescience. In 2010 he wrote:
    “So did I call for a bubble? The quote comes from this 2002 piece, in which I was pessimistic about the Fed’s ability to generate a sustained economy. If you read it in context, you’ll see that I wasn’t calling for a bubble — I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea.”
    http://krugman.blogs.nytimes.com/2010/04/05/me-and-the-bubble/

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  • A joint report issued in 2000 by HUD and the Department of the Treasury entitled Curbing Predatory Home Mortgage Lending noted that a very limited number of borrowers benefit from HOEPA’s protections because of the high thresholds that a loan must exceed in order for the protections to apply. The report also found that certain terms of subprime loans appear to be harmful or abusive in practically all cases. To address these issues, the report made a number of recommendations, including that the FRB use its HOEPA (Home Ownership and Equity Protection Act) authority to prohibit certain unfair, deceptive and abusive practices by lenders and third parties. During hearings held in 2000, consumer groups urged the FRB to use its HOEPA rulemaking authority to address concerns about predatory lending. Both the House and Senate held hearings on predatory abuses in the subprime market in May 2000 and July 2001, respectively. In December 2001 the FRB issued a HOEPA rule that addressed a narrow range of predatory lending issues. (Sheila Bair testimony at the Financial Services Inquiry Commission, Jan 2010).

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